Tag Archives: government

American States Water Company: A Helping Hand Boosting Growth

American States Water Company’s shares have become undervalued as a result of negative earnings results in the past. This undervaluation does not take into account the favorable Californian regulatory environment that could help move the company along. Investors looking for a stable, long-term investment opportunity with the potential for capital appreciation should consider picking up the company’s shares. As investors know, utilities companies are some of the most stable companies that investors can invest in. These companies are known for their strong, stable balance sheets that regularly doll out steady income in the form of dividends. Not many investors would consider utilities companies as investments for risk-loving investors, given the fact that demand in the utilities industry is so inelastic. This inelasticity stems from the fact that consumers will purchase utilities services no matter what happens to the general economy; after all, no one in their right mind would save money by cutting off their water or heat. But small cap utilities companies can offer investors looking for something else a chance at both capital appreciation and steady income. Given the nature of small cap companies, small cap utilities companies give investors the chance to outperform the general market without too much risk involved. This is not to say that company-specific risk can still play a role in increasing the overall risk in a portfolio, but industry-wise, the risk in that aspect is rather low. One small cap utilities company that investors should consider taking a look into is American States Water Company, Inc. (NYSE: AWR ), a pure play water company that mainly serves customers in California by providing water and electric utilities services. The company operates through two main businesses: Golden State Water company and American States Utility Services, and each of these business segments has their own individual subsidiaries. Golden State Water company contains Golden State Water, a regulated water utility company, and Bear Valley Electric, a regulated electric utility company. Furthermore, American States Utility Services contains a number of subsidiaries, including: Fort Bliss Water Services company, Old Dominion Utility Services, Old North Utility Services, Palmetto State Utility Services, and Terrapin Utility Services. All of these subsidiaries enable a strong amount of diversification within the company’s sales mix, which enable investors to share in that diversification indirectly through an investment in the company’s shares. Moving on to the company’s stock chart, investors can see the outstanding returns that the company has generated for investors. Funds invested in the company on the onset of calendar year 2011 would have generated a return on investment of more than 150%, not bad for a utilities company. While the company has had a great turn in the years 2011 throughout 2014, the company’s shares recently began slowing down in value growth. That, in part, is due to macroeconomic events out of the company’s control, and thus, investors should not discount the stock due to a slowdown in value growth throughout 2015. In regards to a technical perspective, the 50-day moving average has been basically above the 200-day moving average for the most part, with the 50-day moving average occasionally touching the 200-day moving average. The two technical indicators’ spread have been widening recently, which could signal near-term upside. (click to enlarge) Source: Stockcharts.com From a fundamental standpoint, long-term investors have much to feast upon. The California water utilities regulation has been particularly favorable in the sense that regulators are taking action to make processes more streamlined and adjust the way that water usage is measured. Through this favorable regulatory environment, the company can once again augment its customer expansion and increase top-line growth. As a result of numerous earnings calls in the past that yielded negative earnings growth, investors have discounted the stocks’ investment potential, but these investors fail to see the long-term picture. As such, shares of the company have become undervalued and are ripe for pick up by value investors with that long-term perspective in mind. Growth in EPS has been unsteady, but that could change with this favorable regulatory environment as the company streamlines its operations and widens its margins, boosting EPS. While the utilities industry is indeed a heavily regulated industry, and while industries that are heavily regulated are subject to the whims of the government, in this case, that’s a good thing. The company will have a helping hand prop up and reignite its growth engines. Investors looking for a stable, long-term investment that has the potential for capital appreciation should consider investing in American States Water Company.

Is The Argentina ETF A Good Buy Ahead Of The Runoff Election?

