Tag Archives: management

CEMIG: What’s The Weather Like?

Summary CEMIG seems very cheap, but faces several easy-to-spot problems. One of those problems is clearly cyclical and temporary. It’s the weather. Beyond a general overview of the issues CEMIG faces and offering a long-term opinion, this article also considers the importance of the weather in trying to establish a CEMIG position. On paper, CEMIG – Companhia Energética de Minas Gerais (NYSE: CIG ) is an extremely appealing equity. Here’s a utility that has a current dividend yield of 10.6% and trades for 4.4x its 2016 EPS consensus. Sure, CEMIG is in Brazil. And Brazil is in the dumper due to an implosion in commodity pricing (namely crude and iron ore), on which its exports long relied. Also, Brazil’s government budget is slowly turning into a deficit, on account of both the economy and higher social spending: (click to enlarge) Source: Tradingeconomics.com, government budget Plus, of course, CEMIG faces its own travails, having lost 3 hydroelectric concessions which are likely to drive its earnings down by ~50% . And then there’s the fact that CIG is an ADR, reflecting the behavior of CEMIG as quoted in São Paulo … in Brazilian Reais. You see, the real has been doing its best impersonation of a banana republic currency – both on account of the commodity implosion, the resulting economic slowdown and the slowly-eroding budget balance: (click to enlarge) Source: Xe.com There is, thus, a lot of trouble to go around. I could however say there’s one bright spot here on the currency front. While the commodity implosion had a very negative impact on exports, the Real implosion made sure that imports fell hard as well. The end result is that Brazil is still holding on to a positive balance of trade: (click to enlarge) Source: Tradingeconomics.com, balance of trade The main economic risk is thus reduced to the chance that the budget deficit deteriorates so much that Brazil resorts to money printing and turns this manageable situation into a Venezuela . Barring that, we could argue that the Real is fairly valued or even undervalued (if some of the commodity weakness in oil and iron ore goes away). At this point, we could thus argue that taking into account the economic outlook, Real, valuation (EPS consensus) and the loss of concessions, CIG should be at an attractive long-term level. And that would probably be right. But there’s yet another factor. The Weather You see, Brazil is supposedly in the midst of its worst drought in the last 80 years ( I , II ). A drought which was made worse by the weak 2014 rain season (starting in November 2014). Now, a drought here is a serious matter, because Brazil relies heavily on hydroelectric power – and CEMIG relies even more on it (though that will now be reduced by the loss of 3 hydro concessions): (click to enlarge) Source: CEMIG Presentation The drought, as I said, was made worse by a weak 2014 rain season. A drought is clearly a temporary factor, so buying stock affected by it could make sense long-term. But usually, you wouldn’t want to necessarily be doing so right away if you thought that there was still significant pain ahead. In that regard, it pays to check how this rain season is going, as it will affect hydroelectric power generation throughout 2016. We do have a way of monitoring how it’s been doing: Source: NOAA, National Weather Service As it were, the answer about the weather is “not so good”. The most important state for CEMIG is Minas Gerais and the adjoining smaller states, and those are clearly seeing under-average rainfall during this rain season as well. Source: Company Presentation So, for timing purposes, we do know that more fundamental deterioration likely still lies ahead for CEMIG even if the present share levels already look attractive for the longer-term. On The Other Hand CEMIG does get a lot of its profits from generation. But it also gets 1/3rd of EBITDA from transmission, and that ought to be defensible: (click to enlarge) Source: Company Presentation This is yet another factor telling us that, longer-term, CEMIG should be attractive – though it probably won’t mitigate further short-term fundamental weakness coming from the weather. Conclusion Some of the problems CEMIG faces are structural, like the loss of 3 important concessions. Others seem discounted, like the massive Real plunge (unless the government goes all Venezuela on us). Taking into account these problems and the earnings impact, it would look like CEMIG is already at an interesting level for longer-term investments (the 2016 EPS consensus puts the company at 4.4x earnings, and should already account for the concession losses – but not for further fundamental deterioration). However, to further refine the timing of buying CEMIG shares, one of the largest problems with CEMIG remains, though it’s clearly cyclical and temporary. I’m talking about the weather. On that front, it looks likely that the fundamental newsflow over the next 3-9 months will remain rather negative – since if it’s not raining a lot right now, it will be hard to compensate for most of 2016. On this account, it might also happen that CEMIG will further cut its dividend or entirely eliminate it (temporarily) – which is another possible “ugly newsflow” event. Putting it all together, CEMIG is trading at an interesting long-term level given the depressed valuation. Weather considerations are mainly for trying to establish the best possible entry point, in spite of the stock already looking attractive long-term.

