Tag Archives: alt-investing

The Vanguard Short-Term Bond ETF Is A Great Replacement For Cash

Summary The Vanguard Short-Term Bond ETF delivers excellent diversification benefits relative to the equity market without being as miserable as a savings account. The bonds in the Vanguard Short-Term Bond ETF are focused on very high credit quality but there is a small selection of lower rated bonds to enhance returns. The Vanguard Short-Term Bond ETF bond selections contain some diversification in maturity to give investors a focus on short term investments without giving up on yield. The Vanguard Short-Term Bond ETF (NYSEARCA: BSV ) is a solid bond fund for the very conservative investor that wants a place to park while earning a better return than a savings account will offer. Lately I’ve been concerned about the market being relatively highly valued. I don’t intend to retire for quite a while (measured in decades), so I’m willing to be more aggressive with my portfolio. Despite being willing to accept additional risk on my portfolio, I want to be compensated for taking risk. While I still like certain parts of the market (as shown by buying diversified REIT ETFs), I’m looking for ways to get better diversification in the portfolio. The desire for better diversification across asset classes has pushed me to make a few hard decisions. For instance, it is pushing me to slow my rate of purchases on additional equity so I can have more money on hand to buy in if we see a significant retreat in equity prices. Those expectations and desires bring to me look for some solid bond ETFs so I can at least get a little interest on the money that I would otherwise have to hold in cash. Low volatility and low correlation with the domestic stock market are major concerns, but I also want something with reasonable liquidity and low expense ratios. When the yields on bonds are terrible, and I believe that is a fair statement today, a high expense ratio would eat a substantial portion of the returns. In this case, the expense ratio is only .10%. It is in my nature to be cheap and I have to admit, that .10% sounds fair to me. It thoroughly beats many bond funds on expense ratio. How volatile is the Vanguard Short-Term Bond ETF? I started by checking for correlation with the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) by comparing the monthly changes in dividend adjusted closes over the last 8 years. The correlation was 3.34%, which is beautiful. By virtually any measure, incorporating BSV into a portfolio is going to materially reduce the risk of the portfolio. While SPY had a standard deviation of 4.6% in monthly returns, BSV only had a deviation of .777%. Low correlation and low volatility is exactly what we should expect for a fund invested in short-term high quality bonds, but it is always worth double checking. Sources of Return With the returns on short term maturities being very low, investors should consider having at least a little bit of credit risk or duration in their portfolio even if they want to focus on short term holdings. I checked both of those areas to see how the Vanguard Short-Term Bond ETF was doing on internal diversification. Credit The following chart shows the credit quality breakdown: In my opinion, this is a fairly reasonable allocation for an ETF that an investor might want to use as a substitute for cash in their portfolio if they expect to be holding that cash for a few months at a time. The ETF portfolio drops down to ratings as low as Baa but keeps the majority of their holdings in very high credit quality bonds. Maturity The next chart shows the maturity of the various bonds Again the maturity distribution looks good for short term holdings. By dividing the holdings between the different maturities rather than focusing them around a specific point there is more diversification across the short term yield curves which should produce a slight decrease in the expected level of volatility for the expected level of income. A Potential Cash Replacement Looking at the monthly returns over 8 years, I found there was only one month where the change in the dividend adjusted close was equal to 2% or greater. In that one month, it was precisely at 2%. Due to the positive returns from interest and low levels of duration and credit and risk the downside risk is fairly low. Of course, if an investor is using it as a replacement for cash they’ll need to use a brokerage that lets them buy and sell it with no commissions. Conclusion I like the portfolio for the Vanguard Short-Term Bond ETF. The yields are still weak, but that is an issue with high quality short term yields being very low rather than a problem with the underlying ETF. Given the low risk of the bond ETF, I like this fund as a source of diversification in the portfolio. It’s too bad free trading on the ETF is not more widely available, because this looks like a solid place to park cash when the market gets too rich or when investors are just looking for new options. The combination of a small amount of duration with a little credit risk makes this option more appealing to me than a fund that refused to take on any risk in those categories. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: Information in this article represents the opinion of the analyst. All statements are represented as opinions, rather than facts, and should not be construed as advice to buy or sell a security. Ratings of “outperform” and “underperform” reflect the analyst’s estimation of a divergence between the market value for a security and the price that would be appropriate given the potential for risks and returns relative to other securities. The analyst does not know your particular objectives for returns or constraints upon investing. All investors are encouraged to do their own research before making any investment decision. Information is regularly obtained from Yahoo Finance, Google Finance, and SEC Database. If Yahoo, Google, or the SEC database contained faulty or old information it could be incorporated into my analysis.

