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Are Energy Stocks Finally A Buy?

Is this the time to buy a basket of energy stocks? Yes. Though, I should start by stating the obvious: We are awash in oil, and this market looks to be oversupplied for quite some time. On Thursday, the Energy Information Administration rattled energy stocks by reporting that U.S. crude inventories just saw their highest weekly jump in at least 14 years . Still, this is not the first time we’ve seen a bust in the oil patch. We will almost certainly see business failures as high-cost and highly indebted shale producers go belly-up. But the beauty of an ETF like the Energy Select Sector SPDR (NYSEARCA: XLE ) is that it is dominated by mega-cap supermajors and pipeline operators – the kinds of companies with the balance sheet strength to buy productive assets on the cheap, if we do see forced selling. Let’s take a look at the energy stocks that dominate XLE’s portfolio. Company Symbol % Assets Exxon Mobil Corporation (NYSE: XOM ) 16.63% Chevron Corporation (NYSE: CVX ) 13.63% Schlumberger N.V. (NYSE: SLB ) 7.22% Kinder Morgan, Inc. (NYSE: KMI ) 4.51% ConocoPhillips (NYSE: COP ) 3.95% EOG Resources, Inc. (NYSE: EOG ) 3.87% Occidental Petroleum (NYSE: OXY ) 3.43% Pioneer Natural Resources (NYSE: PXD ) 3.16% Anadarko Petroleum (NYSE: APC ) 3.06% Williams Companies, Inc. (NYSE: WMB ) 2.68% At the top of the list is, of course, that juggernaut of all oil supermajors, ExxonMobil Corp. Exxon accounts for 16.63% of XLE’s portfolio. Exxon will take its licks when it reports earnings. Consensus estimates have the company’s earnings dropping by about 29% when it reports. Yet, Exxon’s dividend is more than adequately covered, and it’s worth noting that it has raised its dividend for 32 consecutive years. Yes, even during the dark days of the 1980s and 1990s, when crude oil traded at generational lows, Exxon managed to keep growing its dividend. Furthermore, at 3.0%, this company is a relative high-yielder in a world in which the 10-year Treasury yields just 1.9%. Moving on, Chevron makes up another 13.63% of XLE’s portfolio. The company has raised its dividend for 27 consecutive years, and currently yields 3.9%. Like Exxon, Chevron’s dividend is more than adequately covered. The dividend payout ratios for Exxon and Chevron are 33% and 38%, respectively. There is a lot of room for crude oil prices to go lower before either of these stocks see their dividends at risk. Schlumberger takes the third spot, at 7.22%. As an oil services company rather than a supermajor, Schlumberger is riskier than Exxon or Chevron. As oil companies slash exploration, the service providers stand to absorb more of the loss in revenue. That’s ok. Schlumberger has lived through its share of both energy bull markets and bear markets, and it’s still here to tell the story. I wouldn’t aggressively buy Schlumberger as a standalone stock right now, but its 7.22% weighting here is more than acceptable. I really wish that Kinder Morgan Inc. gets a larger weighting than its current 4.51%. Kinder Morgan is one of the biggest and best-capitalized pipeline operators in the business, and I fully expect the company to go on a buying spree if some of its weaker competitors go bust. It’s worth noting that founder Richard Kinder started the company by buying unwanted pipeline assets from Enron for a song. Long after Enron bit the dust and became a byword for all that is wrong with corporate America, Mr. Kinder’s creation is going stronger than ever. Has the price of crude oil finally hit bottom? Probably not. But I’m ok with that. Energy stocks remain one of the few cheap sectors in an otherwise expensive market, and XLE provides a fine way to get exposure to the biggest and best. This article first appeared on Sizemore Insights as Are Energy Stocks Finally a Buy? Disclaimer: This article is for informational purposes only and should not be considered specific investment advice or as a solicitation to buy or sell any securities. Sizemore Capital personnel and clients will often have an interest in the securities mentioned. There is risk in any investment in traded securities, and all Sizemore Capital investment strategies have the possibility of loss. Past performance is no guarantee of future results.

ETFs To Hit $5 Trillion In Assets By 2020: PwC

By Clayton Browne A new report from PwC highlights the ETF industry continues to mature Exchange Traded Funds (ETFs) have been only been around for two decades, but they have grown far beyond their initial function of tracking large indices in developed markets and have become an investment sector of their own. As of year-end 2014, ETFs now hold over $2.6 trillion of assets globally and continue to grow rapidly. In fact, PwC projects that the ETF space will top $5 trillion in assets by 2020. Tax and and audit consultancy firm PwC recently published a report titled “ETF 2020: Preparing for a new horizon”. The report is based on a survey of 60 financial industry firms including ETF managers , asset managers and service providers. Increasing segmentation in ETF sector The PwC report points to the increasing segmentation of the ETF market. Institutions are committing more assets as more and more firms find uses for them. Also of note: “The advisor market continues to evolve quickly, with ETF strategists playing a growing role in the U.S. market and now emerging in Europe . Segment and channel trends are largely driven by local considerations, so regional differences abound.” (click to enlarge) While the growth of ETFs has slowed in the U.S. in the last few years, the industry is still expanding in other regions (such as Europe and Asia). According to the PwC report non-traditional indexing is becoming more important in many markets, “while active ETFs are on the verge of radically changing the AM [asset management] industry in the U.S.” Non-transparent active ETFs potential growth area (click to enlarge) In a setback for the industry, two firms seeking approval from the SEC to launch non-transparent active ETFs, which would offer less than the current daily transparency of the portfolio holdings using a blind trust, were denied late last year. However, the sector did get some good news when SEC approved the request of another firm to launch a different type of non-transparent active investment product referred to as exchange-traded managed funds in November last year. The report notes that this new innovation has caught the eye of current and prospective ETF sponsors. The authors anticipate that firms will continue to seek approval to set up non-transparent active ETFs, and argue this “could provide another phase of growth and innovation in the coming years.” Issues facing industry PwC acknowledges that the ETF industry will face numerous challenges in the coming years. One potential issue is changing demographics forcing asset managers to design solutions suitable for a rapidly aging population. Technology is also likely to radically alter the way investment advice and products are evaluated and consumed, and ETF firms must be ready to evolve. The report also notes that regulatory constraints and distribution dynamics benefiting other investments may reduce growth in some markets. The increasingly saturated U.S. marketplace is also a major concern. Disclosure: None. Share this article with a colleague