8 Investing Lessons Learned From Fantasy Football

Summary The importance of analogies. Fantasy football’s lessons for lifetime profit. One last word. Everyone loves a colorful analogy. I suppose that is because a well-placed and entertaining analogy provides a more memorable imprint on the receiving brain than a simple statement does. I’m a big fan of melodrama, so it definitely appeals to me. To say “Seeing John Major govern the country is like watching Edward Scissorhands try to make balloon animals” (Simon Hoggart) is much more interesting than saying that you are very displeased with the inept manner in which John Major is running Great Britain (in the 90’s). Because, well, sometimes you just need to say something ridiculous to cut through the mundane. In general, I spend most of my down time reading articles and opinions about two things: finance and fantasy football. Musings on the interconnectivity between two very different things as I did while thinking about colorful analogies, I came to the realization that fantasy football and investing contain many common themes. I’ve been reading Matthew Berry’s Love/Hate (and everything else he writes – Thanks for all you do, TMR!) religiously for years on ESPN, so a few of these will reference some well-known nuggets of wisdom that he frequently drops. Unfortunately, 2015 fantasy football is ending for the year. Perhaps you brought home the bacon this year with a fantasy championship. Perhaps you drafted Eddie Lacy (the Kinder Morgan (NYSE: KMI ) of 2015) and never recovered. Hopefully these things will help with your drafting next year. I know they’ve been helpful to keep in mind while building my portfolio. Without further ado, here are eight lessons fantasy football teaches the investor: 1: Tune Out The Noise Perhaps the most important virtue of a stock picker is discipline. If you don’t have the conviction to stick with your analysis of a company in the face of setbacks, musings, downgrades, and Jim Cramer, you will hamstring yourself for future earnings. Similarly in fantasy football, there is always a lot of noise when it comes to matchups or weather. While these are important considerations, sometimes people will bench a stud because of a matchup (Julio Jones vs. Josh Norman last week), or other such things. You can’t let the overabundance of available information make you doubt yourself. This leads us straight to #2 … 2: Start Your Studs Everyone wants to make money fast. The allure of penny stocks is watching those big percentage gains during heady bull markets. The flip side of the coin is the important part: without concrete earnings prospects and realistic business models, penny stocks are 99.9% of the time just a roulette spin. Investing has risk involved, but long-term gains mean taking on educated risk based on strong fundamentals or viable prospects. Companies with long history of earnings growth and (as a bonus) uninterrupted dividends are your stock “studs”. Your studs are your guys that you can rely on to achieve above-average points week in and week out. When the playoffs come around, the most commonly given advice is “start your studs.” Those guys got you there, and you need to rely on them to continue to perform. Bortles, while not a high draft pick, was a stud, currently 5th among QBs in fantasy points and total yards, and behind only Cam Newton and Tom Brady in touchdowns. What’s in a name, anyway? 3: Don’t Overpay For A Name (click to enlarge) A name brand doesn’t guarantee safety by any means. I think a lot of investors learned that from Kinder Morgan this year, as the largest energy infrastructure and third-biggest outright energy company in the North America saw its stock price lose 61% in six months. Make sure you are doing your thorough due diligence and don’t get caught up in a name. I hate posting the picture above. As a Green Bay native exiled to D.C., putting Aaron Rodgers under that title wounds me to the bowels of my heart. The fact is, the Packer passing game has been a sore disappointment for awhile now, and playing Rodgers in your fantasy playoffs likely ended them prematurely for you. I know it did for my team Davante’s Inferno (on a related note I wish Davante Adams could catch footballs). 