Tag Archives: health

Otter Tail’s (OTTR) CEO Chuck MacFarlane on Q1 2016 Results – Earnings Call Transcript

Otter Tail Corporation (NASDAQ: OTTR ) Q1 2016 Earnings Conference Call May 3, 2016 11:00 AM ET Executives Loren Hanson – Investor Relations Chuck MacFarlane – President and CEO Kevin Moug – Senior Vice President and Chief Financial Officer Analysts Paul Ridzon – KeyBanc Operator Good morning. Welcome to Otter Tail Corporation’s First Quarter 2016 Earnings Conference Call. This call is being recorded and there will be a question-and-answer session after the prepared remarks. Loren Hanson Good morning, everyone and welcome to our call. My name is Loren Hanson and I manage the Investor Relations area at Otter Tail. Last night, we announced our first quarter 2016 results. Our complete earnings release and slides accompanying this earnings call are available on our website at www.ottertail.com. A replay of the call will be available on our website later today. With me on the call today is Chuck MacFarlane, Otter Tail Corporation’s President and CEO and Kevin Moug, Otter Tail Corporation’s Senior Vice President and Chief Financial Officer, who by the way is also celebrating his birthday today. Before we begin, I’d like to remind you that during the course of this call, we will be making forward-looking statements. These forward-looking statements are covered under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and include statements regarding Otter Tail Corporation’s future financial and operating results, or other statements that are not historical facts. Please be advised that actual results could differ materially from those stated or implied by our forward-looking statements due to certain risks and uncertainties, including those described in our most recent Form 10-K and subsequent quarterly reports on Form 10-Q. Otter Tail Corp revise our forward-looking statements as a result of new information, future developments, events, or otherwise. For opening remarks, I would now like to turn the call over to Otter Tail Corporation’s President and CEO, Mr. Chuck MacFarlane. Chuck? Chuck MacFarlane Thanks, Loren. Good morning and thanks for joining our call. For the quarter net income was $14.5 million or $0.38 per share. This is in line with our expectations with the exception of warmer than normal weather. The warm weather impacted Otter Tail Powers first-quarter earnings per share by $0.04 compared to the normal. But this was partially mitigated by improved margins in our manufacturing platform. Our business model continues to combine a strong regulated electric utility for the portfolio manufacturing businesses intended to enhance long-term returns. A key component of these two platform strategies are planned to grow the utility business. My remarks today will focus on our strategy to grow rate base and a recently filed rate case. I will also update you on efforts within our manufacturing platform to improve our competitive position. Slide 5, shows our utility rate base expansion, which will drive earnings per share growth for the next five years. We plan to invest 858 million in Otter Tail Power during this time frame. This will result a compound average annual growth rate in rate base of more than 8% from 2016 to 2020 – natural gas generation and renewable generation projects will account for the majority of this rate base expansion. With most eligible for construction cost recovery during construction, this is noted on the bottom of the Slide 6, which shows our regulatory framework. As we’ve discussed on prior calls, we’re investing in two 345-kv transmission line within Otter Tail Power services area that the mid-continent independent system operator has deemed multi-value projects. The cost of these projects will be allocated across all customers in my source 12 state upper mid-west footprint. One line will run from Brookings, South Dakota, 70 miles north to a new substation near Big Stone Plant. It’s the next leg of a recently completed CapX2020 line from the twin cities to Brookings. Slide 7, shows how they are connected. We are 50% owner in the transmission line portion of this project with the Xcel energy, our investment is $97 million, and we’ve all required easements and permits. Xcel started construction late last year and has the line on schedule to be service in 2017. The other line will run from the new substation near the plant, 170 miles North-West to Ellendale, North Dakota and is schedule to be in service in 2019. Otter Tail Power manages the project and is a 50% owner with MDU. Our investment is $153 million, construction will begin this summer, landowners have signed more than 325 of the 350 needed easements, we are finalizing contract with construction vendors and the steel tower vendor has begun producing transmission structures. We also expect to invest in new generation. Utility management has identified options within our service territory, for natural gas plant to replace capacity from the Hoot Lake Coal Plant which we plan to retire in 2021. We have identified