Argentina has been on investors’ radar lately for the much-awaited election results that can make or break its fate for the coming four years. The country’s economy is in dire straits, with cooling growth, higher inflation, declining currency and debt default issues. Naturally, a probable change in political power, which might bring about a shift in economy policies, has drawn investors’ attention. In such a backdrop, a poll was held on October 25. But the election did not led to a clear winner, and thus led to a runoff. Notably, Argentina’s outgoing leftist president, Cristina Fernandez, was constitutionally debarred from fighting for the third successive term , and her party’s candidate shocked with a feeble performance. And Conservative opposition’s pro-business candidate Mauricio Macri’s unexpected strength in the poll box set the stage for a runoff on November 22 . Marci will rival FPV candidate Daniel Scioli, who is, in fact, backed by Cristina Fernandez. The first round of elections was a neck-to-neck competition, with Daniel Scioli getting 36.86% and Macri receiving 34.33% votes. Sergio Massa, a past partner of Cristina Fernandez de Kirchner who shifted allegiance to the opposition, could be the wire-puller after capturing 21.34% of the votes, with analysts suspecting that he might tie up with Macri to form the government, as per NY Times . Since Mauricio Macri is viewed as a proponent of free markets, a runoff lifted the Argentine equities. However, citizens are receiving online warnings that they might lose out on social welfare if Macri wins. Basically, Scioli has a leftist approach. He is, thus, repeatedly referring to the free-market policies of the 1990s that led to the 2002 economic crisis, per Reuters . However, Macri’s political pledge is to revamp investment and curb inflation, while simultaneously maintaining the required social programs. Market Impact As the first round of election went against the opinion poll and Mauricio Macri emerged as a dark horse to capture the close second position, investors started to look for growth prospects in Argentina. Several analysts went long on these stocks. The only ETF targeting the nation – the Global X MSCI Argentina ETF (NYSEARCA: ARGT ) – added about 22.9% in the last one month (as of November 2, 2015), of which 11.7% returns came in the last 10 days. Can it Run Further? The second round of elections will take place on November 22. And with Scioli still maintaining the lead, hopes are still alive for him to win. Sergio Massa’s 21% voters will matter the most now, as they could swing the balance. If Macri wins, the Argentina ETF is sure to see a nice rally. If not, then too the stocks will likely enjoy a decent run on hopes of a political change ahead of the runoff election. Investors should also note that Scioli is apparently more market-friendly than Fernandez, under whose governance the country’s growth slackened. So no matter who wins, the Argentina ETF might see a rebound in the near term. ARGT is still 13.7% down from the 52-week high (as of November 2, 2015), and thus, has room for further advancement if speculations over Macri’s win persist. So, investors with a stomach for risks can take a look at the ETF. The fund presently has a Zacks ETF Rank #5 (Strong Sell), with a High risk outlook. Let’s wait for November 22 to see what lies ahead for ARGT in this uncertain time. ARGT in Focus The ETF tracks the MSCI All Argentina 25/50 Index, which measures the performance of the 30 largest and most liquid companies that are listed in Argentina or perform most of their operations in the country. Holding 30 stocks in its basket, the fund is highly concentrated on the top four firms at 60%, while other firms do not hold more than 5.68% share. The fund has amassed $15.2 million in its asset base, and trades at an average daily trading volume of nearly 12,000 shares. The product charges 74 bps in fees and expenses. Original Post

Practical Implementation Of Tactical Strategies Employing Vanguard Mutual Funds

Summary After further assessment of my recently-developed tactical strategies published on Seeking Alpha, I have selected two strategies for “real money” testing in Vanguard accounts. These strategies trade monthly and utilize Vanguard mutual funds. Use of these mutual funds enables backtesting to 1987 and provides substantial benefits over trading ETFs. A trading schedule has been compiled that avoids any fees and/or restrictions while trading Vanguard funds. Trading usually occurs on either the last or first trade day of the month. A methodology is presented that determines how funds can be selected before end-of-the-month data are available (for those days when it is needed). Backtested to 1987 using actual funds, a high growth strategy has CAGR = 15.0% and MaxDD = -9.1%. A more conservative strategy has CAGR = 11.4% and MaxDD = -4.7%. Over the past few months, I have written a number of articles ( here and here ) about tactical strategies that employ Vanguard mutual funds traded on a monthly basis. I see the trading of mutual funds (rather than ETFs) as a paradigm shift in tactical asset allocation strategies that trade every month. In recent days I have begun real-money trading, and in the process I have had to deal with implementation issues. This article presents some of the challenges of trading Vanguard mutual funds on a monthly basis, and how I resolved these challenges. Two tactical strategies I have developed using Vanguard mutual