Good Business Portfolio Started A Position In Hanesbrands

Summary Hanesbrands is in a strong growth uptrend, can it continue? Dividend is 1.2% and has been paid for three years with a low payout ratio. Growth over the last 5 years is fantastic at over 500%. This article is about Hanesbrands (NYSE: HBI ) and why it should be considered as a growth company. Hanesbrands products cover a full line of consumer goods and designs, manufactures, sources and sells a range of apparel products, including t-shirts, bras, panties, men’s and children’s underwear. This growth company could make you rich if the growth continues. The Good Business Portfolio Guidelines, total return, earnings, and company business will be looked at. Good Business Portfolio Guidelines. HBI passes 8 of 10 Good Business Portfolio Guidelines. These guidelines are only used to filter companies to be considered in the portfolio. There are many good business companies that don’t break many of these guidelines but will still not be considered for the portfolio at this time. For a complete set of the guidelines, please see my article “The Good Business Portfolio: All 24 Positions”. These guidelines provide me with a balanced portfolio of income, defensive and growing companies that keeps me ahead of the DOW average. Hanesbrands Inc. is a large cap company with a capitalization of $13.5 Billion compared to many other similar clothing manufacturers. The company has a dividend yield of 1.2% and is its dividend has been paid for 3 years in a row with the payout ratio low at 32%. HBI is therefore not a dividend story at this time but may be if this growth of the company continues. Hanesbrands’ cash flow is good at $503 Million, allowing it to pay its modest dividend and have plenty left over to investing in the growth of the company. HBI has bought small companies to attach to its already large apparel business. They are just getting the cost savings from the Knights purchase. I also require the CAGR going forward to be able to cover my yearly expenses. My dividends provide 2.8% of the portfolio as income and I need 2.2% more for a yearly distribution of 5%. HBI has a 3 year CAGR of 20% easily meeting my requirement. Looking back 5 years $10,000 invested 5 years ago would now be worth over $55,000 today. I feel this makes HBI a good investment for the growth investor. S&P Capital IQ does not have a star rating on HBI but the financial parameters on the fact sheet are very positive indicting a buy. Total Return and Yearly Dividend The Good Business Portfolio Guidelines are just a screen to start with and not absolute rules. When I look at a company, the total return is a key parameter to see if it fits the objective of the Good Business portfolio. HBI did better than the DOW baseline in my 30.4 month test compared to the DOW average. I chose the 30.4-month test period (starting January 1, 2013) because it includes the great year of 2013, the moderate year of 2014 and 2015 YTD. I have had comments about why I do not compare the total return to the S&P 500 average. I use the DOW average because the Good Business Portfolio has six DOW companies in it and is weighted more to the DOW average than the S&P 500. Modeling the DOW average is not an objective of the portfolio but just happened by using the ten guidelines as a filter for company selection. The total return makes HBI appropriate for the growth investor. The dividend is below average and well covered and has been increased each year for 3 years. DOW’s 30.4-month total return baseline is 38.03% Company Name 30.4 Month total return Difference from DOW baseline Yearly Dividend percentage Hanesbrands Inc. 265.7% 227.7% 1.20% Last Quarters Earnings For the last quarter HBI reported earnings that were expected at $0.22 compared to last year at $0.19 and expected at $0.22. Revenue missed by $20 Million. They guided higher to $1.61 -1.66 for the year. This was a fair report. Earnings for the next quarter are expected to be at $0.50 compared to last year at $0.39. HBI will most likely do well going forward. In the fullness of time HBI should continue its growth and make good total returns but will be watched for weakness. Business Overview The HBI apparel business is highly vulnerable to economic shocks as the purchase of clothing items is largely optional in comparison to other discretionary consumer goods. In the first quarter, the negative effects of a harsh winter, West