three sites each with good access to transmission and natural gas supply. We expect to announce our site selection later this year. Otter Tail Power management is also determining the most beneficial timing and location for additional renewable energy. The company already has 250 MW of cost-effective wind generation that’s 19% of the company’s retail energy sales. Fuel utilities in the nation have a higher percentage of wind energy. We anticipated adding up to 200 MW of additional wind energy before 2021, which would put the company wind resources near 30%. We also planned to add enough solar to power 1.5% of our Minnesota electric retail sales by 2020. This equates to approximately 30 MW of new solar. Otter Tail Power will file an updated resource plan in Minnesota on June 1. Rate base investment is important to the health of our company, also important is the successful outcome to the request Otter Tail Power filed in February with the Minnesota Public Utilities Commission for permission to increase rates by approximately $19.3 million on – 9.8%. This reflects the 10.4% return on equity and a 52.5% equity ratio. The company’s current rates were established in 2011 based on 2009 costs. The portfolio has increased reflecting investments in new environmental technologies, a strength in delivery system, expiration of integrated transmission agreements and overall rising cost. On March 24, the PUC granted a 9.56% rate increase on an interim basis while it considers the overall request. The interim rates went into effect on April 16, and we expect final decision on the rate case in 2017. We intend to keep delivering affordable energy and expect Otter Tail Powers rates to remain among the lowest in the nation and region, even with the increase. I’d like to mention three other projects of Otter Tail Power. One is a10 week schedule maintenance over at Coyote Station. The largest projects are replacing the lower boiler wall, installing a separated over fire air system to reduce NOX emissions and tying into the new mine coal conveyor system. Crews have completed six of the ten weeks, so far everything is on schedule, we’ve encountered no surprises and boiler make availability has been good. This is a $35 million project and Otter Tail shares 35% or $12 million. Second project I want to mention is implementation of a new customer information system. The new system will be able to integrate new rate design, geographic information in average management system. Otter Tail Power has dedicated a strong team to this $15 million project. Attention to detail and tracing requirements, validating business processes, testing deliverables, and managing change will ensure a successful final implementation. The third project I want to mention is relicensing the five small hydroelectric plants we own on the Otter Tail River in near Fergus falls. Hydroelectric power is being part of our energy mix since 1907. It was the origin of Otter Tail Power’s name, these five small plants are combined under one folkway [ph] since it must be relicensed by 2021. We begin the relicensing effort which takes 4 to 5 years. Before turning to our manufacturing platform, I should also mention – with this clean power plant to limit CO2 emissions from existing power plants. When we held our earnings call in February, the U.S. Supreme Court had not yet issued its stay on the rule pending a lower court’s review. We expect the outcome from this review later this year followed by a review at the Supreme Court. You may recall the changes from the draft rule to the final rule were positive for Big Stone Plant in South Dakota, but created new concerns for Coyote Station in North Dakota. We don’t have an immediate compliance concern in Minnesota because we intend to retire Hoot Lake Plant in 2021. We’re continuing to meet with stakeholders in all three states as each state determines whether we’ll continue implementation planning during the stay. Now turning to our manufacturing platform, as reported out in our earnings release net income was up quarter-over-quarter, that said, our manufacturing company is continuing to be impacted by economic challenges in agriculture, energy and recreation vehicle end markets, leaving the lower sales quarter-over-quarter excluding skip sales from BTD Georgia which was acquired in September last year. Our Plastics Companies continued to be impacted by tightening margins on PVC pipe. The presence of these companies continued to guide improvement in each of their businesses as they work through the current economic challenges in the markets they serve. We look for much of our future growth in the manufacturing segment to come from BTD, a metal fabricator. In the past year we expand of the size and capabilities of our Minnesota facilities and made a strategic acquisition of $30 million annual revenue in metal fabricator near Atlanta. BTD has nearly $33 million in spending commitments to expand its facilities in Detroit Lakes and Lakeville, Minnesota. The goal is to increase capabilities, reduce logistics cost, enhance