funds are also presented: one is a high growth/moderate risk strategy and one is a moderate growth/low risk strategy. These are the strategies I am currently trading with real money. I have decided to use Vanguard accounts in this testing. I only use mutual funds that have inception dates before 1987, that have no loads/fees, and that only have a 30-day trading restriction. Vanguard spells out what the 30-day restriction encompasses: “After selling a mutual fund, you cannot buy it back within 30 days.” Thus, we must have 30 calendar days between trades if we are to successfully trade Vanguard mutual funds. Two Challenges So my first challenge was to devise a trading schedule that met the 30-day requirement between trades. It turns out that this can be accomplished rather easily. The trading schedule through 2016 is shown in the table below. It can be seen that essentially all trading days occur either on the first trading day of the month (preferred), or the last trading day of the month. There is only one time when a trade has to occur on a day before the last trading day of the month: on December 30, 2015. I have actually assembled a trading schedule through 2019, but I only show the trades days through 2016 below. Trading Schedule Through 2016 Friday, 10/30/15: last trading day; Monday, 11/30/15: last trading day, 31 days; Wednesday, 12/30/15: next to last trading day, 30 days; Friday, 1/29/16: last trading day, 30 days; Tuesday, 3/1/16: first trading day, 32 days; Friday, 4/1/16: first trading day, 31 days; Monday, 5/2/16: first trading day, 31 days; Wednesday, 6/1/16: first trading day, 30 days; Friday, 7/1/16: first trading day, 30 days; Monday, 8/1/16: first trading day, 31 days; Wednesday, 8/31/16: last trading day, 30 days; Friday, 9/30/16: last trading day, 30 days; Monday, 10/31/16: last trading day, 31 days; Wednesday, 11/30/16: last trading day, 30 days; Friday, 12/30/16: last trading day, 30 days. The second challenge that presents itself is how to determine what funds to select when the trade day arrives. I used the commercially-free Portfolio Visualizer (PV) software to run these calculations, and PV determines the selections based on end-of-the-month data. So there is no issue when a trade needs to be made on the first trade day of the new month. But when fund selections are required on the last trade day of the month, we need a methodology in place to estimate what selections should be made. In the paragraphs that follow, I propose a methodology that has a very high probability to make the correct selections before end-of-the-month data are available. And for those few times when the selections do not agree with end-of-the-month selections by PV, it is probably reasonable to think that it was really a close call anyway, i.e. either selection would have worked or not worked for that month. Monthly adjusted data (that provide total return) are first obtained for each mutual fund in the basket of funds. So for a 3-month moving average, the adjusted price data at the end of the previous two months is obtained. The latest mutual fund data (on the day before the trade day) is also recorded. One way to obtain an estimate of the end-of-the month price is to just use the price data of the next-to-last trade day as the end-of-month price. But a better way to estimate the end-of-month price of a mutual fund is to find an ETF that can be used as a proxy for the mutual fund. For instance, the SPDR Barclays Capital Convertible Bond ETF (NYSEARCA: CWB ) can be used as a proxy for VCVSX. The ETF can be tracked in real time during the trading day, and its return can be applied to the mutual fund. So if the ETF has increased 0.5% near the close of the market, then the mutual fund is assumed to increase by 0.5% from its previous day price. In this way, the end-of-month mutual fund price can be estimated, and the moving average calculated. Then the mutual fund selection can be determined and appropriate action taken on the trading day (before market close). A spreadsheet, produced by Terry Doherty, has been created that will help facilitate this calculation. It is available to readers upon request in SA private messages. Two Tactical Strategies Using Vanguard Mutual Funds My two best Vanguard mutual fund strategies will now be discussed: one (Vanguard High Growth, VHG) for the high-growth, moderate-risk investor and one (Vanguard Capital Preservation, VCP) for the conservative, moderate-growth, low-risk investor. Vanguard High Growth Strategy For the VHG Strategy, the objectives are high growth (Compounded Annual Growth Rate [CAGR] greater than 15%) and moderate risk (Standard Deviation [SD] and Maximum Drawdown on a monthly basis [MaxDD] less than 10%). Having no negative annual returns is also an objective. And a final objective is for the MAR Ratio (CAGR/MaxDD) to be greater than 1.5. These objectives are much better than the performance/risk metrics of the Vanguard 60/40 Balanced Index Fund (MUTF: VBINX ) that many money managers like to use as a benchmark for a combined equity-bond strategy. The overall metrics of VBINX from its inception in 1992 are: CAGR = 8.06%, SD = 9.05%, MaxDD = -35.06%, MAR = 0.23, and two negative return years. VHG holds three funds in equal proportions most of the time: Vanguard Convertible Securities Fund (MUTF: VCVSX ), Vanguard High Yield Corporate Fund (MUTF: VWEHX ), and Vanguard Health Care Fund (MUTF: VGHCX ). Each fund is owned every month except when a fund does