Tag Archives: opinion

PEY: Great Companies, Great Sector Allocations And Solid Yields

Summary PEY offers a dividend yield of 3.39%. The individual company allocations include some relatively heavy concentrations. The sector allocation looks nice, but the volatility on the ETF has been surprising. I like the underlying allocations, but rather than using an ETF that trades the companies I’d prefer a simple “buy and hold” strategy. The PowerShares High Yield Equity Dividend Achievers Portfolio ETF (NYSEARCA: PEY ) has an excellent yield at 3.39% and the sector allocations look great. A heavy allocation to utilities and consumer staples seems like a solid way to build a defensive portfolio, however the volatility of the fund has been surprising. Expenses The expense ratio is a .54%. This is quite a bit too high for my tastes. Holdings I put grabbed the following chart to demonstrate the weight of the top 10 holdings: The heaviest weighting by a slight margin was given to the Vector Group (NYSE: VGR ). The stock has an incredibly high 6.7% dividend yield and is in the cigarette business. While I’m not thrilled with the actions of tobacco companies, the dividend is very strong, and their product benefits from being highly addictive. For the investor addicted to reliable income, this is an industry that simply makes great financial sense. I thought it was interesting that the Vector Group received such a heavy weighting when I didn’t see Altria Group (NYSE: MO ) near the top. Digging deeper into the holdings I found that Altria Group was included and currently represents almost 2% of the portfolio. You may also notice a few oil companies in the portfolio. ConocoPhillips (NYSE: COP ) and Chevron (NYSE: CVX ) both get respectable weights and offer investors exposure to the oil industry which seems to be entirely out of favor. When it comes to oil allocations, I’m fine with having them in the ETF or doing them individually. In the case of ETFs with higher expense ratios, I would lean towards just buying the oil companies individually since I see the sector as a simple “buy and hold” area. Market Cap and Style The style demonstrates a fairly heavy focus on value companies with a willingness to allow blended allocations. It should be noted that they do have a fairly notable allocation to both the small-cap and mid-cap areas which I would expect to increase volatility. Sectors This was the chart that I thought provided the best selling point for PEY. They offer investors a significant allocation to utilities and consumer staples. These heavy allocations should result in a portfolio that is capable of being significantly more defensive and able to withstand downturns in the economy. I wanted to check and see if things had played out that way, so I ran a quick regression on PEY with the S&P 500 going back to December of 2004. It turns out that PEY got hammered pretty hard. The worst drawdown during the recession was saw the S&P 500 fall by about 55%, but PEY managed to lose over 72% of the funds value. I don’t believe that the fund is currently as volatile as those numbers would suggest, but I would prefer to see more diversification in the portfolio allocations since running allocations greater than 3% to anything other than a company like Exxon Mobil (NYSE: XOM ) is simply introducing additional price risk. Conclusion The yield is solid and the sector allocations give the fund a definite appeal for investors looking for that steady source of income. During 2008 and 2009 the fund took some pretty harsh beatings, but I wouldn’t expect them to see that kind of loss again. One of the challenges that I believe the fund faces is having the objective to track the price and yield performance of the Nasdaq US Dividend Achievers® 50 Index. The lack of diversification within the index makes creates a challenge for building any diversification into the fund. The individual holdings include several great dividend growth champions, but I don’t see a benefit in creating higher levels of concentration or trading the positions frequently. The underlying companies are the kind where an investor might serve their family well by simply taking physical delivery of the shares and stuffing them in a safe with the door closed for the next 50 years. There are some areas where more frequent trading makes sense, but when it comes to these dividend champions, I don’t see a need to have any frequent changes. If the fund dropped the expense ratio to .05% and indicated that there would be almost 0 trades over the next few decades, I’d be very bullish on the fund because the underlying companies offer investors a solid growing stream of income. In essence, I like the allocations more than the strategy that created them.