margins. The Detroit Lakes portion of the plan is complete. A new state-of-the-art paint line is operational in the expanded Lakeville facility and previously outsourced work is now painted in-house. BDT will finish consolidating the fabrication facility in Lakeville in May. We are beginning to realize productivity improvements associated with these products. The integration of BTD, Georgia has gone smoothly. We began implementing IT production systems or began integrating IT production systems this summer. At T.O. Plastics, net income was slightly ahead of first quarter in 2015, again on slightly lower revenues. The company continues to focus on horticulture containers, which is its primary market. At the PVC pipe companies Northern Pipe Products and Vinyltech, volume was stronger in the quarter, which offset a reduction in margins. Our resin suppliers announced additional resin pricing increases for the second quarter. Both of these customer companies are efficient, low-cost operators. They are in a good position and are working to ensure the pricing policies appropriate. Now, I’ll turn it over to Kevin for the financial perspective. Kevin Moug Good morning. Please refer to Slide 10, as I discuss our first quarter results. The utility net earnings decreased $640,000 quarter-over-quarter. The decline is due to; one, milder weather in first quarter of 2016 compared to the first quarter last year. Heating degree days were down by 16%. As a result weather negatively impacted earnings per share by approximately $0.04 quarter-over-quarter and compared to normal; two, higher operating and maintaining expenses; and three, higher depreciation expense due to increased rate based investments. These items were offset in part by increased environmental and transmission cost recovery writers and increased sales by client customers. Our manufacturing segment earnings increased $669,000 quarter-over-quarter primarily due to the BTDs performance. Revenues increased quarter-over-quarter for BTD by $3.9 million. The components of this increase are as follows, our Minnesota locations revenues were down $5.6 million due to softening demand from the agriculture, oil and gas and recreational vehicle end markets. Our Illinois location had an increase in revenues of $1.7 million driven by strong demand for wind tower components. And our Georgia facility accounted for $7.8 million in new revenues. We acquired the Georgia facility in September 2015. The higher net income at BTD is due to improved productivity relating to lower cost and expedited trade, manufacturing consumables, cost and quality and lower labor and benefit cost. Our plastic segment revenues increased between the quarters as a result of 18.5% increase in the amount of pounds sold, despite 13.3% decrease in the price per pound sold. Increased sales came primarily from the South-West and Central regions in the United States where construction activities remained strong. And our earnings were basically flat between the quarters due to margin compression that occurred with large drop in PVC pipe selling prices. And our corporate expenses decreased $648,000 quarter-over-quarter primarily due to a reduction in employee headcount and lower benefit cost. We are reaffirming our consolidated earnings per share guidance of $1.50 to $1.65 as shown on Slide 12. Our 2016 guidance is dependent on the business and economic challenges our platforms are facing. As part of this we are updating our segment guidance to reflect current conditions being experienced by our operating companies. We are maintaining our guidance range for the electric segment. We expect 2016 electric segment net income to be slightly higher than 2015 net income based on the reasons listed in the press release. We are increasing the expected earnings per share range for the manufacturing segment by $0.01 on both ends of the range. We are able to do this through aggressive cost management and improved productivity to address challenges for softening end markets at BTD manufacturing. We are reducing the expected range of earnings per share for our plastic segment to $0.28 from $0.26 to $0.30. We are expecting operating margins to tighten for the rest of 2016 as announced resin price increases are not expected to be fully passed on to sales prices due to current competitive market conditions. And we are improving the range of our corporate cost by obtaining a share on both ends of the range due to continued cost reduction efforts. 