4: “Prove It” They say “Buy the rumor, sell the news”. This is the opposite of what a long-term investor ought to do. Realizing short-term gains in this manner can’t hold a candle to unlocking long-time value form a great company that grows earnings. As an added negative, if you buy the rumor and the news contradicts it, you’ll find yourself in a losing position very quickly. Buying and selling frequently is a great way to erode capital. In fantasy football, it’s good to give a player coming off an injury or big-game-out-of-nowhere a week on your bench to prove he is legit. Bishop Sankey, a popular sleeper last year who disappointed, scored 21 points in Week 1. He was likely picked up and immediately started by many. In Week 2 he scored a measly 4 points; in fact, the entire rest of the year combined he has 25 points. Alshon Jeffery (using a Bear to make up for the Rodgers above) never recovered from his injuries this year, and was a huge disappointment when he played. 5: Coaching Matters Every company has a CEO, a CFO, and a slew of other executives that guide the company according to the path they have in mind and the over the obstacles that arise. How those executives view the company and the emphasis that they place on the paths of revenue available to the company has a huge impact on future earnings. In addition, how they determine the best value to shareholders (i.e. buybacks, dividends, M&A, etc.) will impact you directly. A coaching change can have a huge impact on a franchise. With Andy Reid in town in Kansas City, you know that when Jamaal Charles goes down with an injury, he’ll plug in the next guy as a workhorse. Some coaches place more emphasis on certain positions (or the other side of the ball, even), so it is an overlooked point of vast import to know the head coach’s mindset when drafting members or claiming waivers for your fantasy football team. 6: Waivers = The “Bargain Bin” Stocks, like football players, have “floors” and “ceilings”, downside and upside. A well-balanced portfolio, accounting for risk appetite (usually correlated to one’s age), will contain some stocks that have “breakout” opportunities. Favorable macroeconomic tailwinds, business cycle gyrations, and friendly legislation can all raise the ceiling for a stock’s projected capital appreciation. Unfavorable elements can lower the floor, making downside movement more risky. The waiver wire makes or breaks championships. David Johnson was 2% drafted at the beginning of the year, was the player with the highest representation on ESPN championship teams (42.2% owned as reported by Keith Lipscomb). Waivers are where the bargains are; Waiver pickups can swing from a low ceiling, low floor to high ceiling high floor with just one injury to a key starter. 7: Diversify Your Positions Diversification is Investing 101. Spread your investments among different sectors/cap size companies/asset classes in order to maximize return and minimize risk. Some would say that if you can be disciplined while stocks are tanking over-diversification is “di-worsification”, leading to sluggish returns over time. Still, fear is a powerful agent, so having some green among the red can be a huge comfort, and can help one avoid panic-selling. In my opinion, a team should have a blend of top-tier players spread across different positions. I believe having one stud QB, RB, and WR is better than having three stud WRs in a standard league. For instance, taking two RBs in the first/second pick is generally viewed as a “safe play” on draft day. This year that would have absolutely killed you. 8: Buy Low, Sell High (click to enlarge) The most obvious advice in history, buy low/sell high is still the most important. Understanding valuations and being able to part with a stock you have come to love (because of how good to you it has been) is hard to do. Similarly, buying an unloved stock beaten down by news or rumors can be hard, as no one wants to try and catch a falling knife. Being able to judge what “low” and “high” mean in so many unique circumstances is a consummate skill. Every player that is lighting it up will normalize to the mean. Brady was a fantastic draft pick: a Hall of Fame quarterback with a Hall of Fame coach who was ticked off at bureaucratic debate and punishments levied. He had fire in his eyes, and that came out on the field. There came a time where his perceived value was higher than his average output, and that was the time to trade him away for someone with a lower perceived value but higher average value. It’s important to be active in your management, just as it is in stocks. Conclusion Lessons can be crossover between many different media. These eight lessons form a great platform of basic directives for investing, and as a bonus you have some things to think about for fantasy football next year as well! I hope everyone enjoyed the lighthearted article; its important change gears a bit at times. Please let me know how you liked it in the comments. Thanks to Seeking Alpha for letting me go nerdy on two different levels simultaneously.

