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Chalking Up Another BRIC

Summary It’s almost 15 years since Goldman Sachs coined the term “BRICs” for Brazil, Russia, India and China. Progress for the countries has been hit and miss, but it’s important to remember that we’re still less than 20% into the 21st century. Despite experiencing significant turbulence, these markets are still massive, representing 20% of the world economy. With Brazil and Russia seemingly bottoming out, there may never be a better time to get back onto the BRICs bandwagon. It’s almost 15 years since Goldman Sachs’ then chief economist, Jim O’Neill, coined the term ‘BRIC.’ The idea was that four countries (Brazil, Russia, India and China) were going to be the growth drivers for the 20th century. The idea was catchy, convincing and caught on. Soon, there were more acronyms and groups of countries doing the rounds: MINT and Next 11 were two that spring to mind, but probably none were as notorious as the BRICs. As of 2015, the BRICs aren’t nearly as popular with future gazers as they once were. True, China did experience several years of double-digit growth after the acronym was invented but you didn’t need an economist to tell you that would happen. Russia, India and Brazil have fluctuated between star performers and dunces of the class: in short, typical emerging market economies. All in all, a pass mark for the BRIC prediction but better predictions have been made. But as faddish as the term BRIC was in the middle of the last decade, it’s equally faddish now to write them off entirely. True, there hasn’t been much good news emanating from any of the BRIC countries for the past year or two but we’re not even 20% through the 21st century. Many of the fundamentals that Jim O’Neill attributed to the countries are still in place, meaning there are still opportunities for investors who are willing to ride out the inevitable storms. Furthermore, even if they’re out of vogue, the BRIC countries have a combined GDP of about 20% of the world economy. And close to a third of the world’s population. So, keeping an eye on their progress is not only of interest – it’s of importance . The iShares MSCI BRIC ETF (NYSEARCA: BKF ), which has understandably been a poor performer for the past five years. Given how the BRIC acronym has fallen from grace, there’s every chance the ETF will be removed from the Blackrock portfolio entirely over the next few years, so it may be better to watch the ETFs offered for each individual country when investing in this group is concerned. iShares MSCI Brazil Capped ETF (NYSEARCA: EWZ ) The Brazil ETF is trading at around half the level it was five years ago, and with Brazil facing into an economic abyss, it’s difficult to see this ETF recovering value anytime soon. The Brazilian real has been the biggest faller of any currency in the world in 2015, although it has stabilized in the past month and even made a minor recovery. It’s going to be a tough year or two for Brazil but markets have priced most of it in already. The component companies of this particular ETF are both well diversified (Brazil Foods, AmBev (NYSE: ABEV ), Bradesco Banking corporation (NYSE: BBD ), Vale mining (NYSE: VALE )) and not entirely dependent on the fate of the Brazilian economy. If (and it’s an ‘if’ not a ‘when’) President Rouseff finally deals with structural issues in the Brazilian economy, this ETF will almost certainly experience a bounce. iShares MSCI Russia Capped ETF (NYSEARCA: ERUS ) When Winston Churchill famously called the future of Russia ‘a riddle, wrapped in a mystery, inside an enigma,’ he may have been understating it. Sanctions against Russia in the past two years have inevitably led to a fall in its ETF, but possibly not by as much as one might expect. Vladimir Putin’s meetings with Obama in the past month that a defrosting of relations can’t be too far off – and with it, removal of sanctions, a jump in Russia’s economy and a boon to its stock market, the RTS. The Russia ETF is inevitably heavy on energy (Gazprom ( OTCPK:OGZPY ), Transneft, Tatneft ( OTCPK:OAOFY )), but also has some of the largest food retailers in Europe in its composition (Magnit). There’s one thing you can certainly say about Russia (which also goes for the other countries on this list), which should apply