2016 continues to be dependent on the following items; the constructive outcome of our Minnesota rate case that was filed in February of 2016, BTDs successful growth and sales from its new paint line along with continued focus on operational improvements needed to improve our return on sales as well as full integration of BTD Georgia to better serve our customers in the South-East. These initiatives are especially important in light of the continued market softness and the agriculture, oil, gas and recreational vehicle end markets that BTD serves and continued strong earnings, cash flows and returns on invested capital from our plastic segment. We are pleased with our first quarter results, we also like our position, a strong balance sheet reflective of our current equity to total capitalization ratio of 51%. Investment grade senior unsecured credit ratings, solid regulatory environments and rate based growth in our electric segment. And we are well-positioned for a rebound in end markets served by BTD with the strategic investments we have made over the last two years. This ongoing effort positions us to meet our long-term goal of 4% to 7% compounded growth rate in earnings per share, using 2013’s $1.50 share as adjusted for the base year. We are now ready to take your questions and after the Q&A, Chuck will return with a few closing remarks. Question-and-Answer Session Operator Thank you. [Operator Instructions] Our first question or comment comes from the line of Paul Ridzon with KeyBanc. Your line is now open. Paul Ridzon Good morning. How are you? Chuck MacFarlane Good Paul and you? Paul Ridzon Well, thank you. Just one quick question, you mentioned a ten-week outage, was that cost to be capitalized or will soon that hit O&M? Chuck MacFarlane Paul, that the majority of those are capitalized. I believe the entire project has approximately $2 million in operating costs and the remainder is capital. Paul Ridzon Thank you very much. Operator [Operator Instructions] And at this time I’m showing no further questions or comments. So with that I would like to turn the conference back over to President and CEO, Mr. Chuck MacFarlane for closing remarks. Chuck MacFarlane Thank you. To summarize net earnings increased quarter-over-quarter from continued operations. Our manufacturing segment has improving performance including increased margins associated with improved operations. Otter Tail Power filed the first rate increase request in Minnesota in five years and received approval for interim rates which began in April. And we reaffirmed our 2016 earnings guidance of $1.50 to $1.65 per share. Thank you for joining our call and for your interest in Otter Tail Corporation. We look forward to speaking with you next quarter. Operator Ladies and gentlemen, thank you for participating in today’s conference. This concludes the program, you may now disconnect. Everyone, have a wonderful day. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited. THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY’S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY’S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY’S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS. If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com . Thank you!

Trade Like A Chimp! Unleash Your Inner Primate

It is a long established fact that a reasonably well behaved chimp throwing darts at a list of stocks can outperform most professional asset managers. While there would be obvious advantages with hiring chimps over hedge fund traders, such as lower salaries and better manners, there are also a few practical obstacles to such hiring practices. For those asset management firms unable to retain the services of a cooperative primate, a random number generator may serve as a reasonable approximation of their skills. The fact of the matter is that even a random number generator can, and will, outperform practically all mutual funds. Such random strategies may seem like a joke, and perhaps they are, but if a joke can outperform industry professionals we have to stop and ask some hard questions. When designing investment strategies, it can be very useful to have an understanding of random strategies, how they work and what kind of results they are likely to yield. Given that random strategies perform quite well over time, they can act as a valid benchmark. After all, if your own investment approach fails to outperform a random strategy, you may as well outsource your quant modeling to the Bronx Zoo. Click to enlarge Meet your new boss. Portfolio Modelling Frequent readers of my articles (both of you) shouldn’t be surprised that we’re dealing with portfolio models here. A portfolio model is something very different from what most retail traders call a trading system. Oddly, the perception of trading system as a set of rules for timing buys and sells in a single market is still pervasive. That’s still what you tend to see if you ever pick up a trading magazine. That’s normally not how things look in reality of course. Not on the sharp end of the business. What we’re normally dealing with is portfolio models. In a portfolio model, the position level is of subordinate importance. The only thing that matters is how the portfolio as a whole performs. We’ll always have many positions on, and it’s the interaction of these positions that matter in the end. Portfolio modelling is a more productive way to spend your time. It would certainly be more useful in the asset management world. What may surprise some not in the industry is that often portfolio models don’t even bother to try any sort of entry and exit