Tag Archives: hawaiian

Best And Worst Q4’15: Small Cap Growth ETFs, Mutual Funds And Key Holdings

Summary The Small Cap Growth style ranks eleventh in Q4’15. Based on an aggregation of ratings of 11 ETFs and 427 mutual funds. SLYG is our top-rated Small Cap Growth style ETF and VSCRX is our top-rated Small Cap Growth style mutual fund. The Small Cap Growth style ranks eleventh out of the twelve fund styles as detailed in our Q4’15 Style Ratings for ETFs and Mutual Funds report. Last quarter , the Small Cap Growth style ranked eleventh as well. It gets our Dangerous rating, which is based on an aggregation of ratings of 11 ETFs and 427 mutual funds in the Small Cap Growth style. See a recap of our Q3’15 Style Ratings here. Figure 1 ranks from best to worst the nine small-cap growth ETFs that meet our liquidity standards and Figure 2 shows the five best and worst-rated small-cap growth mutual funds. Not all Small Cap Growth style ETFs and mutual funds are created the same. The number of holdings varies widely (from 29 to 1186). This variation creates drastically different investment implications and, therefore, ratings. Investors seeking exposure to the Small Cap Growth style should buy one of the Attractive-or-better rated mutual funds from Figure 2. Figure 1: ETFs with the Best & Worst Ratings – Top 5 (click to enlarge) * Best ETFs exclude ETFs with TNAs less than $100 million for inadequate liquidity. Sources: New Constructs, LLC and company filings The Vanguard S&P Small-Cap 600 Growth ETF (NYSEARCA: VIOG ) and the PowerShares Russell 2000 PureGrowth Portfolio ETF (NYSEARCA: PXSG ) are excluded from Figure 1 because their total net assets are below $100 million and do not meet our liquidity minimums. Figure 2: Mutual Funds with the Best & Worst Ratings – Top 5 (click to enlarge) * Best mutual funds exclude funds with TNAs less than $100 million for inadequate liquidity. Sources: New Constructs, LLC and company filings The Managed Porftolio Smith Group Small Cap Focused Growth (SGSNX, SGSVX) and the American Beacon Bahl & Gaynor Small Cap Growth (GBSIX, GBSYX) are excluded from Figure 2 because their total net assets are below $100 million and do not meet our liquidity minimums. The State Street SPDR S&P 600 Small Cap Growth ETF (NYSEARCA: SLYG ) is the top-rated Small Cap Growth ETF and the Virtus Small-Cap Core Fund (MUTF: VSCRX ) is the top-rated Small Cap Growth mutual fund. SLYG earns our Neutral rating and VSCRX earns our Very Attractive rating. The First Trust Small Cap Growth AlphaDEX ETF (NYSEARCA: FYC ) is the worst-rated Small Cap Growth ETF and the Dreyfus Managers Small Cap Growth Fund (MUTF: DSGAX ) is the worst-rated Small Cap Growth mutual fund. FYC earns a Dangerous rating while DSGAX earns a Very Dangerous rating. Hawaiian Holdings (NASDAQ: HA ) is one of our favorite stocks held by Small Cap Growth ETFs and mutual funds and earns our Attractive rating. Since 2010, Hawaiian Holdings has grown after-tax profits ( NOPAT ) by 11% compounded annually. The company’s current 12% return on invested capital ( ROIC ) is a great improvement over the 7% earned in 2013 and points to the business becoming more profitable. Despite the improving fundamentals, HA remains undervalued. At its current price of $36/share, Hawaiian Holdings has a price to economic book value ( PEBV ) ratio of 1.0. This ratio means that the market expects Hawaiian’s NOPAT to never meaningfully grow from current levels. If Hawaiian Holdings can grow NOPAT by just 9% compounded annually over the next decade , the stock is worth $46/share today – a 27% upside. Scholastic Corporation (NASDAQ: SCHL ) is one of our least favorite stocks held by Small Cap Growth funds and earns our Very Dangerous rating. Since 2011, Scholastic’s NOPAT has declined by 8% compounded annually. The company’s ROIC has followed suit from 5% in 2011 to its current bottom quintile 1% in 2015. Despite the deteriorating operations of the business, shares are still priced for significant growth. To justify its current price of $42/share, Scholastic must grow NOPAT by 6% compounded annually for the next 15 years . This expectation seems unlikely to be met considering Scholastic’s inability to grow NOPAT over the past five years. Figures 3 and 4 show the rating landscape of all Small Cap Growth ETFs and mutual funds. Figure 3: Separating the Best ETFs From the Worst ETFs (click to enlarge) Sources: New Constructs, LLC and company filings Figure 4: Separating the Best Mutual Funds From the Worst Funds (click to enlarge) Sources: New Constructs, LLC and company filings D isclosure: David Trainer and Thaxston McKee receive no compensation to write about any specific stock, style, or theme.