to its ETF: The country has weathered so many economic crises that it can surely ride out another one and come back stronger in the future. iShares MSCI India Index ETF (BATS: INDA ) And the star performer of the BRICs group is… India. Unlike the first two ETFs in this group, India isn’t going through a particularly dire economic period. Its growth is still hovering at around 4% – highly respectable in global terms. Just this week, CNBC released an article under the heading, “Why India is turning into everyone’s favorite EM.” Therein, it referred to India as “the world’s new growth engine.” Basically, what Jim O’Neill at Goldman Sachs predicted all those years ago. This ETF is trading at around 14,000, about 40% over what it was trading for three years ago. There are several familiar names in its composition, including some tech firms (Infosys (NYSE: INFY ), Tata (NYSE: TTM )), pharmaceuticals (Sun Pharmaceutical ( OTC:SMPQY )) and consumer staples (Hindustan Unilever ( OTC:HNSQY )). Industrial production in India is on an uptick, and many of these component companies will be the beneficiaries. iShares China Large-Cap ETF (NYSEARCA: FXI ) It’s hard not to detect an element of schadenfreude in the U.S. Press about China’s short-term economic demise. It would be unwise of anyone to think it’s going to be anything but short-term, though. Having dropped off a cliff at the beginning of 2015, falling by around 33% in just a few short months, the China Large-Cap ETF has already begun to rebound on the back of the Chinese Government’s aggressive economic policy. Other good news comes for China’s economy in the form that the Yuan has overtaken Japan’s yen as a unit of exchange. The China-Large Cap ETF gives investors exposure to 50 of the largest Chinese companies, and if you don’t know their names now, you soon will. There are large financials (Bank of China ( OTCPK:BACHY ), ICBC ( OTCPK:IDCBY ) and China Life Insurance (NYSE: LFC )), technology and telecommunications firms (Tencent Holdings ( OTCPK:TCEHY ) and China Mobile (NYSE: CHL )) and some energy giants (PetroChina (NYSE: PTR ) and CNOOC (NYSE: CEO )). A position on this ETF is a position on China’s future – and nearly fifteen years on from Jim O’Neill’s coining of the term BRICs, China is still the one you should invest in. With prices down 33% on last year, now is not a bad time to get involved. Conclusion Long after popular acronyms fade away, fundamentals remain. Anyone who thought investing in four of the world’s largest emerging markets and wouldn’t get a bumpy ride was fooling themselves. The BRICs provide enough evidence of that. However, with 20% of the world economy and over 30% of the world’s population, the BRICs still represent an excellent choice for anyone who wants to take a position on the long-term. There’s a maxim here which applies almost perfectly right now: Be careful when others are greedy and greedy when others are careful. In 2015 where the BRICs are concerned, too many are being careful. It may be your opportunity to be greedy.

NiSource – Red Flags All Around

Summary NiSource’s coal operations have gotten it in trouble before; it won’t be the last. Floundering gross margins have handicapped profitability. Net debt/EBITDA over 4x indicates significant leverage. Nearly $500M in annual interest expense. NiSource (NYSE: NI ) is a provider of natural gas and electricity to customers across seven states. The company touts its long-term return potential, citing strong local market growth, geographic diversity, and sizeable upgrade potential on its existing infrastructure, on which it would be entitled to a fair return on its investment. NiSource recently completed a spin-off of its Columbia Pipeline (NYSE: CPGX ) business, which means the new NiSource generates nearly 100% of its revenues from regulated utility operations. This fact, plus management’s guidance of 4-6% annual dividend growth from here on out, has drawn in income investors that have been searching for low-risk, stable income options in a highly volatile market. Is NiSource deserving of this praise, or are there potential bumps in the road for the company in the years ahead? Columbia Pipeline Spin-Off NiSource completed the spin-off of Columbia Pipeline Group in early July. Pitched to shareholders as unlocking value by separating two