Star Wars is awesome… but is that investable? How do you win stock picking contests? How can you exploit deadweight loss from Christmas? In the current episode, we discuss the following question: If Star Wars is going to sell a ton of tickets and if Disney (NYSE: DIS ) owns Star Wars, then does it follow that I should buy Disney? We also chat about stock picking contests and the deadweight loss of Christmas presents.
Unregulated utility companies’ performance likely to stay challenging in 2016 because of weak and volatile power prices. DUK and SO making correct strategic attempts to strengthen regulated operations. Stock valuations for DUK and SO are cheap, as both are trading at discounts to peers and the industry average. 2015 has been a tough year for the U.S. utility sector, mainly because of concerns regarding the Fed interest rate increase; the utility sector ETF (NYSEARCA: XLU ) is down 10% year-to-date. Moving into 2016, given the decline in the power and natural gas prices, U.S. unregulated utility companies’ performance will stay volatile and weak; however, I think U.S. utility companies with significant and growing regulated business operations will stay an attractive investment option for income-hunting investors. Duke Energy (NYSE: DUK ) and Southern Company (NYSE: SO ) are the two U.S. utility companies that have large regulated business operations and are further working to strengthen their regulated business operations, which will provide stability to their revenues and cash flows, and support dividend growths. Moreover, valuations for both the stocks stay compelling. Two Utility Stocks: DUK and SO In recent years, low power and natural gas prices has adversely affected performance of unregulated business operations. As the power and natural gas prices continues to stay weak, I think, 2016 will be another challenging year for the unregulated utility companies. In the volatile unregulated business environment, the U.S. utility companies are working to lower their unregulated business operations, which will positively affect their performance. DUK is among the leading utility companies of the U.S., and has been working to strengthen its regulated business operations by making regulated capital investments; the company is expected to make capital investments of $20 billion in the next four years, which will result in increase in its rate base and support earnings growth. The company is not only upgrading its existing regulated infrastructure, but also diversifying the power generation assets by focusing on renewable energy sources, which will improve its business risk profile and allow it to comply with changing environmental regulations. DUK plans to spend to $3 billion on renewable energy in the next four years. Moreover, in 2016, if the company decides to sell its international unregulated business operations, it will positively affect its stock price and will make its cash flows more stable. Also, once the company successfully closes acquisition of Piedmont Natural Gas (NYSE: PNY ), which is consistent with its efforts to grow regulated earnings, it could opt to undertake more regulated gas business acquisitions to strengthen its gas business. Given the company’s aggressive efforts to strengthen its regulated operations, its cash flows will improve, which will allow it to increase its dividend growth consistently in the coming years. The stock has yield of 4.75% , which is supported by its 14% operating cash flow yield, and makes it an impressive investment option for income investors. Also, investors should keep track of yearly earnings call in February, in which the company will provide update on its 5-year growth expectation, synergies related to PNY acquisition and rate case outlook. Southern Company is another utility stock which stays an attractive investment option for income investors, as it offers a solid yield of 4.7% , which are backed by its operating cash flow yield of 15% . The company generates almost 90% of its earnings from regulated operations, which provides stability to its cash flows. Similar to DUK, SO also is working aggressively to modernize and strengthen its power generation assets. Moreover, once the company’s two construction projects, Kemper and Vogtle Power plants, are completed it will portend well for its long-term earnings. Also, the company has been actively increasing its renewable energy asset base. The company spent more than $2 billion on renewable in 2015, and plans to spend another $1.3 billion in 2016, which is expected to increase its renewable energy portfolio capacity to 2,600 MW. Consistent with its renewable generation assets base growth, the company acquired almost 600 MW of solar assets from First Solar (NASDAQ: FSLR ). And also, completion of SO’s and AGL Resources (NYSE: GAS ) in the later half of 2016 will augur well for the stock price. The company’s efforts to improve its regulated power asset base will support its long-term earnings growth, and its business risk profile will improve, as it will complete pending acquisitions and ongoing construction projects. Also, the company’s cash flows will stay strong to support its dividend growth, which will improve investors’ confidence. Valuation and Summation Unregulated utility companies’ performance is likely to stay challenging in 2016 because of weak and volatile power prices. However, companies like DUK and SO, which are making correct strategic attempts to strengthen their regulated operations, will deliver healthy performances in future years. Both DUK and SO offer solid yields of 4.7% and 4.75%, respectively, which makes them attractive investment prospects for income-hunting investors. Moreover, stock valuations for DUK and SO are cheap, as both are trading at discounts to their peers and the industry average. DUK and SO are trading at forward P/E of 14.8x and 15.7x, respectively, versus the utility sector’s forward P/E of 16.5x .