Why I’m Still Not Interested In NextEra

NextEra represents one of the most socially responsible industrial investments, but we believe valuations are not good enough to buy. The company continues to see a battle over what we believe is their largest catalyst – Hawaii. The company’s business remains strong in regulated markets. NextEra (NYSE: NEE ) has recovered about 5% since the last time we looked at the company, and today, we want to take a fresh look at the utility play after their latest round of earnings. We first looked at the company in late February and followed that with an update in June as well as September . As we have previously noted, we like a lot of aspects of NextEra but have not seen the value in 2015, feeling the company is fairly valued for the year. As we near year-end, how did we do? The stock is down 3% on the year as we felt it was worth in best-case scenario $96. The issues that we believe have kept valuations in check as well as our thesis is margin compression and consistency as well as the potential for the Hawaiian Electric (NYSE: HE ) deal. Today, we will wrap up our 2015 catalysts, look towards the future with 2016, and talk about potential targets for 2016 pricing. 2015 Catalysts Concluded, 2016 Focus Economic Moat Strength For us, in 2016, the main reason you invest into NextEra remains the same. The key strength for NEE remains its economic moat that exists from non-competitive agreements that the company has with many municipalities. These type of agreements mean that the company has negotiated a “fair price” deal with a certain geographic area that does not allow competition to enter the market. The idea is that it keeps prices lower for citizens and allows the company to also benefit from non-competition. NEE is attractive because 80% of its business is in the regulated area, which means higher margins, consistent revenues, and low risk for investors. This image from Market Realist tells the tale: (click to enlarge) (click to enlarge) In the latest earnings call, the company talked about its largest regulatory marketplace – Florida Power and Light: We continue to execute on our overall customer value proposition by delivering clean energy, low bills, and high reliability for Florida customers. Each of our capital deployment initiatives to provide low-cost, clean energy continues to progress in accordance with our development plans. Our generation modernization project at Port Everglades is on schedule to come online in mid-2016 and remains on track to meet its budget. Development of our three new large-scale solar projects remains on schedule, with each of these roughly 74 megawatt projects expected to be completed in 2016. These projects, once complete, will roughly triple the solar capacity on our system and add to the overall fuel diversity of our fleet, which is important for FPL and its customers. Will anything change on this front in 2016? The major regulatory change to watch in 2016 has to do with Hawaii not Florida. The company is seeking state approval after they acquired HE, and that has been the main focus of our articles in the past…it will remain our focus for 2016 as well. The company stands to benefit a lot from adding HE to this high margin regulated environment, and a lot of the value in the company is embedded in that opportunity. Hawaii – Another Regulated Market to Add Shareholder Value As we have noted previously: In 2014, NextEra bought Hawaiian Electric ( HE ) for north of $4B. The move was a chance to come into a new market that was in need of cost savings and be able to combine a regulated market with the company’s practice of making efficient utility deliveries. Further, NEE wanted to be able to bring its ability and knowledge of scaling renewable energy in an area that is burdened by extreme energy costs. Between the company’s initiatives in solar energy and knowledge of other sources, NEE stands to be able to generate a very strong value proposition for Hawaii while also continuing to promote its economic moat. So, how have things been moving since the last time we looked at the company… The last two times we have investigated NEE the key aspect for the company has been getting regulatory approval from Hawaii. When we first looked at the acquisition, NextEra was quite confident they could get the deal done in a timely fashion. Since then, things have gone up and down. For example, in April, HE’s CEO came out saying he was confident that the deal would be completed within a year, and the Hawaiian House of Representatives put a resolution in place to complete the deal by June 2016. Given the market is regulated, it is a major decision for Hawaii, consumers, etc. Yet, in the last report, we noted that the Governor of Hawaii had come out at least much less confident in the deal if not against the acquisition. As CEO James Robo noted: Steve this is Jim, obviously the state filed a testimony ten days ago saying that they opposed the deal in its current form and the Governor held a press release where he, press conference where he said he opposed the deal in its current form. I think the key, the keywords there in its