• Jerremy Alexander Newsome

How to Evaluate ETF's. A deep dive into HACK and CYBR



How do you value a stock or an exchange-traded fund (ETF)? Are you looking for a day trade, swing trade or a long term investment? Are you looking for growth or value? That’s the question that I’ve been searching for answers for a while. This past summer I found out that I have relatives that are coming out of the military and back into civilian life. I asked what career they were going to look into and they both stated cybersecurity. I’ve been intrigued by the cybersecurity sector in general, which is why this sector caught my eye and I’ve been watching it for a few months.


What is the ETFMG Prime Cyber Security ETF (HACK)? This stock’s inception date was 11.11.14. According to the HACK ETF report “HACK is the first ETF on the market that focuses on cybersecurity. The index it follows splits the industry into 2 types of firms: 1) those that create cybersecurity hardware and software; 2) those that provide cybersecurity as a service. Each of these segments is weighted proportionally by its respective market cap in comparison with the cumulative market cap of both segments. After evenly weighting components within each of these segments, adjustments are made for liquidity. It's an odd Fit because it has a unique, cybersecurity-focused take on the technology segment that gives it a small-cap tilt, with concentrations in software and IT services that you won't find in a plain-vanilla fund. It's a very liquid fund, with high daily volume and narrow spreads, but block liquidity is a bit tougher thanks to the inclusion of all those less-liquid small- and micro-caps in the basket. HACK charges a large fee—though not an outrageous one for the coverage—and tracking can be loose.”


After doing more research, First Trust NASDAQ Cybersecurity ETF (CIBR) is also in the cybersecurity space with an inception date of 7.7.15. According to the CIBER ETF report “CIBR is a specialized fund focusing on cybersecurity, a broader rival to the massively popular HACK. It weights holdings by liquidity, which makes sense given the fund’s heavy small-cap exposure. CIBR focuses on cybersecurity companies as classified by the CEA, which means it holds primarily software and networking companies, but also branches out from the tech sector into more diversified industries like aerospace & defense. This slightly expanded focus is the major distinction between CIBR and HACK, both of which have small, tech-dominated portfolios. Though global in scope, the geographic tilt is strongly to the US. CIBR’s fee is in line with other thematic global tech funds, and on par with HACK’s. This is a niche fund and daily trading volume reflects that, but spreads are reasonable. Underlying liquidity is not a serious concern for block traders.”


A third player that I’m looking into is ticker symbol CYBR, CyberArk Software, that was discussed on Benzinga’s Pre-Market Prep show back in December 2019 by Anne-Marie Baiynd as one of her top picks for 2020.


Where do you start when trying to value an ETF with a stock or even compare ETSs? I’ve been searching Google, Yahoo Finance, Investopedia and other sites to try to determine what to look for when comparing ETFs and stock. The first question was “What’s the most important valuation components?” During research I found that it depends on how long you want to hold the ETF or stock and if you're looking for growth or value stocks. The next question, “What’s the difference?” “Growth stocks are considered stocks that have the potential to outperform the overall market over time because of their future potential, while value stocks are classified as stocks that are currently trading below what they are really worth and will, therefore, provide a superior return.”


I started with the ETFs and used the Net Asset Value (NAV).

Net Asset Value for HACK as of 2.28.20 = 39.61 / # of shares outstanding 34.75M = 1.13.

Net Asset Value for CIBR as of 2.28.20 = 28.34 / # of shares outstanding 46.15M = 6.36.


Is a higher NAV good?


It means that the investments have done well or it’s been around for a long period of time. What does this mean? In general terms it means that HACK’s investments have done well. There’s just shy of an eight month difference in inception dates between HACK and CIBR, so again, I’d say that HACK’s investments have done better than CIBR. In further research I find that the NAV isn’t really that important after all because the NAV is not decided upon by investors nor does it account for future prospects.


The stock value is what’s important because it’s decided by the investors depending on the fundamentals of the company which includes future prospects. Now what? What metrics do I need to look at and what do they all mean?