Summary Rising yields generally mean the economy is improving, which should benefit companies that depend on corporate and consumer spending. Technology is at the edge of another transformative wave. The acceleration of global population aging is going to drive demand across the biotech sector. Ride the coming transformative wave with this unique ETF that targets both technology and biotech and has consistently outperformed the broader market by a wide margin. Michio Kaku is a world-renowned, American futurist and theoretical physicist. He is a Professor of Theoretical Physics at the City College of New York (CUNY). Kaku has written several books about physics and related topics and has made frequent appearances on radio, television, and film. I recently had the pleasure of listening to him speak at an event in Boston. During his talk, he described the past three waves of wealth generation and shared his vision of how technology will shape the future. The question today is: what is the fourth wave? The first wave was steam power, the second wave was electricity, the third wave was high technology – all of it unleashed by physicists. What is the fourth wave of wealth generation? It’s going to be on the molecular level: nanotech, biotech and artificial intelligence . – Michio Kaku. According to Kaku, we’re at the edge of another wave of technological transformation. The world is growing increasingly dependent on technology. Products and services based upon or enhanced by information technology have revolutionized nearly every aspect of human life. The use of IT and its new applications has been extraordinarily rapid across all industries and an IT-Biotech convergence is already well underway. The acceleration of global population aging and technological breakthroughs are going to drive demand across the biotech sector. Longer life spans and increasing rates of chronic conditions will continue to fuel demand for new products and services. Nanotech breakthroughs will spur innovations across a wide range of applications in biotech and healthcare, potentially curing human illness. Multiple platform technologies working in combination – nanotechnology, biotech/genomics, artificial intelligence, robotic and ubiquitous connectivity – are going to lead to increasing profits for the dominant players utilizing these technologies. Many ETF issuers are coming up with innovative concepts targeting these technological transformative areas. The iShares Exponential Technologies ETF (NYSEARCA: XT ), with an annual expense ratio of 0.30%, attempts to track the developed and emerging market companies which create or use exponential technologies such as big data and analytics, nanotechnology, medicine and neuroscience, networks and computer systems, energy and environmental systems, robotics, 3-D printing, bioinformatics, and financial services innovation. (click to enlarge) There are funds targeting cloud computing such as the First Trust ISE Cloud Computing Index Fund (NASDAQ: SKYY ), which has annual expense ratio of 0.60%. The Robo-Stox Global Robotics and Automation Index ETF (NASDAQ: ROBO ), with an annual expense ratio of 0.95%, targets the robotics industry or you could own the Purefunds ISE Cyber Security ETF (NYSEARCA: HACK ), for 0.75% per year, which holds a portfolio of companies in the cyber security space. SKYY and HACK both follow the technology sector solely while ROBO and XT follow multiple sectors. Although many of these ETFs hold a few well-known, large-cap companies, most are fairly expensive and have so far proven to be more volatile than the broader technology sector. Because they have a short history, and until many of the smaller Exponential Technology companies achieve consistent profit growth, I prefer to ride the coming tech-biotech transformative wave with a portfolio of large, high-quality companies – market leaders within their respective industries, with a history of delivering consistent revenue growth. These large-cap market leaders are, no doubt, aware of how emerging technologies might bring them new customers or force them to defend their existing bases or even inspire them to invent new strategic business models. Many successful small-cap companies with disruptive technologies will eventually become dominant large-cap players. In fact, the NASDAQ’s dominant players have changed drastically