current form, they also, the state also listed several conditions that would be, I think just positive for them to think about changing their view. And we are in the process of responding to that testimony and we think we have a very strong case to put forward to the Commission around the benefits to customers, the benefits to customers were actually pretty compelling and I think we’re going be able to make that case as we go forward. So, this was not necessarily a surprise to me that the state filed a kind of testimony that they did and we are going to continued to move forward on laying out our arguments and we look forward to the hearings we’re going to have in December to make our case. This news was not exactly the type of “positive” news that the company had hoped for. Since that comment in July, the Governor has said the process was still very early, and that he is looking forward to the company’s responses to testimony it presented. The process had grinded to halt. In the latest earnings call, the company noted: Steven Isaac Fleishman – Wolfe Research LLC And then, lastly, just could you maybe give us any color or latest thoughts on the Hawaiian Electric deal? James L. Robo – Chairman, President & Chief Executive Officer Sure. So we continue to work hard to get the final hurdle, which is state regulatory approval in Hawaii. We have recently gotten a couple intervenors to either fall away or announce their support, and I was very pleased that the IBEW announced their support for the transaction last week. And we continue to work it. I think my expectation, based on timing right now, is that we’re not going to get any kind of decision from the PSC until next year, and so we’re going to continue to work it and continue to talk to the parties to try to get it across the finish line. That was the company’s only mention in the call of the deal. Outside of the earnings, the news has been moving positively. As Robo noted, the largest union of electrical workers, representing 1500 workers, came out in support of the acquisition. That type of support is the kind that the company needs as they are seeking approval. The issue has come down to that the Governor wants 100% renewable energy in Hawaii by 2045. NextEra has not made those types of promises. Electricity is extremely expensive in Hawaii, so the move to all renewable would dramatically decrease costs and Hawaii’s dependence on shipping in electricity. NextEra came out recently saying that it would take $30B to get to that 100% renewable energy: Eric Gleason, president of NextEra Energy Hawaii LLC, said at a Waikiki business luncheon this week that getting the state off its dependence on oil would cost $30 billion over the next three decades. “There is no utility in the country that has as much on its shoulders as Hawaiian Electric does right now,” Gleason said. “Hawaii needs a financially very strong utility to either make or backstop something like $30 billion of investments over the next few decades. … There is a big need for capital to make all of this happen.” That number has scared the PUC, which approves the deal. They believe that cost will be passed onto customers, which would make high bills rise even more. The idea of HE getting the capital and infrastructure from NEE was that bills would get lower, but NEE argues that if it is predicated on getting to 100% renewable energy…it can brings bills down. Thus, we have the stalemate. With more support being thrown to NEE, the company has more grounds to pressure the government. We will continue to see this issue for the coming months, and the company’s getting the deal done in the timeframe they originally expected does not look likely. Does this materially change the outlook for NEE? It does not change any revenue/profits, but it changes potential revenue and profits. The deal added about 10% to the value of the stock, so if it falls through or is derailed…we could see that type of reduction in prices as well as our model. 2016 Pricing The company’s 2016 pricing will be delayed for us as we don’t see any material change in our current valuations with one more quarter to go in FY 2015 and the Hawaii deal in limbo. For now, we continue to like the $96 price tag we had originally floated at the beginning of the year. For 2016, we are set to see that price tag increase by the rate of earnings increasing, which is estimated at 5%. If Hawaii does go through, this could change this model, so we want to wait to see how this plays out and FY 2015 closes out. Conclusion NextEra has interesting catalysts to 2016, but a lot of the potential for another major run will be predicated on getting Hawaii right. The company’s valuation has come down with the flat move in the share price this year, which does set it up for probably a 5-10% move in 2016. Without success in Hawaii, though, we could see another flat to weak year in FY 2016. Recent issues in Hawaii Electric ( HE ) make me nervous, but the rest of the company’s business is extremely intriguing and strong, which neutralizes my fears there. With PEG still over 2.0, though, we aren’t interested in dipping a toe at this time still.