not pass its 2-month Exponential Moving Average [EMA]. When the fund fails to pass its filter, the money for that fund goes to the Vanguard Long-Term Treasury Fund (MUTF: VUSTX ) for that month. The backtest results from 1987 through October, 2015 are shown below. The CAGR is 15.04%, the SD is 7.57%, the MaxDD is -9.06%, MAR is 1.55 and there are no negative years. The 2015 YTD return is 12.04%. VHG: Total Return, 1987 – 2015 (click to enlarge) VHG: Summary Table, 1987 – 2015 (click to enlarge) VHG: Annual Returns, 1987 – 2015 (click to enlarge) Some readers may object to the use of VGHCX as the equity fund in the basket. I selected it because of its superior performance and risk metrics from 1987 to present. Alternatively, the Vanguard Small Cap Equity Fund (MUTF: NAESX ) may be substituted for VGHCX. The backtest results (1987 – 2015) using NAESX in place of VGHCX are: CAGR = 13.60%, SD = 8.84%, MaxDD = -10.56%, and MAR = 1.29. Although there are three negative years of return (1987, 1994 and 2002), the returns are essentially zero in those years. So, the strategy with NAESX instead of VGHCX does not breakdown, but the performance and risk are somewhat worse using NAESX instead of VGHCX. For that reason, I decided to use VGHCX as the equity in the VGH Strategy. The robustness of the VGH Strategy (with VGHCX) is seen in its performance with different moving averages. Comparable performance and risk are seen over a wide range of moving averages, e.g. 2-month Simple Moving Average [SMA], 2-month EMA, 3-month SMA, 3-month EMA, 4-month SMA and 4-month EMA. Here are the overall results (CAGR, MaxDD and MAR) using the various moving averages: 2-month SMA: CAGR = 15.44%, MaxDD = -11.94%, MAR = 1.29 2-month EMA: CAGR = 15.04%, MaxDD = -9.06%, MAR = 1.66 3-month SMA: CAGR = 14.73%, MaxDD = -10.97%, MAR = 1.34 3-month EMA: CAGR = 14.10%, MaxDD = -9.37%, MAR = 1.50 4-month SMA: CAGR = 13.67%, MaxDD = -11.77%, MAR = 1.16 4-month EMA: CAGR = 13.85%, MaxDD = -9.97%, MAR = 1.39 As can be seen, varying the moving averages produces a fairly tight range of CAGRs (13.67% to 15.44%), MaxDDs (-9.06% to -11.94%) and MARs (1.16 to 1.66) Vanguard Capital Preservation Strategy The second strategy I will present is called Vanguard Capital Preservation [VCP]. VCP is more conservative than VHG. The objectives of VCP are: 1) CAGR greater than 10%, 2) MaxDD less than 5%, 3) MAR greater than 2.0, and 4) no negative annual returns. The basket of funds is: VCVSX; VWEHX; Vanguard High Yield Tax-Exempt Fund (MUTF: VWAHX ); Vanguard GNMA Fund (MUTF: VFIIX ); Fidelity Limited Term Government Fund (MUTF: FFXSX ), a substitute for Vanguard Short Term Treasury Fund (MUTF: VFISX ). FFXSX was used to enable backtesting to 1987; VUSTX; and VGHCX. The correlation between funds is presented below. It can be seen that the funds are not well-correlated, as desired. (click to enlarge) A dual momentum approach is utilized for VCP. The relative momentum at the end of each month is determined using one-month lookback total returns. CASHX (money market) is used as the absolute momentum filter. The three top-ranked funds are selected each month unless they do not pass the absolute momentum filter. If the absolute momentum filter is not passed, then the money for that fund goes to money market. This is in contrast to VUSTX being the safe haven in VHG. For VCP, the money market is the safe haven. What is somewhat unusual about the VCP Strategy is the short duration lookback period that is used to rank the funds each month. In many dual-momentum strategies, much longer duration lookback periods are used, e.g. 10 months or 12 months. But for some reason, perhaps because less volatile bond mutual funds are used except for VGHCX, a short duration lookback period is optimal. Usually, short lookback periods cause whipsaw in a strategy, but this does not seem to be the case in this strategy. The backtest results for VCP are shown below: VCP: Total Return, 1987 – 2015 (click to enlarge) VCP: Summary Table, 1987 – 2015 (click to enlarge) VCP: Annual Returns, 1987 – 2015 (click to enlarge) The CAGR is 11.4%, the SD is 5.61%, and the MaxDD is -4.70%. The Sharpe Ratio is 1.36, the Sortino Ratio is 2.82, and the MAR Ratio is 2.43. The only negative is that the worst annual return is 2015 YTD: +0.6%. VCP also exhibited robustness in that the lookback period could be changed from 15 trading days to 24 trading days without any significant change in performance or drawdown. VCP actually uses one calendar month (~ 21 trading days on average) for its lookback period. Summary In summary, this article has presented a way to practically implement tactical strategies using Vanguard mutual funds. To avoid trading frequency penalties, a viable trading schedule has been compiled. In order to decide what selections to make before month-end data are available, a methodology has been presented to estimate month-end data before market close. The results are presented for two tactical mutual fund strategies that I consider to be the best strategies I have developed in recent months. One strategy (Vanguard High Growth, VHG) should interest investors who want high growth (~15%) with moderate risk (less than 10% SD and MaxDD). For more conservative investors, one strategy (Vanguard Capital Preservation, VCP) produces moderate growth (~11.5%) with very low risk (SD less than 6% and MaxDD less than 5%). Currently, for November 2015, both strategies are invested in VCVSX, VWEHX, and VGHCX.