Tag Archives: enterprise

Which Markets Currently Offer Value And Which Are Best To Avoid?

Summary Analysis of world equity indices can give an idea as to which equity markets provide good investment opportunities and which are best to avoid. Currently, investors should be very alert about investments, particularly on British, Brazilian, Canadian, Mexican and Russian stock exchanges. On the other hand, Chinese H-Shares, South Korean and Vietnamese equities have the capacity for a positive surprise. However, the indisputably best investment opportunity seems to lie in Japan as Abenomics is in full swing. As globalization and new technologies evolve, differences between individual countries are inevitably diminishing. Greater interconnectedness causes local risks to easily spread around the globe and short-term profit opportunities to be quickly seized. However, investors can still find long-term economic moats if they fully understand the underlying timeless principles of equity investing. First of all, they have to realize that the progress of the fundamental value of an investment is strongly correlated with earnings of that investment in the long run. Therefore, investors should focus their attention in this direction and not get fooled by any incidental events. Second, it absolutely crucial to know by heart Warren Buffett’s famous mantra: ,,Price is what you pay, value is what you get.” And third, be aware that proper diversification is a must, otherwise you may face a nervous breakdown in this rapidly changing world. Recently, in light of growing economic and geopolitical tensions, I have been thinking about the geographical allocation of my portfolio. In order to complement broadly discussed issues in financial media, I decided to identify which markets currently offer generally good investment opportunities based on valuation multiples, return on equity and earnings growth analysis of major world equity indices. Price-To-Earnings Looking at the comparison of current PE ratios below, we quickly spot Russian MICEX and several Asian indices among the lower multiples on the left side of the chart and Mexican Mexbol, Brazilian Bovespa and British FTSE on the right side of the chart with higher multiples. Even though PE ratio is widely used valuation metric, it has limitations and hence should be taken with caution. Current Enterprise Value To Trailing Twelve Months EBITDA Especially in the cases of Russia and China, PE indicators may be very misleading since we have heard that the recent Chinese stock frenzy was largely fueled by borrowed money. As a better valuation indicator can then serve EV/EBITDA ratio as it adequately accounts for the level of leverage. Compared to the previous chart, we can clearly observe the shift of Chinese A-Shares index Shanghai Composite to the expensive zone of the chart. Nevertheless, notice that Chinese H-Shares index Hang Seng remained on the relatively cheap side of the chart. Price-To-Book P/B is another popular financial ratio used to gauge market valuation of a stock. However, some assets may be not worth buying even when they trade below their book value. Although Russian equities are boasting with extremely low valuation multiples, they are cheap for good reason. The stiffness of the local business environment and the risk of losing the whole investment due to eventual nationalization of assets are simply too high. Return On Common Equity Moreover, Russian equities together with Brazilian, Canadian and British have the lowest Return on Equity in the given sample. ROE is an important profitability measure and a critical weapon in many value investors’ arsenals. In 1972, Buffett implied that he desires a rate of return on equity of at least 14%. Nine years later, he identified the average rate of return on equity of American companies at 11%. To the last day of October this year, ROE of the S&P 500 totaled 12.5%. 3 Years Earnings CAGR Because of the strong relationship between earnings and market prices in the long-term, one should also assess earnings growth. The following chart captures earnings growth (in %) for the most recent 3 continuous years, ending on the last trading day of October 2015. As you can see, profitability of Russian, Brazilian, British, Canadian and Mexican companies suffered significant losses in recent years, while several Asian indices led the earnings growth. Undoubtedly the most notable rise in earnings was recorded in Japan as the yen heavily depreciated during the given period. Japanese economic miracle 2.0? The fact that the Japanese economy is slowly heating up after long period of deflationary pressures has already been noticed by several renowned economic journals . In order to spur the yet fragile economic recovery, Japan’s Prime Minister Shinzo Abe last week rolled out additional fiscal stimulus. Whether we will witness the second ‘Japanese economic miracle’ can be hardly predicted, but for now, it is quite obvious that Abenomics has considerably changed the course of the third largest world economy. Furthermore, most of Abe’s reforms greatly emphasize the importance of corporate efficiency with a particular focus on ROE. This could help