Utilities: Across The Universe

Summary I currently favor utilities in the current market environment. While the sector has trailed in 2015 in anticipation of rising interest rates, this may be present investors with opportunity today. Investors may be well served to focus on specific themes within this space. With this in mind, it is worthwhile to take a walk across the utilities universe. I currently favor utilities in the current market environment. Following a strong advance in 2014, the sector has been under pressure for much of the year due in large part to concerns about the U.S. Federal Reserve and plans to raise interest rates. This recent weakness may be presenting investors with opportunity as they position for the future. But instead of taking a blanketed approach in allocating to the sector, investors may be well served to focus on specific themes within this space. With this in mind, it is worthwhile to take a walk across the utilities universe. Why Utilities? Utilities have struggled in 2015 in anticipation of the Fed raising interest rates. Given the interest rate sensitivity of the sector, this is not necessarily surprising. But many reasons exist to expect that utilities may be set to perform well once the Fed finally ends the suspense and starts hiking rates. First, utilities have demonstrated the ability to perform well during past rate hike cycles. During the period from June 2004 to June 2006 when the Fed last completed a interest rate normalization cycle by increasing the funds rate from 1.00% to 5.25%, the utilities sector managed to increase by a cumulative +52% in value. Not too shabby for a sector that investors are supposedly inclined to abandon when interest rates are rising. (click to enlarge) Of course, this assumes that the Fed will actually be able to complete a rate normalization cycle this time around, which is doubtful at best. This is due to the fact that unlike June 2004 or the numerous past interest rate hiking cycles that came before it, the Fed is seeking to accomplish the unprecedented by sustainably raising interest rates off of the zero bound, but also do so in a global and domestic economic environment that is languid at best and increasingly deteriorating in many parts of the world. As I’ve mentioned in past articles, the Fed is seeking to raise interest rates not because of the economy but despite the economy. As a result, it should be anticipated that the Fed may squeeze out one or two rate hikes at most in the coming months before they are forced to either stop or reverse course. And given that utilities offer stock investors both relative safety from a price stability perspective as well as high income from a total returns standpoint, such an outcome would likely prove beneficial to the utilities sector. And this may be particularly true given the fact that the sector has been sold off throughout much of 2015 in anticipation of an event in the Fed normalizing interest rates that may never come to pass. Exploring The Utilities Universe Suppose you are an investor that has interest in the utilities sector. One of the challenge that many immediately face when exploring utilities is that they like financials are not like most other sectors in the equity marketplace. In the case of utilities, they are mostly domestically focused (which may be an added plus for the sector given increasing currency volatility and expectations for a stronger dollar with operations that are located in a specific region of the country with pricing that in many cases is regulated by local government officials. Moreover, some of the metrics that investors focus on in evaluating utilities are unique to the sector. And among the individual names in the space are wide differentiations in terms of exactly how they are generating their power, getting along with their regulators and running their businesses. With all of this in mind, it is worthwhile to establish a snapshot framework for viewing and organizing the utilities industry. For the purpose of this report, I will be focusing exclusively on utilities that are domiciled in the United States and trade on one of the three exchanges in the NYSE, the NASDAQ and the AMEX. In total, there are exactly 100 U.S. firms that are designated as utilities that are exchange traded. But not all of these firms fit the specific criteria of the types of utilities that we would expect to perform generally in line with what we have defined for the broader utilities universe above. For