Dull Industrial Earnings Put These ETFs In Focus

As previously expected the Industrial sector has come out with lukewarm results for the fourth quarter earnings season. The major players in the space, such as General Electric (NYSE: GE ) , Caterpillar Inc. (NYSE: CAT ) and 3M Company (NYSE: MMM ) , have reported lackluster results, missing either on revenues or earnings. In fact, a disappointing performance from industrial leader Caterpillar and weaker-than-expected data on durable-goods orders sparked fears about a slowdown in economic growth, leading the Dow Jones Industrial Average to plunge more than 350 points in yesterday’s trading session. Industrial Earnings in Focus General Electric Operating earnings for the reported quarter came in at 56 cents per share compared with 53 cents a share in the year-ago quarter, beating the Zacks Consensus Estimate by a penny. The company posted net earnings of 51 cents per share, up 61% year over year. Total revenue for the quarter increased 4% year over year to $42 billion but fell short of the Zacks Consensus Estimate of $42.4 billion. The company’s operating profit in the Industrial segment increased 9% in the reported quarter as its businesses that sell power-generating turbines and jet engines helped offset weak sales in its oil and gas unit. However, GE Capital’s profit declined 19% year over year to $1.9 billion. The company, however, is committed to increasing its focus on industrial operations, away from finance. Caterpillar Mining and equipment behemoth Caterpillar however missed Q4 earnings estimates and also guided lower for 2015. Earnings per share declined 20% year over year to $1.35 per share, missing the estimates by 13%. Revenues declined 1% year over year to $14.2 billion in the quarter but surpassed the Zacks Consensus Estimate of $14.1 billion. The company blamed the muted mining environment and lower prices of oil and key mined commodities, particularly copper, coal and iron ore as the key factors behind the earnings miss. Moreover, the company also guided materially lower for 2015 due to continued weakness in oil prices. The company expects 2015 EPS of $4.75 on $50 billion in revenues, significantly below the current Zacks Consensus Estimate for 2015 of $6.69 in EPS on $54.6 billion in revenues Union Pacific Corporation (NYSE: UNP ) The rail transportation operator, Union Pacific , managed to beat our estimates on both fronts. Earnings per share rose 27% year over year to $1.61, beating the Zacks Consensus Estimate of $1.51, while revenues increased 9% year over year to $6.2 billion, ahead of the Zacks Consensus Estimate of $6.1 billion. 3M Company Like General Electric and Caterpillar, 3M also reported mixed financial results, beating on the earnings front but missing on revenues. Earnings per share came in at $1.81 per share, up 11.7% year over year, beating the Zacks Consensus Estimate by 2 cents a share. Net sales during the quarter were $7,719 million, up 2% year over year, but below the Zacks Consensus Estimate of $7,779 million. Market Impact Uneven earnings results from the top industrial stocks saw mixed reactions. While GE is up 5% since its announcement on January 23, Caterpillar shed 7% yesterday following its disappointing results. Meanwhile, 3M and Union Pacific closed marginally lower following their earnings. Given the uninspiring earnings results from some of the top industrial players, investors should cautiously play the industrial ETF space for the upcoming days. Below, we have highlighted three industrial ETFs having a sizeable exposure to the above stocks. Industrial Select Sector SPDR (NYSEARCA: XLI ) XLI is the most popular fund in the space with an asset base of $8.8 billion and an average daily trading volume of 9.9 million shares. The fund provides exposure to a basket of 66 stocks charging 65 basis points as fees. General Electric occupies the top spot with 9.3% allocation, while Union Pacific, 3M and Caterpillar have a combined exposure of roughly 14.2% in the fund. XLI lost 1.32% on Tuesday but is up 13.1% in the past one year and currently has a Zacks ETF Rank #3 or Hold rating. Vanguard Industrials ETF (NYSEARCA: VIS ) VIS is also quite a popular fund in the space with an asset base of more than $1.9 billion and trading with moderate volumes. VIS tracks the MSCI U.S. Investable Market Industrials 25/50 Index to provide exposure to 352 industrial stocks. The four stocks have a combined exposure of roughly 21%. VIS lost 1.2% in yesterday’s session and currently has a Zacks ETF Rank #3 or Hold rating. iShares U.S. Industrials ETF (NYSEARCA: IYJ ) IYJ tracks the Dow Jones U.S. Industrials Index to provide exposure to U.S. companies that produce goods used in construction and manufacturing. General Electric, Union Pacific, 3M and Caterpillar are among the top 10 holdings with a combined exposure of roughly 19.4%. The fund manages an asset base of $ 861.5 million and is slightly expensive with 43 basis points as fees. IYF currently has a Zacks ETF Rank #3 or Hold rating.