Coast port disturbances and unfavorable currency translations were offset by an improving economy and lower gas prices which improved consumers’ discretionary spending power. The Company’s innerwear and active wear apparel brands include Hanes, Champion, Bali, Playtex, Maidenform, JMS/Just My Size, L’eggs, Flexees, barely there, Wonderbra, Gear for Sports and Lilyette. Its international brands also include DIM, Nur Die/Nur Der, and Zorba,. The economy seems to have steadied and is getting better but very slowly and who knows when the FED will start to raise rates which will indicate a stronger growing economy. The past three years have seen a straight line of upward growth for HBI , we will see in time if it can continue. Low Cotton prices have helped HBI reduce material costs. Take Aways I think HBI could well be a continuing growth company. I have just started a small position at 0.3% of the Good Business Portfolio and will add to it if the earnings continue to show growth and when cash is available as I trim the positions above 8% after earnings season. The objective of the Good Business Portfolio is to embrace all styles of investing, HBI is a growth play. My only fear is that I am too late to the party. Of course this is not a recommendation to buy or sell and you should always do your own research and talk to your financial advisor before any purchase or sale. This is how I manage my IRA retirement account and the opinions on the companies are my own. Disclosure: I am/we are long HBI. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

CEMIG – A Good Company Facing Some Bad Storms

Summary The company lost the concessions for about 40% of its electricity production, and the effect of that should lower net income by 50%. It is a stable company not at risk of bankruptcy, getting close to the bottom with its current price decline. The positive long-term economic outlook for Brazil should also positively influence CIG. The downside risk of investing in CIG is about 35%, and the upside expectation is about 100% or more in the next few years. Stable but state-owned energy company Companhia Energética de Minas Gerais (NYSE: CIG ) operates in generation, transmission, marketing and distribution of electricity, energy solutions (Efficientia S.A.) and distribution of natural gas (Gasmig) in 23 Brazilian states and in Chile. The Cemig Group comprises of the holding company (Cemig), its two main wholly-owned subsidiaries – Cemig Geração e Transmissão S.A. (‘Cemig Generation and Transmission,’ or ‘Cemig GT’) and Cemig Distribuição S.A. (‘Cemig Distribution,’ or ‘Cemig D’) – and other subsidiaries and affiliates; a total of 206 companies, 18 consortia and two Equity Investment Funds (FIPs). With a direct interest of 26.06%, CIG also controls Light S.A., an electricity distributor serving 31 cities in the state of Rio de Janeiro, a region with over 11 million consumers. CIG also has an interest of 43.36%, exercising control, in the transmission company Taesa (Transmissora Aliança de Energia Elétrica S.A.). As part of a growth strategy increasingly aiming to expand in renewable energy sources, in 2014, CIG became part of the control block (27.4%) of Renova, a leading company in Brazil’s wind power market, which also owns investment portfolios in solar and other renewable sources. The controlling stockholder of CIG is the State of Minas Gerais in Brazil, which owns 51% of the common (voting) shares. Another major stockholder is AGC Energia S.A., holding 32.96% of the common shares. CIG is a strongly-positioned energy company that is state owned. Every investor should be aware of the ownership issue because according to Transparency International , Brazil should improve on transparency in local governments and integrity in public contracting. As you will see later, those are the issues that are hammering CIG at the moment. Macro look CIG has been hammered with really bad news lately (about this later), and when this is combined with the trouble the Brazilian economy is currently going through, a 70% decline in its share price in the last 3 years should not be a surprise. Figure 1. shows that the Brazilian currency has depreciated by 50% in relation to the US$ in the last 5 years, and the depreciation trend is still strong. An investment in CIG is not only an investment in a company, but also a currency bet. Figure 1. USD vs. BRL (click to enlarge) Source: xe.com On the other hand, Brazil