example, some are master limited partnerships concentrated more on pipeline operations than distributing electricity to customers. Others are electricity wholesalers, which is a notably different business model than the traditional utilities business. With these items among others in mind, it is worth filtering down the utilities universe to its representative components. Included in this process is screening out companies that are set to be acquired as well as those that are trading at small market capitalizations and low average trading volumes that have the potential to present challenges from a liquidity standpoint. Lastly, only those utilities that pay investors a dividend are included, as this income is an important aspect in supporting the price stability of the utilities sector, particularly during periods of market instability. After conducting this screening process, we are left with 53 core public exchange traded utilities domiciled in the United States. These can be broken down into three main categories, which are shown below. Electric Utilities – 37 Gas Utilities – 7 Water Utilities – 9 The characteristics of the latter two categories are fairly straightforward, but electric utilities warrant further discussion. Electric Utilities First, let’s introduce the 37 names in the group including their market capitalization and current dividend yield. NextEra Energy (NYSE: NEE ) $46.4 billion 3.1% Duke Energy (NYSE: DUK ) $46.3 billion 4.9% Dominion Resources (NYSE: D ) $40.4 billion 3.8% Southern Company (NYSE: SO ) $39.9 billion 4.9% American Electric Power (NYSE: AEP ) $27.2 billion 3.8% Exelon (NYSE: EXC ) $26.3 billion 4.3% PG&E (NYSE: PCG ) $25.9 billion 3.5% PPL Corporation (NYSE: PPL ) $22.4 billion 4.5% Public Service Enterprise (NYSE: PEG ) $19.7 billion 4.0% Edison International (NYSE: EIX ) $19.6 billion 2.8% Consolidated Edison (NYSE: ED ) $18.3 billion 4.2% Xcel Energy (NYSE: XEL ) $17.9 billion 3.6% Eversource Energy (NYSE: ES ) $15.9 billion 3.3% WEC Energy (NYSE: WEC ) $15.6 billion 3.4% DTE Energy (NYSE: DTE ) $14.4 billion 3.7% FirstEnergy (NYSE: FE ) $12.8 billion 4.8% Entergy (NYSE: ETR ) $11.7 billion 5.1% Ameren (NYSE: AEE ) $10.6 billion 3.8% CMS Energy (NYSE: CMS ) $9.7 billion 3.3% SCANA (NYSE: SCG ) $8.5 billion 3.7% Pinnacle West (NYSE: PNW ) $6.9 billion 3.8% Alliant Energy (NYSE: LNT ) $6.6 billion 3.8% NiSource (NYSE: NI ) $6.1 billion 3.2% Westar Energy (NYSE: WR ) $5.8 billion 3.5% OGE Energy (NYSE: OGE ) $5.2 billion 4.2% Great Plains Energy (NYSE: GXP ) $4.1 billion 3.7% Vectren (NYSE: VVC ) $3.4 billion 3.7% IdaCorp (NYSE: IDA ) $3.3 billion 2.9% Portland General Electric (NYSE: POR ) $3.1 billion 3.4% Northwestern (NYSE: NWE ) $2.6 billion 3.6% ALLETE (NYSE: ALE ) $2.5 billion 4.0% PNM Resources (NYSE: PNM ) $2.2 billion 2.9% Avista (NYSE: AVA ) $2.1 billion 4.0% Black Hills (NYSE: BKH ) $2.0 billion 3.6% El Paso Electric (NYSE: EE ) $1.6 billion 3.0% MGE Energy (NASDAQ: MGEE ) $1.5 billion 2.8% Empire District Electric (NYSE: EDE ) $1.0 billion 4.7% An initial observation about the group listed above. It is worth noting that consolidation and acquisition activity has been taking place within the electric utility industry. This has included, Pepco Holdings (NYSE: POM ), TECO Energy (NYSE: TE ), Hawaiian Electric (NYSE: HE ) and Cleco (NYSE: CNL ), each of which has a market capitalization between $3 billion and $7 billion. Exactly how these utilities generate their electricity for their customers has a meaningful impact on their business operations and their stock prices. For example, electric utilities that emphasize using coal in the power production process are dealing with operational pressures resulting from increased carbon emissions standards from the U.S. Environmental Protection Agency. The nuclear generators have also been dealing with unfavorable market conditions and face event risk concerns that can spillover from high profile accidents like the Fukushima disaster in Japan back in 2011. As a result, it is worthwhile to consider exactly how these utilities generate their electricity. Coal The following is a subset of utilities that are most heavily reliant on coal in producing electricity including the percentage of their generating sources concentrated in coal. It should be noted that some publicly traded utilities do not disclose this information and may not be included in the list below as a result despite being reliant upon coal for power generation. NiSource 77% Ameren 74% DTE Energy 