5 Investing Lessons I Learned In 2015

Summary Every year I like to do a recap of the lessons I learned over the preceding 12 months. A 50/50 diversified portfolio of stocks and bonds is likely sitting near the zero line in 2015. At some point we are going to see a turn in this commodity downtrend that leads to a new bull market cycle. In my opinion, a counter-intuitive mindset is still one of your greatest allies when navigating these markets. Every year I like to do a recap of the lessons I learned over the preceding twelve months. I find this exercise to be cathartic in examining past mistakes as well as reminding myself of successful portfolio management guidelines that will serve us well in the future. Many of these lessons also apply to other areas of my life outside of the financial markets as well. Part of this practice also involves reviewing my prior years’ lessons in order to stay mindful of the journey that has brought us to this point. So let’s dive in to the high-level topics that drove the markets and our portfolios this year … Trendless markets require endless patience. Looked at a chart of the SPDR S&P 500 ETF (NYSEARCA: SPY ) lately? It’s gone virtually nowhere over the last 12 months. However, that doesn’t mean it has been completely asleep. There have been gut-wrenching drops and face ripping rallies that virtually no one could have foreseen ahead of time. To add to this sense of frustration is the fact that returns in bonds and cash are virtually flat as well. A 50/50 diversified portfolio of stocks and bonds is likely sitting near the zero line in 2015. It’s years like this that truly test your patience with sticking to your plan versus trying to go find a better system or advisor that rose to the top. Of course, you have to ask yourself whether any supposed alpha this year was driven by a time-tested process or the result of simply stumbling into the right place at the right time. Be mindful of taking on too much risk by chasing performance in areas of the market that appear stretched or are outside your comfort zone. Just because an investment seems cheap, doesn’t mean it can’t get cheaper. Anyone who has been trying to find a bottom in commodities or energy stocks this year certainly can relate to this axiom. There have been plenty of pundits, pivots, and pirates in this group that have been unable to successfully navigate the deflation trade. At some point, we are going to see a turn in this commodity downtrend that leads to a new bull market cycle. This will likely fuel demand for beaten down areas of the market like junk bonds, MLPs, oil and gas stocks, or the futures contracts themselves. The bottom line: We aren’t there yet. Trying to pick a perfect bottom in this market is more than likely going to cause undue stress rather than simply waiting for a more discernible pattern to develop. My grandfather used to say that a little bit of lost opportunity is better than a lot of lost money. That certainly applies in this instance. A counter-intuitive mindset is still your best ally. Remember that crazy summer correction in the market? The one that caused a panic on Wall Street, a lockup in ETF liquidity, and decrees that the apocalypse has arrived? Yeah it turned out we overcame that pretty fast. It was scary for sure, but taking a measured approach to any portfolio changes versus full-blown panic was the better move. In my opinion, a counter-intuitive mindset is still one of your greatest allies when navigating these markets. There is a great deal of pessimism and fear out there. More tactical investors can capitalize on that by reducing a portion of your exposure as prices rise and adding to new opportunities on dips. Long-term investors should be looking to put new money to work on any pullbacks to maximize their average cost basis. Starting something new can be rejuvenating. We all get stuck in the grind of our daily life. Our normal routines can get boring, dull, and allow complacency to set in. One of the ways we combated that mindset this year is by introducing a new premium newsletter service to our blog. We call this the Flexible Growth and Income Report , which is designed for serious investors with intermediate to long-term time frames. Our primary investment vehicles are diversified, transparent, and liquid exchange-traded funds. It’s also one of the few services that implements closed-end funds to enhance yield or seek greater returns. The introduction of this new service allowed us the opportunity to evaluate new themes, interact with new clientele, and challenge our existing market thesis. All of this may seem like additional work at first, but it can be truly rejuvenating in the sense that we are creating dynamic content that is rabidly consumed and used as actionable material. It’s a humbling and inspirational process that we enjoy producing every week. Shoulda, coulda, woulda are a drain on emotional capital. Ever feel like there was that one trade you almost took and then decided it wasn’t right for you? Then it goes on to be a very profitable investment and you can’t seem to get that “I should have bought XX” feeling out of your mind. It’s even worse if there was a trade that you forced, only to find out that it was a big loser in time or money. This seems to be a reoccurring theme when I talk to individual investors about their portfolios. Even very successful investors are haunted by missed opportunities or trades they wish they could have back. There is nothing wrong with a short period of self-reflection if you feel you made a mistake with your portfolio. Nevertheless, spending too much time worrying about something that has already passed you by is a drain on emotional capital. It also keeps you preoccupied from being in the present and the future opportunities that will be afforded to you. It’s not always easy to live in the here and now when we are constantly bombarded with historical results in this business. Yet, filtering out the noise and letting go of nominal miscues will be a significant game changer in your long-term success. The Bottom Line 2015 was a difficult year in many respects. However, it afforded the chance to learn and grow as well. Make sure you take the time prior to 2016 to set goals for your personal, professional, and investment endeavors. This will enable you to benchmark your performance to ensure you are on the right track to meet your ultimate objectives.