distinct businesses into independently run, pure-play public companies. Shareholders bought the idea hook, line, and sinker. Columbia Pipeline owns an extensive route of pipelines connecting the Northeast Marcellus/Utica shale plays to important local locations along with hundreds of billions of cubic feet of natural gas storage. Customers are primarily contracted, fee-based giants in the energy/utility business such as Exxon Mobil (NYSE: XOM ) and Dominion Resources (NYSE: D ). The prospect of management-guided 20%+ annual EBITDA growth on a seemingly ever expanding domestic energy market drew in investors chasing big capital gains and solid dividends. Unfortunately for shareholders of this new entity, the market has sold off highly leveraged midstream energy MLPs like Columbia Pipeline (along with peers like Kinder Morgan (NYSE: KMI )) on fears related to the sustainability and growth potential of American energy production. Smaller companies like Columbia Pipeline have been more adversely affected by the sell-off; shares are down 40% in a few short months compared to a flat performance from the S&P 500. This lesson in volatility has likely been a tough pill to swallow for dividend investors who have likely grown used to relatively mild movements in price. While I think midstream MLPs have been oversold and selling here would be a mistake, investors should likely consider paring down exposure to Columbia Pipeline as the share price recovers. Pro-Forma Operating Results Unfortunately for shareholders, NiSource has done a mediocre job regarding transparency of breaking out Columbia Pipeline’s contribution to NiSource’s earnings results on its presentations. This is necessary for investors to properly evaluate how the utility business has been performing over the past few years. After digging around in the SEC filings, I’ve broken out NiSource’s utility operations above given its pro-forma Columbia Pipeline filings given here . Total revenue has grown marvelously, but gross margins have contracted. NiSource has never been known for efficient operations and that trend has continued into recent years. This has always been a concern for investors. Another concern with the company is its electric operations, which generated approximately 30% of total utility revenues in 2014. The vast majority of available power generation (2,540MW of 3,281MW, or roughly 77% of power generation) is fired by coal. Energy mix has been unchanged for years, and given my pessimistic outlook on coal, my opinion here should be obvious. With such a high percentage of ageing coal power plants, it is likely only a matter of time before these plants reach the same fate as the company’s Dean Mitchell Generating Station, which was shut down in a settlement with the Obama Administration. This agreement also led to the company being forced into $600M in infrastructure upgrades on these old coal plants. The company had avoided provisions that required these upgrades for years. Even pro forma to exclude the buildup in the Columbian Pipeline infrastructure over the past few years, NiSource has been a serial burner of cash and a big issuer of debt – the combined company has issued billions in debt over the past few years to cover cash flow shortfalls. After the spin-off, NiSource is being left with a $5.5B long-term debt load. With EBITDA falling in the $1.3B range for 2015, net debt/EBITDA will be a hair over 4x. This is manageable for a utility, but investors should be cautious, especially given likely capital expenditure requirements for NiSource to maintain and update its prior-mentioned aging coal power plants. Conclusion Management here has the opportunity for a fresh start towards operating a functional utility. Improving gross margins, investing in its business smartly, and paying down its debt. Unfortunately, the company is more like a three-legged chair at the moment – the very foundation of the company is wobbly. Coal-fired generation puts a target on the company’s back. Nearly $500M in annual interest expense cuts operating profit off at the knees. With the company trading at nearly 18x 2016 earnings estimates, shares aren’t cheap compared to peers. Fair value is closer to 15x 2016 earnings of $1.03/share, or $15.45/share. In my opinion, investors would be wise to avoid NI’s shares currently.