timing. Stop loss methodology is rare and concepts like position pyramiding would simply never be a topic. What we’re dealing with here are usually simple models, with mechanisms for selecting components, allocating to the components, rebalancing the components and of course benchmarking the result. Portfolio Model Benchmarking isn’t what it used to be Let’s start with that last point. Benchmarking. Every portfolio has to be measured against something. Very few professionals actually have the zero line as their benchmark. That’s what hedge funds are for. If you work in the industry, odds are that you have a specific index as your benchmark. We’ll go with one of the most common benchmarks here, at least for American equities; the S&P 500 Total Return Index. When you’ve got a benchmark index, you’re being measured against that. It doesn’t matter if you end the year +10% or -10%. It matters if you outperformed or underperformed the bench. At times it can be very comfortable to be measured relative to the index. It removes many difficult investment decisions. You gain and lose at the same time as everyone else. On the other hand, it can be frustrating when the markets are falling and you still have to be in. The index we’re using in this article, S&P 500 TR is different from the normal S&P index that you always see quoted. This is a total return index, meaning that all dividends are reinvested. The traditional S&P index is highly misleading over time, as the dividends appear as losses. So keep in mind that the S&P TR index will always show a better performance than the regular price index over time. In the long run, we’re all dead. Not too impressive, is it? Well, perhaps mutual funds can help. Mutual Funds Can’t Help The mutual fund industry is fundamentally flawed. There’s really no reason at all to ever, for any reason buy a mutual fund. If ever the internet memes about “You had one job…” fit any industry, this would be it. The mutual funds are tasked with tracking and outperforming an index. On average, around 85% of all mutual funds fail. How do I know that? The freaking SPIVA reports . A monkey would have a better chance. How can the Chimps Help? Professor Burton Malkiel once famously wrote in A Random Walk Down Wall Street that A blindfolded monkey throwing darts at a newspaper’s financial pages could select a portfolio that would do just as well as one carefully selected by experts. Now I think that’s highly unfair. After all, why would we want to blindfold the monkey? In what way would that contribute? As we all know, academic research has to be confirmed by empirical observation to be of much use. Ladies and gentlemen, I give you Ola the Ape. Back in early 90 when I was in business school in Sweden, we had a highly prestigious national investment championship. This was normally won by the famous analysts at the big investment banks. This was quite a big deal and getting a high ranking in this competition was a big career move. Then in 1993, somehow a chimp from the local Stockholm zoo got entered into the competition. Ola the Ape threw actual darts at the actual stock listings of the newspaper to pick his stocks. And he won. Amateurs! Random Simulations Unfortunately, our office chimp Mr. Bubbles has just accepted a higher offer from a competing firm, so I will have to resort to random number generators to prove this point. The first strategy we’ll test is something you’ve probably seen elsewhere. But we have to start somewhere. Here are the rules: We only pick stocks from the S&P 500 index. Historical membership accounted for of course. At the start of each month, we liquidate the portfolio and buy random stocks. We buy 50 random stocks for each new month. Each position is given an equal cash weight. Monkeys 1 – Index 0 Not too bad, is it? Not a single monkey failed to beat the index. But what’s going on here? Surely there’s a trick here? Let’s push this concept a little further and see if it falls apart. Our next simulation is even randomer. Yes, I’m sure that’s a word. The previous simulation had equal weighted position allocation. Perhaps that’s the trick. But would a monkey really allocate an equal amount to each stock? Or would he pick that at random too? Here’s our next simulation: We only pick stocks from the S&P 500 index. Historical membership accounted for of course. At the start of each month, we liquidate the portfolio and buy random stocks. We buy 50 random stocks for each new month. Each position is given a totally random allocation . Yes, we’re allowing any position sizes here. Perhaps a position is 0.0001% or perhaps it’s 99.99%. Let’s go wild. Monkeys 2 – Index 0 Ok, this is getting ridiculous. We’re still clearly outperforming the market. Not a single monkey loses against the index. Sure, there’s a lot wider spread here and that’s to be expected. There’s quite a large difference between the best monkey and the worst one, but they’re all better than the index and certainly better than the mutual funds. So where’s the trick? Is it the 50 stocks? Could this whole thing have