67% Great Plains Energy 64% PNM Resources 57% WEC Energy 56% ALLETE 56% SCANA 48% Westar Energy 48% MGE Energy 48% Alliant Energy 47% Empire District Electric 47% FirstEnergy 44% CMS Energy 44% OGE Energy 44% Southern Company 39% Duke Energy 37% Pinnacle West 34% IdaCorp 34% Black Hills 34% Dominion Resources 30% Of course, a small utility heavily reliant on coal for electricity generation may not be having the same environmental impact as a large utility that is more diversified in its power generation. As a result, it is also worthwhile to list those utilities mentioned above that are ranked highest in terms of carbon dioxide emissions according to a report by Ceres. According to the report, Duke, AEP, Southern Company, FirstEnergy and PPL all rank in the top ten in terms of total carbon dioxide emissions. Nuclear Applying the same criteria from above, the following are the subset of utilities that rely most on nuclear power in generating electricity for their customers. Exelon 67% El Paso Electric 47% Dominion Resources 33% Entergy 33% PNM Resources 30% Duke Energy 28% Pinnacle West 27% FirstEnergy 26% NextEra Energy 23% PG&E 21% Ameren 21% Hydro Two utilities standout in particular for their emphasis on hydroelectric power generation, while a few others register on the list. IdaCorp 35% Avista 32% PG&E 8% Portland General Electric 8% Exactly how each utility is generating their power is just one of the many factors to consider when evaluating an investment opportunity in the electric utilities space. Gas Utilities The natural gas distribution utilities universe consists of seven names. These are firms that are focused on the sale and distribution of natural gas and energy related products to its customers. In short, while a number of the utilities mentioned above have varying degrees of natural gas electricity production in their business, these are more purely natural gas electricity producers. Atmos Energy (NYSE: ATO ) $6.1 billion 2.6% WGL Holdings (NYSE: WGL ) $3.0 billion 3.1% New Jersey Resources (NYSE: NJR ) $2.6 billion 3.0% Laclede Gas (NYSE: LG ) $2.4 billion 3.3% South Jersey Industries (NYSE: SJI ) $1.7 billion 4.2% Northwest Natural Gas (NYSE: NWN ) $1.3 billion 4.0% Chesapeake Utilities (NYSE: CPK ) $0.8 billion 3.3% It should be noted that this group consisted of ten names at the start of the year, as AGL Resources (NYSE: GAS ), Piedmont Natural Gas (NYSE: PNY ) and UIL Holdings (NYSE: UIL ) are all in the process of being acquired in 2015. A primary driver of the acquisition binge in the natural gas distribution utilities space is the priority by many electric utilities, particularly those that are more reliant on coal, to diversify their generation sources with a shift toward natural gas. Water Utilities Distinctly different from their electricity producing relatives listed above but similar in the fact that they are also regulated at the local level, the following is the list of nine publicly traded water utilities. Within the broader utilities sector, these stocks have their own unique return and correlation characteristics that are differentiated from electric utilities as well as the broader market. American Water Works (NYSE: AWK ) $10.1 billion 2.4% Aqua America (NYSE: WTR ) $5.0 billion 2.5% American States Water (NYSE: AWR ) $1.5 billion 2.2% California Water Service (NYSE: CWT ) $1.0 billion 3.1% SJW Corporation (NYSE: SJW ) $586 million 2.7% Middlesex Water (NASDAQ: MSEX ) $397 million 3.1% Connecticut Water Service (NASDAQ: CTWS ) $391 million 3.1% York Water (NASDAQ: YORW ) $297 million 2.6% Artesian Resources (NASDAQ: ARTNA ) $223 million 3.6% Next Steps The opportunity set in the utilities universe is attractive and is likely to continue to be so for some time regardless of whether the Fed ends up raising rates or not. As a result, I will be placing an increased concentration on the utilities sector going forward on Seeking Alpha and will be drawing upon the framework introduced in this article for the purpose of future discussion and analysis. This will include a more in depth focus on individual names within the utilities space and timely recommendations on my premium service on Seeking Alpha. Disclosure : This article is for information purposes only. There are risks involved with investing including loss of principal. Gerring Capital Partners makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made. There is no guarantee that the goals of the strategies discussed by Gerring Capital Partners will be met.