Japanese shares move even higher in the upcoming years. The Bottom Line Probably the best way how to invest in a country’s equity market is through some ETF. The most liquid ETFs with exposure to Japan’s equity market are the iShares MSCI Japan ETF (NYSEARCA: EWJ ) and Japan Hedged Equity Fund (NYSEARCA: DXJ ). Based on the comparison charts above, Chinese H-Shares seem to be surprisingly a good value play even despite the concerns about a slowdown of the Chinese economy. Favorite ETFs consisting of securities listed on the Hong Kong stock exchange include the iShares China Large-Cap ETF (NYSEARCA: FXI ), iShares MSCI China Index Fund (NYSEARCA: MCHI ), SPDR S&P China ETF (NYSEARCA: GXC ) and Guggenheim China Small Cap ETF (NYSEARCA: HAO ). South Korean equities also do not look bad and could be substantially boosted by potential monetary response of local central bank as I wrote about earlier this year . ETFs that could eventually thrive are the iShares MSCI South Korea Capped ETF (NYSEARCA: EWY ), Deutsche X-trackers MSCI South Korea Hedged Equity ETF (NYSEARCA: DBKO ) and the WisdomTree Korea Hedged Equity ETF (NASDAQ: DXKW ). However, not all country ETFs suitably track broad equity indices’ fundamentals. For example, the only ETF providing sole exposure to the Vietnamese equity market – Market Vectors Vietnam ETF (NYSEARCA: VNM ) – mismatches the returns of the national stock market index Vietnam Ho Chi Minh Stock Index (VN Index) by a great deal. Hence, thorough analysis of specific investment instrument should never be neglected as it can easily hamper your original investment objective. With respect to high valuations and weak profitability, the most popular ETFs that should be shorted or avoided by long-only investors are the iShares MSCI United Kingdom ETF (NYSEARCA: EWU ), iShares MSCI Canada ETF (NYSEARCA: EWC ), iShares MSCI Mexico Capped ETF (NYSEARCA: EWW ), Market Vectors Russia ETF (NYSEARCA: RSX ) and iShares MSCI Brazil Capped ETF (NYSEARCA: EWZ ). Note: All presented figures in the charts were exported from Bloomberg Terminal as of 10/30/2015.

Best S&P 500 Utility Stocks According To Zweig Principles: Consider Ameren Corporation

Summary Ranking the top 20 S&P 500 utility stocks according to “All-Stars: Zweig” ranking system. Explanation and back-testing of the “All-Stars: Zweig” ranking system. Description and a buy recommendation for the first-ranked stock of the system: Ameren Corporation. S&P 500 utility stocks have underperformed on average the S&P 500 index over the last year. The average return of the 29 S&P 500 utility stocks that are included in the S&P 500 index (included dividends) in the last 52 weeks has been only 0.18% while the S&P 500 index has returned 2.96%. The table below shows all S&P 500 utility companies, ranked according to their 52-week return. (click to enlarge) On one previous article from September 15, 2014, I described the “All-Stars: Zweig” ranking system. However, in this article, I updated the backtesting of the system and ran it on another group of stocks. The “All-Stars: Zweig” ranking system is quite complex, and it is taking into account many factors like EPS Growth, Sales Growth, Market Performance and Insiders activity, as shown in the Portfolio123’s chart below. To find out how such a ranking formula would have performed during the last 17 years, I ran a back-test, which is available through the Portfolio123 ‘s screener. For the back-test, I took all the 6,555 stocks in the Portfolio123’s database. The back-test results are shown in the chart below. For the back-test, I divided the 6,555 companies into 20 groups according to their ranking. The chart clearly shows that the average annual return has a very significant positive correlation to the “All-Stars: Zweig” rank. The highest-ranked group with the ranking score of 95-100, which is shown in the light blue column in the chart, has given the best return – an average annual return of about 17%, while the average annual return of the S&P 500 index during the same period was about 3.2% (the red column at the left part of the chart). Also, the second, the third group, and the fourth group (scored: 90-95, 85-90, and 80-85) have yielded superior returns. This brings me to the conclusion that the ranking system is very useful. After running the “All-Stars: Zweig” ranking system on all S&P 500 utility stocks on November 24, I discovered the 20 best stocks, which are shown in the table below. In this article, I will focus on the first stock of the list: Ameren Corporation (NYSE: AEE ). (click to enlarge) Company Description St. Louis-based Ameren Corporation powers 2.4 million electric customers and more than 900,000 natural gas customers in a 64,000-square-mile area through its Ameren Missouri and Ameren Illinois rate-regulated utility subsidiaries. Ameren Illinois provides electric delivery and transmission service as well as natural gas delivery service while Ameren Missouri provides vertically integrated electric service, with generating capacity of over 10,200 megawatts, and natural gas delivery service. Ameren Transmission Company of Illinois develops regional electric transmission projects. In 2014, the