to do with the magical number 50? After all, isn’t this a Fibonacci number ? And why would a monkey pick this number of stocks anyhow? Fine, let’s relax this one as well. Let’s do another one. We only pick stocks from the S&P 500 index. Historical membership accounted for of course. At the start of each month, we liquidate the portfolio and buy random stocks. We buy a random number of random stocks for each new month. Each position is given a totally random allocation . A random number of random stocks at random allocations. Now that’s how a proper monkey trades. Will the monkeys finally lose this time? Game, set and match. No. The monkeys still win. Now we see some really wild swings, but in the end our primate friends persevere. But now it’s really getting silly, isn’t it. What are we doing here that’s clearly working? Actually, it’s the other way around. The single largest positive factor is that we avoid making a mistake. That mistake being market capitalization weights. Simply by avoiding market cap weighting, we outperform. The larger issue here is benchmarking against an equal weighted index, such as the S&P 500. We all know that there are (approximately) 500 stocks in the S&P 500. But is that really true? Did you know that the top 10 stocks in that index has an approximate weight of 18%? And that the bottom 300 stocks also have a combined weight of about 18%? We’re all pretending that the S&P 500 is a diversified index, but it’s really not. It’s tracking a handful of the largest companies in the world and the rest really don’t matter. There’s practically no diversification in the S&P 500 To be fair to the index, and the index providers, I’d have to point out that indexes were not originally meant to be investment strategies. They were meant to measure the health of a market. As such, they’re not all that bad. But that doesn’t mean that you should invest like the index. It’s easy to check out equal weighting performs against market cap weighting. Just compare the S&P 500 Equal Weighted Total Return Index with the S&P 500 Total Return Index. Same stocks, same index provider, same methodology. Easy. Some stocks are more equal than others. In the random simulations above, we’ve seen that both equal weights and random weights are better than market capitalization weights. Obviously only a chimp would use random weights. Equal weights are quite common, though in my own opinion it makes much more sense to use volatility parity weights. That’s nowhere near as complicated as it sounds. Vola parity just means that we size our positions according to inverse volatility. A more volatile stock gets a smaller allocation. Why? Because if you put an equal amount of cash in each stock, your portfolio will be driven by the most volatile stocks. If you buy a utility stock and a biotech, the biotech stock is likely to be the profit and loss driver of the portfolio. An equal weight in the two would mean that you put on more risk in one stock that the other. Vola parity weighting means that you, in theory, put on equal amount of risk in both stocks. Yes, I deliberately used the word risk here so the comment field will be filled up with quants pointing out that I don’t understand risk. Go ahead. I’ll wait. Let’s do one more of these funny simulations before getting to the real stuff. We only pick stocks from the S&P 500 index. Historical membership accounted for of course. At the start of each month, we liquidate the portfolio and buy random stocks. We buy 50 random stocks for each new month. Each position is given a volatility parity allocation . Best monkeys so far. This looks pretty good, doesn’t it? Now we have better performance and more importantly, a narrower span of performance. The monkeys all do really well and there’s not all that much difference between them. If only we could figure out a way to be one of those better chimps. Let’s be the better primate! Why should the chimps get all the fun? Clearly these guys know how to trade, but perhaps we can figure out a way to beat them. We’ll have to take out the random factor and find a better way to pick our stocks. The volatility parity seems to work though, and so does the monthly rebalancing. We’ll keep those. There are several valid ways of picking stocks. You could use value factors, dividend yield, quality, momentum etc. I’m going to use momentum here, because clearly it’s the best one (not at all because I wrote a really neat book on that topic ). Besides, it’s the easiest one to quantify and model. The data is more readily available and so are the tools needed. Here’s our new, chimp free simulation: We only pick stocks from the S&P 500 index. Historical membership accounted for of course. Trading is done monthly only. Rank stocks based on Clenow Momentum™ . If cash is available at start of month, buy from top of ranking list until no more cash. Inverse vola position sizing, using ATR20. Sell at start of month if stock is no longer in top 20% of index or if Clenow Momentum ™ is lower than 30. Some may recognize this as a simplified version of the one