The Triple Qs are More Than Just Tech

04/02/2019 5:00 am EST

Focus: ETFS

Todd Rosenbluth

Senior Director of ETF & Mutual Fund Research, CFRA Research

Our latest Focus ETF is Invesco QQQ Trust (QQQ), which earns our highest rating of Overweight, suggests Todd Rosenbluth, analyst with CFRA Research's The Outlook.

The ETF turned 20 years old on March 10 and remains one of the largest and most liquid ETFs, with $70 billion in assets and 30 million shares traded daily, yet we think investors don’t understand what makes this fund unique.

Our top rating is driven by our holdings-level analysis and certain fund specific attributes. QQQ tracks the NASDAQ 100 Index, but many investors think of this ETF as a technology ETF. As of late February, the fund had just 43% in stocks within the Information Technology GICS sector.

To be sure, most of the remaining assets are in sectors considered growth oriented, such as Communication Services (23% of assets). Moreover, Consumer Discretionary (16%), Health Care (9%) and Consumer Staples (6%) companies are also well represented in the portfolio.

Meanwhile, looking back ten years, there’s been a shift in exposure. For example, the Information Technology (54% of assets 10 years ago) and Health Care (14%) sectors have come down, while Consumer Discretionary (10%) and Communication Services (12%) has climbed higher (data based on what is now in the Communication Services sector, which was created in 2018). The index behind the ETF, which excludes financials, is rebalanced quarterly and reconstituted annually.

Yet, the ETF has remained relatively concentrated over the years, with the top-10 holdings comprising 52% of assets (up slightly from 47% 10 years ago). As such, CFRA’s holdings-based approach to rating ETFs provides compelling insight into the fund’s prospects.

Though CFRA has a Hold recommendation on Microsoft (MSFT), the fund’s largest position, other major positions including Alphabet (GOOGL), Amazon (AMZN), Apple (AAPL), Cisco Systems (CSCO), Comcast (CMCSA), Facebook (FB) and PepsiCo (PEP) are CFRA Buy or Strong Buy recommendations.

CFRA Equity Analyst Angelo Zino, CFA, who has a Buy recommendation on Apple shares, acknowledges replacement cycles for iPhones are extending, but he thinks a rising and older installed phone base of more than 900 million creates the potential for stabilization and growth, given a potential 5G launch in calendar year 2020.

In addition, Zino sees new service offerings across video streaming, magazine subscriptions, gaming and health care helping support multiple expansion. Zino has a 12-month target price of $210, suggesting upside from current levels.

CFRA Equity Analyst Scott Kessler, who has a Buy on Alphabet, highlights the communication services company’s revenues recently rose 22%, driven by mobile search and YouTube.

Looking forward, he sees capital spending growth decelerating notably this year and expects the firm to deploy some of its $109 billion in cash/short-term investments with a new $12.5 billion buyback. Kessler has a 12-month target price of $1,330 and sees ample room for multiple expansion.

CFRA Equity Analyst Garrett Nelson, who has a Strong Buy on PepsiCo, looks for improvement in beverage trends in the second half of 2019 and into 2020, aided by increased media spending. He thinks PEP’s focus on healthier snacks and beverages will likely continue to drive the top line and he looks for strong returns to shareholders in the form of dividends and share repurchases.

Nelson has a 12-month target price of $128, which could provide an opportunity for gains this year. From a cost perspective, the fund charges 0.20%, which remains in the sweet spot for investors who are focused on fees. In addition, the bid/ask spread is just a $0.01/share.

From a technical perspective, QQQ has recovered nicely from its weakness in the fourth quarter of 2018 and has bullish tendencies. As QQQ heads into its 21st year, we think investors will find a lot to celebrate.

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