I found that these components are used to find the best values for ETFs and I added the Price component:


● 1-year daily total return

● Expense Ratio

● Annual Dividend Yield

● 30 Day Average Daily Volume

● Assets Under Management

● Price as of 3.6.20


HACK

● 1-year daily total return: 1.4%

● Expense Ratio: 0.60%

● Annual Dividend Yield: 0.41%

● 30 Day Average Daily Volume: 280

● Assets Under Management: $1.4 billion

● Price as of 3.6.20: $38.90


CIBR

● 1-year daily total return: 2.66%

● Expense Ratio: 0.60%

● Annual Dividend Yield: 0.67%

● 30 Day Average Daily Volume: 417

● Assets Under Management: $1.37 billion

● Price as of 3.6.20: $28.01


When you compare these components, it appears that CIBR would be the better choice based on the annual dividend yield, a larger 30 day average daily volume and a less expensive price even though HACK’s NAV was better than CIBR’s.


How does the stock CYBR play into the ETF valuation and what do you look at?


Here are some of the financial ratios and metrics that appeared in my searches as important to value stock:


● Market Cap - total value of all the companies outstanding shares by annual revenue

● Income - money received

● Gross margin - a company's net sales revenue minus its cost of goods sold. The higher the gross margin, the more capital a company retains on each dollar of sales, which it can then use to pay other costs or satisfy debt obligations

● Operating margin - how much each dollar of revenue is left over after both COGS and operating expenses are considered

● Earnings per Share (EPS) - EPS is the portion of a company’s profit that is allocated to every individual share of the stock. The higher the earnings per share of a company, the better is its profitability. The EPS ratio can tell him/her the room a company has for increasing its existing dividend

● P/S - price to sales - used to compare ratios of companies with similar business models

● Sales Q/Q - is a measure of an investment or a company’s growth from one quarter to the next which can be consecutive quarters or Q1 2019 v Q1 2020 depending on how the company reports

● Short Float - the percentage of a company’s stock that has been shorted primarily by institutional traders compared to the number of shares of a company’s stock that is available for public trading

● P/E Ratio - Stock prices/earnings per share - measures its current share price relative to its per-share earnings (EPS). The lower the P/E the more earnings power investors are buying with each share or the less time that it takes for a stock to pay investors back in earnings. A high P/E could mean that the stock is overvalued and/or that companies that grow fast. It could also mean that investors are willing to pay a higher share price because of growth expectations in the future. The average P/E for the S&P 500 has historically ranged from 13 to 15. Growth investors typically look for higher P/E

● PEG is P/E by expected earnings growth, typically 1 - 5 years, the lower the better value in price and past or future growth

● ROS - tells you how efficiently your company runs its operations Net income before taxes / sales = return on sales or % on each dollar of sales - same or higher than others, they’re doing a good job of managing the assets

● ROA - tells you now well the company is using their assets to generate profits. Net income / total assets = ROA. Same or higher than others, they’re doing a good job of managing the assets

● ROE - tells you how successful the company was in earning money for the owners or investors. Net income / shareholder’s equity = ROE %. ROE doesn’t take debt into consideration so it looks better than ROA

● Retained earnings should be positive

● Price target - buy, hold or sell

● Is it a regular outperformer

● Does it deliver consistent growth and dividends

● What does the future of the company look like

● Balance sheet - tells investors how much money a company or institution has (assets), how much it owes (liabilities), and what is left when you net the two together (net worth, book value, or shareholder equity)

● Income statement - a record of the company's profitability. It tells you how much money a corporation made or lost

● Cash flow statement - a record of the actual changes in cash compared to the income statement. It shows you where the cash was brought in and where the cash was disbursed



All metrics are as of March 13, 2020. Here we go!


● Market Cap - 3.28B

● Income - 63.10 M

● Gross margin - 85.60%

● Operating margin - 14.50%

● Earnings per Share (EPS) - 1.62

● P/S - price to sales - 7.57

● Sales Q/Q - 27.60%

● Short Float - 4.87%

● P/E Ratio - 51.10

● PEG - 2.75

● ROS - 15.11%

● ROA - 7.8%

● ROE - 11.50%

● Retained earnings should be positive - 163.71

● Price target - buy, hold or sell - Upgraded to Outperform - Strong Buy $154

● Is it a regular outperformer - no

● Does it deliver consistent growth and dividends - no and no dividends

● What does the future of the company look like - EPS better than expected as reported in Q4 2019 The price-to-sales ratio (Price/Sales or P/S) is calculated by taking a company's market capitalization (the number of outstanding shares multiplied by the share price) and divide it by the company's total sales or revenue over the past 12 months.