presented in Stocks on the Move . It’s much simpler, but performs in a very similar manner. It has slightly deeper drawdowns and slightly higher return. Those of you who didn’t read Stocks on the Move, may wonder what a Clenow Momentum is, and whether or not I’m joking about that name. Step one, put my name on stuff. Step two, get a comb-over. The Clenow Momentum ™ is clearly a silly name for a pretty decent analytic. This is just an improved way of measuring momentum. First we take the exponential regression slope, instead of the linear, since it’s measured in percent and can therefore be compared across stocks. It will tell us the slope in percent per day, which will give you a number with too many decimals to keep track of. So we annualize it get a number that we can relate to. Now the number tells us how many percent per year the stock would do, should it continue the same trajectory. But the annualized exponential regression slope doesn’t say anything about how well the data fits the line. The coefficient of determination, R2, does. That’s a number between 0 and 1, where a higher value means a better fit. If we multiply the two, we essentially punish stocks with high volatility. And there you go. Clenow Momentum ™! Not too bad for a human! Now we’re seeing some interesting results! Even without the help of the chimps, we’re now clearly outperforming the bench. It’s a consistent outperformance too, during both up and down markets. The reason that we outperform in bear markets is that we don’t buy stocks with a low absolute momentum value. When there are no stocks moving up, we don’t buy any. This all seems good and well, but I’m sure you’re all wondering about the most important point. How did we do against the chimps? You can’t beat all the chimps. We may not be the best primate, but we’re certainly among the smarter ones! Being in the upper 5% of the chimps is pretty good. On the evolutionary scale, we have now moved beyond the mutual fund managers, beyond the index itself and we’re competing with the best of the chimps! So what’s the point here? There are several important learning lessons from all of this. Perhaps the best way to summarize it would be to paraphrase Gordon Gekko: The point, ladies and gentlemen, is that chimps are good. Chimps are right. Chimps work. Chimps clarify, cut through and capture the essence of the evolutionary spirit. Well, with all due respect to Gekko the Great, perhaps there are better ways to sum this up. Random models reveal the weakness of index construction. Benchmarking against random models help you put your own results into context. Does your portfolio model really add value, or is it just another chimp? It’s very easy to make a simulation that beats the index. Systematic momentum investing is likely to beat the index, and most of the chimps. You will never beat all the chimps. The recent book Stocks on the Move, incidentally written by yours truly, contains a more in depth analysis of how momentum strategies can be used to outperform the benchmark. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: No chimps were harmed in the production of this article.

Healthcare Mutual Funds To Bounce Back After Q1 Debacle: 5 Picks

The healthcare space was mostly out of favor in the first quarter following Democratic Presidential Candidate, Hillary Clinton’s allegation on “price gouging.” The massive decline in Valeant Pharmaceuticals International, Inc.’s (NYSE: VRX ) shares also had an adverse impact on biotech stocks, eventually dragging the healthcare sector down. Healthcare mutual funds weren’t spared as the category turned out to be the worst performer in the first quarter. Foremost funds from the healthcare space failed to end in positive territory during the period. Despite this hiccup, investors shouldn’t be demoralized as the long term bodes well for such funds. The healthcare sector is poised to gain from an ageing population both at home and abroad. And with an increase in mergers, and innovative product pipelines and approvals, it’s just a matter of time before the sector bounces back. Not to forget that biotech stocks have already rebounded in the past few days after being torn apart in the first three months of the year. Banking on this optimism, it will be prudent to invest in healthcare funds that have given solid returns over a long period of time and also boast strong fundamentals. (Read: 3 Healthcare Funds to Buy on Biotech Rebound ) Healthcare Losing Ground in Q1 It’s been an awful first quarter for the healthcare sector. Political scrutiny about drug prices took a toll on healthcare stocks. Healthcare Equity Funds nosedived 13.28% during the first quarter, according to Morningstar. Among the worst performing drug makers were Mallinckrodt Public Limited Company (NYSE: MNK ), Horizon Pharma plc (NASDAQ: HZNP ) and Endo International plc (NASDAQ: ENDP ), whose shares plunged 17.9%, 21.4% and 54%, respectively, in the first quarter. If you think that was bad, then biotechs had it even worse. The iShares NASDAQ Biotechnology Index plummeted