Ill At Ease With Biotech? Prescribing #1 Healthcare ETFs

The recent carnage in biotech investing seems more vicious than anticipated. This hot corner of the broad U.S. healthcare market has seen many a correction before, but none seemed as rigorous as it looks now. The recent rout was instigated merely by a tweet – by presidential candidate Hillary Clinton. Her tweet raised concerns over the over pricing on life-saving drugs. Questions over biotech pricing came on the heels of a 5,455% price hike (in about two months) of a drug called Daraprim, used to treat malaria and toxoplasmosis. This gigantic leap in pricing action was taken by a privately held biotech company Turing Pharmaceuticals (read: How Hillary Clinton Crushed Biotech ETFs with One Tweet ). Pricing issues in the biotech space has long been a concern. On the whole, branded drug prices underwent a rise of about 14.8% last year, as per research firm Truveris. There are several other drugs namely cycloserine, Isuprel, Nitropress, and doxycycline that have seen enormous price hikes this year, per the source. This along with overvaluation concerns led to a bloodbath in this otherwise soaring sector last week. In fact, growing pains for biotech investing led the biggest related ETF iShares Nasdaq Biotechnology ETF (NASDAQ: IBB ) to incur the largest weekly loss in seven years. Plus, investors should note that biotech stocks underperformed the broader market during the last four election cycles, as noted by Barrons.com . Barrons’ analysis shows that the broader market indices including S&P 500, Dow Jones and NASDAQ composite gained 11%, 8%, and 18%, respectively, on average against 15% loss incurred by the NASDAQ Biotech index during last four election phases. In such a scenario, it is wise to take some rest off biotech stocks and ETFs, and instead spin your attention toward the more stable but equally promising broader healthcare ETFs (read: Guide to Inverse & Leveraged Biotech ETF Investing ). Why Broader Healthcare? The broader healthcare sector is also loaded with potential. A whirlwind of mergers and acquisitions, promising industry fundamentals, plenty of drug launches, growing demand in emerging markets, ever-increasing healthcare spending and Obama care play major roles in making it a lucrative bet for the long term. Moreover, unlike biotech, healthcare ETFs are relatively defensive in nature and do not completely let investors down even in a broader market sell-off. In the latest biotech tumult, when ETFs like the SPDR Biotech ETF (NYSEARCA: XBI ) , the ALPS Medical Breakthroughs ETF (NYSEARCA: SBIO ) and the BioShares Biotechnology Clinical Trials ETF (NASDAQ: BBC ) retreated in the range of 6% to 8% on September 25, most broader healthcare ETFs lost in the range of 2% to 3%. As a result, Zacks Rank #1 (Strong Buy) healthcare ETFs could be in watch ahead, at least until the penchant for biotech investing returns. Investors should note that the following healthcare ETFs hold a Zacks ETF Rank #1. PowerShares S&P SmallCap Health Care Portfolio ETF (NASDAQ: PSCH ) This ETF has delivered a spectacular performance in the broad healthcare world, returning nearly 25% so far this year and losing just 2.4% in the last one month overruling the biotech woes (as of September 25, 2015). The fund offers concentrated exposure to small cap healthcare securities. It holds 74 securities in its basket, with each security holding less than 4.61% share. From an industry perspective, about one-third of the portfolio is allotted toward healthcare equipment and supplies, followed by healthcare providers and services (28.3%) and pharmaceuticals (15.7%). The ETF has amassed $268.5 million in assets and trades in a lower volume of about 40,000 shares per day, while charging a relatively low fee of 29 bps a year. The fund continues to hold a Zacks ETF Rank #1 with a High risk outlook. SPDR S&P Health Care Equipment ETF (NYSEARCA: XHE ) This product looks to track the S&P Health Care Equipment Select Industry Index. Holding 73 stocks in its basket, each security accounts for less than 1.73% of total assets. This is often an overlooked fund with AUM of $51 million and average daily volume of about 5,000 shares. From an industry look, healthcare equipment accounts for over three-fourth of the portfolio while healthcare supplies have a considerable allocation. The product charges 35 bps in annual fees. XHE gained about 18.6% in the last one year and lost 4.2% in the last one month. It was also upgraded from Zacks Rank #3 (Hold) to Rank #1 in our latest Rank updates. iShares U.S. Medical Devices ETF (NYSEARCA: IHI ) This ETF follows the Dow Jones U.S. Select Medical Equipment Index with exposure to medical equipment companies. In total, the fund holds 52 securities in its basket with major allocations going to Medtronic Plc (NYSE: MDT ) and Abbott Laboratories (NYSE: ABT ) at 14.5% and 710.7%, respectively. The fund has been able to manage about $708 million in its asset base while volume is moderate at about 100,000 shares per day on average. It charges 45 bps in annual fees and expenses. This ETF was also upgraded from a Zacks ETF Rank #3 to Rank #1 recently. The product added 12.6% in the last one year and could be a nice pick for Q4. In the last one month, the fund lost 5.8% which was much lower than double-digit losses incurred by biotech ETFs. Link to the original article on Zacks.com