The lower the P/S ratio, the more attractive the investment. Price-to-sales provides a useful measure for sizing up stocks. Why is this important? The price-to-sales ratio shows how much the market values every dollar of the company's sales. This ratio can be effective in valuing growth stocks that have yet to turn a profit or have suffered a temporary setback. For example, if a company isn't earning a profit yet, investors can look at the P/S ratio to determine whether the stock is undervalued or overvalued. If the P/S ratio is lower than comparable companies in the same industry that is profitable, investors might consider buying the stock due to the low valuation. Of course, the P/S ratio needs to be used with other financial ratios and metrics when determining whether a stock is valued properly. CYBR’s P/S as of March 13, 2020 is 7.57. As an example, in a highly cyclical industry such as semiconductors, there are years when only a few companies produce any earnings. This does not mean semiconductor stocks are worthless. In this case, investors can use price-to-sales instead of the price-earnings ratio (P/E Ratio or PE) to determine how much they are paying for a dollar of the company's sales rather than a dollar of its earnings. If a company's earnings are negative, the P/E ratio is not optimal since it will not be able to value the stock because the denominator is less than zero.



The price-to-sales ratio can be used for spotting recovery situations or for double-checking that a company's growth has not become overvalued. It comes in handy when a company begins to suffer losses and, as a result, has no earnings with which investors can assess the shares. How do you know what’s good? If there’s a lower P/S, then if the company can turn sales around the P/S will increase and get in line with those in the sector. In general, a low P/S is good for investors and a high P/S could be a warning signal. But what about debt? P/S does not account for a company’s debt on their balance sheet. If a stock has a particular high short percentage of float (approaching 40%), this warrants some serious research into that stock. CYBR has a low short float of 4.87% as of March 13, 2020. How do you put it all together? Ratios are used to compare stocks to other stocks in its sector to get a feel of where the stock you’re looking at falls with others. Low P/S can indicate unrecognized value potential—so long as other criteria exist, like high-profit margins, low debt levels, and high growth prospects. Otherwise, the P/S can be a false indicator of value. What were the lessons learned? I learned a TON!! You really shouldn’t compare ETFs to stocks, at least I don’t think that you typically should. You should compare ETFs to ETFs and stock to stock.


I also learned that there are really three groupings of stock to invest in such as income, growth and value.


Another miss is that I didn’t compare CYBR to it’s stock competitors. Some competitors to CYBR are FireEye Inc, FEYE; Palo Alto Networks, PANW; Fortinet Inc, FTNT; Varonis Systems Inc, VRNS; Qualys Inc, QLYS; Proofpoint Inc, PFPT; Radware LTD, RDWR; Checkpoint Software, CHKP and Zix Corp, ZIXI. I still like CIBR over HACK and I didn’t think that I would come to that conclusion.


I will need to do an analysis with CYBR v competitors.


This was a good learning tool for me to use as I continue to dive into the world of investing in the stock market.


References: https://www.etf.com/HACK https://www.etf.com/CIBR https://economictimes.indiatimes.com/mf/learn/fund-basics/does-net-asset-value-nav-really-matt er/articleshow/55435264.cms https://www.investopedia.com/articles/fundamental/03/032603.asp https://www.investorgreg.net/guides/what-does-short-percentage-of-float-mean https://www.investopedia.com/investing/use-pe-ratio-and-peg-to-tell-stocks-future/ https://www.investopedia.com/terms/g/grossmargin.asp https://www.thebalance.com/investing-lesson-3-analyzing-a-balance-sheet-357264 https://www.dummies.com/business/accounting/using-an-income-statement-to-test-a-businesssprofitability/ https://www.investopedia.com/articles/etfs/top-value-etfs/ https://www.investopedia.com/articles/professionals/072415/value-or-growth-stocks-which-best. asp https://finance.yahoo.com/news/why-cyberark-software-ltd-nasdaq-162416490.html https://economictimes.indiatimes.com/definition/earnings-per-share-eps https://financialmodelingprep.com/dupont-ratios-analysis/CYBR/ https://financialmodelingprep.com/financial-ratios/CYBR https://financialmodelingprep.com/financial-statements/CYBR https://www.nasdaq.com/market-activity/stocks/cybr/earnings https://www.barchart.com/stocks/quotes/CYBR/competitors


March 14, 2020

Robyn J Steckel




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