almost 23% in the first quarter. The Valeant Pharmaceuticals disaster was also responsible for the significant underperformance. U.S. lawmakers investigating Valeant’s pricing practices, accusations about accounting irregularities and delay in filing annual reports practically ruined the company. In the first quarter alone, Valeant’s shares plummeted 36.8%. With the new tax inversion rules the pain seems to have intensified. According to the U.S. Treasury Department and Internal Revenue Service, the rule bars U.S. companies from undertaking inversion transactions if they have done so in the past three years. These inversion deals were a ploy for U.S. drug companies to dodge tax bills by relocating their headquarters abroad. On the earnings front, things are also looking gloomy. First-quarter earnings from the healthcare sector are anticipated to grow a meager 0.6% from the year-ago level compared with 9.3% growth witnessed in the previous quarter. (Read: Previewing the Q1 Earnings Season ) Tailwinds are Strong Even though healthcare witnessed a dismal first quarter, the sector is positioned to grow in the future thanks to an ageing American population. There are about 77 million U.S. baby boomers, which is quite a significant number. An ageing population bodes well for the healthcare sector as they require more medical attention. Along with it, an ageing China also provides long-term opportunities for both U.S. pharmaceutical and medical technology companies. The need to trim costs and tap growth opportunities are driving healthcare firms into mergers and acquisitions (M&A). Additionally, the Fed’s dovish outlook to proceed cautiously on hiking rates is also expected to boost M&A deals. Also, the first FDA-approved biosimilar, Zarxio, hit the market last year. Biotech companies are now vying to enter this high revenue generating space. Several other products such as Imlygic, Ibrance, Strensiq, Genvoya and, PCSK9 inhibitors, Praluent and Repatha also got approved. This in turn is expected to help companies from the healthcare space to generate steady revenues. Thanks to the mandated healthcare coverage in the U.S., more Americans are seeking treatment, which is also a net positive for healthcare firms. 5 Healthcare Mutual Funds to Invest In As discussed above, these tailwinds may collectively act as growth facilitators and help the healthcare sector overcome the drubbing it took in the first quarter. In case of inversion rules, healthcare companies will continue to seek creative ways to relocate their tax residence to avoid paying the lofty taxes at home, as per the Treasury Secretary Jacob J. Lew. Since the long run holds good for the healthcare sector, it will be wise to buy mutual funds associated with the sector. These funds have yielded positive returns for a long time despite being in the red in the first quarter. Moreover, these funds are fundamentally solid, which will eventually help them gain in the future as well. We have selected five healthcare mutual funds that have impressive 3-year and 5-year annualized returns and carry a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy). These funds also possess a relatively low expense ratio and have minimum initial investment within $5000. T. Rowe Price Health Sciences Fund (MUTF: PRHSX ) invests a large portion of its assets in companies engaged in the development and distribution of health care products. PRHSX’s 3-year and 5-year annualized returns are 19.7% and 21.1%, respectively. Annual expense ratio of 0.76% is lower than the category average of 1.35%. PRHSX has a Zacks Mutual Fund Rank #1. Fidelity Select Health Care Portfolio (MUTF: FSPHX ) invests a major portion of its assets in companies involved in the manufacture and sale of products used in connection with health care. FSPHX’s 3-year and 5-year annualized returns are 19.2% and 18.8%, respectively. Annual expense ratio of 0.74% is lower than the category average of 1.35%. FSPHX has a Zacks Mutual Fund Rank #2. Hartford Healthcare Fund A (MUTF: HGHAX ) invests the majority of its assets in the equity securities of health care-related companies worldwide. HGHAX’s 3-year and 5-year annualized returns are 17.3% and 17.7%, respectively. Annual expense ratio of 1.28% is lower than the category average of 1.35%. HGHAX has a Zacks Mutual Fund Rank #2. Live Oak Health Sciences Fund (MUTF: LOGSX ) invests a large portion of its assets in equity securities of health sciences companies. LOGSX’s 3-year and 5-year annualized returns are 16.1% and 15.7%, respectively. Annual expense ratio of 1.08% is lower than the category average of 1.35%. LOGSX has a Zacks Mutual Fund Rank #2. Fidelity Select Biotechnology Portfolio (MUTF: FBIOX ) invests the majority of its assets in companies engaged in the manufacture and distribution of various biotechnological products. FBIOX’s 3-year and 5-year annualized returns are 16.1% and 23.7%, respectively. Annual expense ratio of 0.74% is lower than the category average of 1.35%. FBIOX has a Zacks Mutual Fund Rank #2. Link to the original post on Zacks.com