is currently in an economic slowdown that does not affect CIG because it is a non-cyclical company, and according to the World Bank , Brazil’s economy is expected to fall by 1.3% in 2015 but grow in 2016 by 1.1% and 2.0% in 2017. The turnaround in the economy could be a positive sign for investing in Brazil and will presumably have a positive impact on the currency. Also a turnaround would be very helpful for CIG because of its short-term debt structure (Figure 2.) with an average debt cost of 7.05% in real terms (currently, the inflation in Brazil is just below 9%). Figure 2. CIG’s debt (click to enlarge) Source: Cemig IR Current bad news that hammered the stock To find out what is really happening, you have to search for Brazilian news agencies because news about CIG flies under the radar of the big international news agencies. A few days ago, CIG managed to finance only 60% of the one billion R$ offering with a 7.97% interest rate. The most plausible reasons for that are the high debt of Brazilian energy companies in general and the current out-of-favor status of the sector. Before the failed financing issue, Fitch also degraded CIG’s credit rating from “AA” to “AA-” because of its aggressive acquisition plans, high dividend payout ratio, and political risks. But the most important bad news is the loss of the concession contracts for the Jaguara, São Simão, and Miranda hydroelectric plants that accounted for about 40% (Fitch 36% and Diariodocomercio 45%) of the company’s electricity generation potential. The loss of the contracts should have a negative impact of R$1.5 billion on CIG’s annual EBITDA. Consequently, it should impact a little bit less than 50% of CIG’s net profits that were at R$3.1 billion for 2014. Valuation Because of the currency risk, I will base my valuation on the dividends in order to clearly see what an international investor can expect in the future. The current dividend is US$0.15 per share; it is 25% of the 2014 net earnings and not 50% as usual and statutory due to the low levels in the electricity-generating water reservoirs. As soon as the financial situation of the company stabilizes and the water levels rise, CIG will pay out the rest of the dividend up to the statutory 50% of the net earnings for 2014. I am going to continue using the 25% payout ratio to take a large margin of safety. In the worst case scenario, assuming that CIG will not be able to renegotiate the concession contracts for the Jaguara, São Simão and Miranda hydroelectric plants, its net income will probably fall by 50% and the dividend will fall accordingly. Thus, in the future, we can expect a dividend of US$0.07 per share and EPS of around US$0.28. If we add the 15% depreciation of the Brazilian Real (R$) in relation to the US dollar, we get a constantly lower dividend in real terms for international investors. So in the worst case scenario, with all the risks accounted for, and expecting a P/E ratio of around 8, the share price of CIG should be US$2.24, a downside risk of 35% at the moment. Conclusion I am not sure that all will be so bad as it is at the moment, and that the current situation with the concessions is final. If the company manages to renegotiate the contracts, and we see a turnaround in the Brazilian economy with lower interest rates, CIG’s strong growth strategy would be boosted, and it could become a very successful investment. By keeping the current EPS of US$0.65 and by adding a P/E ratio of 10, we find ourselves very quickly with a US$6.5 valuation per share. As soon as the economic situation in Brazil improves, and the management works out a deal with the government for the concessions, the stock has a very large positive potential. I would put the downside risk to US$2.24 and the upside expectation to US$6.65 in the next two years. So the upside expectation is about 100%. Due to the current financial problems and concession contract issues, I will not initiate a position at the moment but wait to get better buying opportunities with a larger safety margin. I believe CIG is a sound company that is currently in a bad internal and macro position but without any bankruptcy risks on the horizon, and getting very close to the bottom of its price decline (the time frame for the bottom should be about one or two years; that for me is very short term but for the majority of investors a very long term). Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.