Tag Archives: investing ideas

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.

Asset Values And Valuation

What’s a stock worth? “The market is overvalued.” “No, it’s fair.” “No, you’re missing the point – the economy has changed.” “What? Are saying it’s different this time?” “It’s always different.” Arguments over stock-market valuation have been around ever since stocks have traded. In many ways, the purpose of an open stock market is to discover what the clearing price for a company should be – what price satisfies both the buyers and sellers of a company’s shares. But just knowing something’s price doesn’t tell you what it’s worth. As Warren Buffett is fond of saying , “price is what you pay, value is what you get.” There are two general ways to value an asset: bottom-up, fundamental analysis that focusses on the present value of expected cash flows; and top-down, relative-value analysis that looks at the entire market and the range of investment alternatives. The first examines a specific company; the second evaluates an entire industry – or even the whole economy. Any economic asset generates cash over time. This cash flow can be forecasted, and the results discounted to present value. With bonds, this is fairly straightforward; the cash-flow is contractual. With stocks earnings can be more volatile, but they can also grow over time. We compensate for this by increasing the discount rate. Lower risk means a lower interest rate. Net present value formula. Source: Wikipedia The top-down approach looks at any asset and asks, “Compared to what?” So we use various financial ratios – price/earnings, price-to-book, enterprise value over free cash flow. With bonds, we focus on the “spread” – their level of yield above comparable risk-free government bonds. By checking what else is out there – playing the field – investors can see how what they own looks relative to everything else. Map of S&P 500 PE ratios. Source: Financial Visualization Both methods have their merits: bottom-up analysis generates an intrinsic value – something that is fairly stable over time. Top-down valuation looks at the range of investment alternatives. No investment, after all, is an island. But folks who only focus on bottom-up analysis can get distracted by the details and miss the forest for the trees. Top-down studies can be too volatile: the world may always be changing, but it doesn’t change that much from day to day. And human nature never really changes. Financial analysis tries to answer the question of what an asset is really worth. It’s a good question. In the end, though, a stock is only worth what someone else is willing to pay for it.

November Update – ETFReplay.com Portfolio

The ETFReplay.com Portfolio holdings have been updated for November 2015. I previously detailed here and here how an investor can use ETFReplay.com to screen for best-performing ETFs based on momentum and volatility. The portfolio begins with a static basket of 14 ETFs. These 14 ETFs are ranked by 6-month total returns (weighted 40%), 3-month total returns (weighted 30%), and 3-month price volatility (weighted 30%). The top 4 are purchased at the beginning of each month. When a holding drops out of the top 5 ETFs, it will be sold and replaced with the next highest ranked ETF. The 14 ETFs are listed below: Symbol Name RWX SPDR DJ International Real Estate PCY PowerShares Emerging Markets Bond WIP SPDR Int’l Govt. Infl.-Protect. Bond EFA iShares MSCI EAFE HYG iShares iBoxx High-Yield Corp. Bond EEM iShares MSCI Emerging Markets LQD iShares iBoxx Invest.-Grade Bond VNQ Vanguard MSCI U.S. REIT TIP iShares Barclays TIPS VTI Vanguard MSCI Total U.S. Stock Market DBC PowerShares DB Commodity Index GLD SPDR Gold Shares TLT iShares Barclays Long-Term Treasury SHY iShares Barclays 1-3 Year Treasury Bond Fund In addition, ETFs must be ranked above the cash-like ETF (NYSEARCA: SHY ) in order to be included in the portfolio, similar to the absolute momentum strategy I profiled here . This modification could help reduce drawdowns during periods of high volatility and/or negative market conditions (see 2008-2009), but it could also reduce total returns by allocating to cash in lieu of an asset class. The cash filter is in effect this month, the same as the previous four months. SHY is the highest rated ETF in the 6/3/3 system. Therefore, it will continue to be the sole holding in the portfolio. The top 5 ranked ETFs based on the 6/3/3 system as of 10/30/15 are below: 6mo/3mo/3mo SHY Barclays Low Duration Treasury (2-year) PCY PowerShares Emerging Markets Bond LQD iShares iBoxx Invest.-Grade Bond VNQ Vanguard MSCI U.S. REIT TLT iShares Barclays Long-Term Treasury In 2014, I introduced a pure momentum system, which ranks the same basket of 14 ETFs based solely on 6-month price momentum. There is no cash filter in the pure momentum system, volatility ranking, or requirement to limit turnover – the top 4 ETFs based on price momentum are purchased each month. The portfolio and rankings are posted on the same spreadsheet as the 6/3/3 strategy. The top 4 six-month momentum ETFs are below: 6-month Momentum VNQ Vanguard MSCI U.S. REIT TLT iShares Barclays Long-Term Treasury SHY Barclays Low Duration Treasury (2-year) PCY PowerShares Emerging Markets Bond TIP, a holding for 2 months, will be sold for a loss of -.56%. LQD, a holding for 1 month, will be sold for a gain of .28%. The proceeds will be used to purchase VNQ and TLT. The updated holdings for the pure momentum portfolio are below: Position Shares Purchase Price Purchase Date PCY 85 27.65 8/31/2015 SHY 29 84.86 7/31/2015 VNQ 30 79.89 10/30/2015 TLT 19 122.74 10/30/2015 Disclosure: None.