The Forensic Accounting ETF (NYSEMKT: FLAG) is still new and trying to gain traction in an ETF marketplace that is very crowded. What makes this one unique is that it “flags” accounting issues to seek to invest in the company’s with strict accounting measurements through time. It is also somewhat actively managed due to key changes that can occur through time. The exchange traded fund has made some recent changes to its portfolio based on the underlying accounting metrics.

What is interesting is that DJIA component Home Depot Inc. (NYSE: HD) was among the changes in the portfolio to the downside. The Forensic Accounting ETF team gave it an “F” rating. Other new “F” ratings were handed out to the likes of Ford Motor Co. (NYSE: F), Rockwell Collins Inc. (NYSE: COL) and even to the high-growth Trip Advisor Inc. (NASDAQ: TRIP). The fund said:

• Home Depot’s revenue increase of average 6% doesn’t justify the stock’s 23-plus P/E ratio.
• Ford has high and increasing cost of goods sold putting pressure on margins, which are declining.
• Rockwell Collins was listed as having its cost of goods sold and selling, general and administrative expenses combined at nearly all-time highs and putting pressure on its margins while declining total shares suggests that the earnings per share figure is being artificially boosted.
• Trip Advisor’s selling, general and administrative expenses are seen as rising rapidly rising and there are indications the company is having difficulty collecting monies due.

Conversely, Lockheed Martin Corp. (NYSE: LMT), Abercrombie & Fitch Inc. (NYSE: ANF) and Broadcom Corp. (NASDAQ: BRCM) were given “A” ratings.

• Lockheed Martin was shown as having beaten earnings in the last four quarters and cost of goods sold is down 1% year over year while inventories and payables are low.
• Abercrombie is experiencing strong margin expansion as a result of impressive growth, and EBITDA is the highest in two years.
• Broadcom’s revenue trend was called positive and receivables as a percentage of revenue are declining.

We would note that this new Forensic Accounting ETF (NYSEMKT: FLAG) is still fighting to gain market share. Some might argue that it is fighting to become relevant as well, since trading volume is still sometimes under 10,000 shares per day. We applaud the effort for an ETF manager to go out and make picks and pans based on a designated set of accounting metrics. As a reminder, this one has only traded since the end of January, so the verdict on how successful it will be is still to be determined.

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