company generated 61% of its electricity from coal, 16% from its Callaway nuclear plant, 2% from hydro sources, 1% from gas, and 20% from outside purchases. (click to enlarge) Source: Edison Electric Institute Financial Conference On November 06, Ameren Corporation reported strong third quarter 2015 financial results, which beat EPS expectations by a big margin of $0.11 (8.5%) and raised the low end of its core EPS guidance range to $2.55 to $2.65 from $2.45 to $2.65 previously. The company showed significant earnings per share surprise in three of its last four quarters, as shown in the table below. Data: Yahoo Finance Ameren announced net income attributable to common stockholders of $343 million, or $1.41 per diluted share, for the third quarter of 2015, compared with $293 million, or $1.20 per diluted share, for the third quarter of 2014. The year-over-year increase in third quarter 2015 earnings reflected higher retail electric sales volumes driven by warmer summer temperatures that were near normal. The comparison also was favorably affected by earnings on increased investments in electric transmission and delivery infrastructure made under formula ratemaking. In addition, earnings benefited from a seasonal rate redesign and the timing of revenues under formula ratemaking for Ameren Illinois’ electric delivery service as well as a lower effective income tax rate. In the report, Warner L. Baxter, chairman, president and chief executive officer of Ameren, said: We are on track to deliver strong earnings growth in 2015. This growth is driven by the execution of our strategy, which includes allocating capital to jurisdictions with modern, constructive regulatory frameworks and managing our costs in a disciplined manner for the benefit of all our stakeholders. In my view, Ameren is well positioned to achieve its target for strong long-term earnings growth. According to the company, it expects 7% to 10% compound annual EPS growth from 2013 through 2018. Ameren’s $8.9 billion, five-year regulated capital spending plan should help to drive long-term EPS growth. The formulaic Illinois rate structure is constructive, and with increased capital expenditures in the Illinois utility, rates will increase further. The company is waiting for rulings from the Illinois Commerce Commission about an electric delivery formula rate increase along with a natural gas delivery rate case that would raise rates. A decision in these cases is expected in December. The company is experiencing a more favorable regulatory climate at the state level than in the recent past, and, under a Federal Energy Regulatory Commission formula rate plan, is benefiting from returns on its transmission buildout program, which are usually higher than the returns earned on electricity generating and distribution assets. All in all, Ameren is a reliable, fully regulated utility that should provide investors with growing dividend income and long-term share price appreciation. Valuation Year to date, AEE’s stock is down 6.0% while the S&P 500 Index has increased 1.3%, and the NASDAQ Composite Index has gained 7.7%. Moreover, since the beginning of 2012, AEE has gained only 30.8%. In this period, the S&P 500 Index has increased 65.9%, and the Nasdaq Composite Index has risen 95.9%. AEE Daily Chart (click to enlarge) AEE Weekly Chart (click to enlarge) Charts: TradeStation Group, Inc. Ameren’s valuation is fairly good. The trailing P/E is at 16.25, and the forward P/E is at 15.93. The price to book value is at 1.53, and the Enterprise Value/EBITDA ratio is low at 8.32. On October 09, the company declared a quarterly cash dividend on its common stock of 42.5 cents per share, a 3.7% increase from the prior quarterly cash dividend of 41 cents per share, resulting in an annualized equivalent dividend rate of $1.70 per share. The previous annualized equivalent dividend rate was $1.64 per share. The forward annual dividend yield is pretty high at 3.92%, and the payout ratio at 61.2%. The annual rate of dividend growth over the past three years was at 1.2%, and over the past five years was at 0.9%. Ameren expects the dividend payout ratio to be between 55% and 70% of annual earnings. AEE Dividend data by YCharts Summary Ameren delivered strong third quarter 2015 financial results, which beat EPS expectations by a big margin and raised the low end of its core EPS guidance range to $2.55 to $2.65 from $2.45 to $2.65 previously. The company showed significant earnings per share surprise in three of its last four quarters. In my view, Ameren is well positioned to achieve its target for strong long-term earnings growth. According to the company, it expects 7% to 10% compound annual EPS growth from 2013 through 2018. Ameren’s $8.9 billion, five-year regulated capital spending plan should help to drive long-term EPS growth. The company recently raised its dividend by 3.7% to a new annual rate of $1.70 per share. The forward annual dividend yield is pretty high at 3.92%. All in all, Ameren is a reliable, fully regulated utility that should provide investors with growing dividend income and long-term share price appreciation, and its stock is an investment opportunity right now.