in the last 15 years and probably will look much different in the future. You can capture this large-cap dynamic dominance with one of our favorite, can’t miss ETFs, the tech-heavy PowerShares QQQ ETF (NASDAQ: QQQ ), a unique fund that targets both technology and biotech and has outperformed the broader market by a wide margin for more than a decade. (click to enlarge) The QQQ is an ETF based on the NASDAQ 100 Index. The Index includes 100 of the largest domestic and international non-financial companies listed on the Nasdaq Stock Market based on market capitalization. The fund is rebalanced quarterly and reconstituted annually. Besides being a 5-Star Morningstar-rated ETF with an expense ratio of just 0.20%, QQQ has delivered consistently superior returns during most time periods over the last decade. QQQ Sector Allocation: (click to enlarge) The top 10 holdings of QQQ consist primarily of U.S. technology, and also include Gilead Sciences (NASDAQ: GILD ), a major biotechnology firm, Amazon (NASDAQ: AMZN ), an e-commerce retailer and Comcast (NASDAQ: CMCSA ), a media/entertainment giant. QQQ Top 10 Holdings: (click to enlarge) In addition to the technology names in the above graphic, the QQQ holds another 36 big-tech firms including Qualcomm (NASDAQ: QCOM ), Texas Instruments (NASDAQ: TXN ) and Baidu (NASDAQ: BIDU ) to name a few. Besides Amazon and Comcast , there are 31 additional Consumer Discretionary names including Netflix (NASDAQ: NFLX ), Tesla (NASDAQ: TSLA ) and Priceline (NASDAQ: PCLN ). And besides Gilead, the QQQ’s biotech holdings consist of 15 more companies including Celegene (NASDAQ: CELG ), Amgen (NASDAQ: AMGN ) and Biogen (NASDAQ: BIIB ). Over 55% of the QQQ is tech. Technology is a cyclical industry. When the economy gets stronger, cyclical sectors like technology have tended to generate higher revenues from increased consumer and corporate spending. So its relative performance tends to rise and fall with the strength, or lack thereof, of the economy. However, a number of technological innovations – from nanotech applications to cloud computing to mobile connectivity – are spurring migration to new technologies. This migration may continue regardless of the overall condition of the global economy. Some solid, pure technology funds include the Technology Select Sector SPDR ETF (NYSEARCA: XLK ), the iShares U.S. Technology ETF (NYSEARCA: IYW ), the Vanguard Information Technology ETF (NYSEARCA: VGT ) and the Fidelity Select IT Services Portfolio (MUTF: FBSOX ). However, the aforementioned funds are primarily all tech and not the unique mix of the QQQ. The world’s dependence on technology and the acceleration of global population aging are two megatrends that should drive performance for years to come. Seventy percent of the QQQ’s holdings focus on well-established, high-quality technology and biotech companies. The fund’s consumer discretionary stocks should also benefit from an improving economy while the fund’s consumer staples stocks add a defensive component to the mix. Let’s take a look at how the QQQ has performed over various time frames. The newer Exponential Technology ETFs don’t have a long-term performance record so they cannot be included in this comparison. As you can see in the table below, the QQQ, with its unique structure of one-half tech, one-fifth consumer discretionary and one-seventh biotech, has outperformed the S&P 500 and just about every other large-cap technology fund during most time periods over the past decade, including the iShares S&P 500 Growth ETF (NYSEARCA: IVW ), which holds the fastest growing half of the S&P 500 stocks. QQQ is a kind of quirky fund, but it works. It delivers a unique combination of tech-biotech, growth and large-cap exposure. 10-Year Performance: (click to enlarge) Conclusion Rising yields generally mean that the economy is improving, which should be good for technology and growth companies that depend on corporate and consumer spending. Big tech and biotech companies have the potential to capitalize on two mega-trends for years to come – the increasing global dependence on technology and the acceleration of global population aging. QQQ is in a strong position to benefit from these favorable trends. As Michio Kaku says, “Don’t bet against technology. Be a surfer. Ride the wave of technology, see the wave coming, get on the wave”.