Equity CEFs: Enough Is Enough, Consider The Cohen & Steers Infrastructure Fund

Summary I realize this is a “have” market and you have to own what works but sometimes, the valuation of some CEFs become so absurd, you can’t ignore it. A number of CEFs are getting to this absurd level, including some REITs, but one fund I have owned a small position in for years I believe is especially attractive. You would be hard pressed to find an equity CEF that has had as good an NAV performance historically as the Cohen & Steers Infrastructure fund, despite a subpar year. I’m going to write this article rather quickly after yesterday’s market close since I wanted to get this out fresh today. The disgust in this market is becoming palpable as investors throw in the towel on what doesn’t work and are forced to buy what does, even at all-time highs. But there comes a point, like in the fall of 2008, when investors are flat-out wrong and making what I would consider to be emotional and short-sighted decisions. I believe we are at such an inflection point with a number of equity CEFs, but none more so than the Cohen & Steers Infrastructure fund (NYSE: UTF ) , $18.96 market price, $23.18 NAV, -18.2% discount, 8.4% current market yield . You read that right. UTF now trades at an unbelievable -18.2% discount with a market price well over $4 below its NAV. Think about this for a minute. UTF went public back in March of 2004 at a $19.10 NAV and a $20 market price (after a $0.90 sales credit per share). So after paying quarterly distributions averaging say, 6% to 7% annually, Cohen & Steers has still been able to grow UTF’s NAV from $19.10 to $23.18 today, even with some subpar years like 2015. You would be hard pressed to find any other equity CEF that has accomplished that. How strong has UTF been historically? Here is UTF’s Annual Performance figures taken from UTF’s Fact Sheet dated 9/30/2015. (click to enlarge) How many CEFs do you think have beaten the S&P 500 in both total return market price and NAV since their inception? Trust me, not many. And UTF has accomplished this as a global equity fund, including a portion of its portfolio in high yield corporate bonds and preferred securities. UTF also happens to be one of the largest CEFs at $2.8 billion in total assets so it is quite liquid. Here are UTF’s top 10 holdings as of 9/30/15. (click to enlarge) Now has UTF had a good past year? No, but I guess if you don’t own Facebook (NASDAQ: FB ) , Amazon (NASDAQ: AMZN ) , Alphabet (NASDAQ: GOOG ) (NASDAQ: GOOGL ) o r Netflix (NASDAQ: NFLX ) in your portfolio somewhere, you probably wouldn’t be having a good year either it seems. Year-to-date, UTF’s NAV is down -5.5%, but that’s hardly what I would call a disaster, especially considering what sectors UTF invests in. UTF is an infrastructure fund which means its owns mostly global stocks in the utility, communication tower, toll roads, rails and satellite sectors. Here is UTF’s sector and geographic breakdown. (click to enlarge) Obviously, UTF is invested in some areas that are under an immense amount of pressure this year, i.e. energy MLPs for example, but you’re also talking about a management team that has been in place since the fund’s inception and has weathered many storms. Barron’s also recently wrote a very positive article on two of UTF’s top positions shown above, Crown Castle International (NYSE: CCI ) and American Tower (NYSE: AMT ) , when it came out with this article on October 17th, How To Profit From The Real Estate Play In Wireless Stocks . If you can’t access the article since Barron’s is subscription based, here is a brief highlight from the article. The companies have slightly different identities. American Tower is the largest with the most international exposure, while Crown Castle has focused on U.S. urban areas. SBA is the smallest and fastest-growing. But the opportunity is the same. The stocks could each rise 20% or more in the coming 18 months, especially as investors shrug off near-term concerns and focus on the big picture. Also consider that UTF has been steadily raising its distributions over the years, most recently this past March from $0.37/share to $0.40/share and now offers an 8.4% current market yield, a healthy bonus over its very reasonable 6.9% NAV yield. Conclusion You almost have to go back to 2008 to find opportunities like this in my opinion. Now I have no crystal ball in regards to where interest rates go or if the utility, energy or “have not” sectors gets worse before they get better, but I do know that when emotions drive CEF market prices to these discount levels, your risk/reward improves dramatically if you just hold onto the fund and even add to your position on any added weakness. The Federal Reserve’s resolve to raise interest rates does not mean the end of anything and everything interest rate sensitive, though that seems to be the consensus of the markets right now, particularly in CEFs. But at some point, there will be a leveling of emotions and sanity will creep back into the market. UTF has been one of the best long term performers of all the CEFs I follow though it has historically traded at a wide discount. But that shouldn’t deter you from owning this fund as that is hardly an indication of its historic market price performance and in fact, some of the worst CEFs I follow trade at premium market prices despite having horrible market price performance. UTF’s -18.2% discount may be a valuation anomaly but it also presents an opportunity for investors to pick up one of the best windfall yield bonuses I have seen in years. In other words, the fund has only to cover a modest 6.9% NAV yield, which is a big reason why UTF has been so successful at growing its NAV over the years as a leveraged CEF, but because of the -18.2% discount, investor’s can receive a bonus 8.4% windfall market yield. Emotions are running high right now and investors, big and small, are jettisoning anything that hasn’t “worked” this year to chase what has. Though I have also been forced to adapt to this strategy, I also believe there are opportunities that can become either a “have” or “have not” as well. UTF has now become a “must have” opportunity.

Who Will Win And Who Will Lose When The Fed Raises Rates In December

Summary Analysis of the jobs report. Explains why bonds and other interest rate sensitive investments will suffer. Explains why stock picking through logic and common sense is back. Today, we had great news as the US jobs report finally showed signs that the economy may be improving as 271,000 jobs were created, beating economists’ estimates of 180,000, while the unemployment rate fell to 5% for the first time since 2008. This is where the jobs were created: (click to enlarge) But the most important thing about the report is that the average hourly wage finally spiked up for the first time in a long time. Janet Yellen and her gang at the Fed are going to party this weekend, as the release valve from the tremendous bone crushing stress that the Fed officials have been under has just opened, and this report is all the evidence the Fed will need to raise interest rates (for the first time since 2004) when it meets in December. That means that the party of free money at zero interest rates will finally come to an end. The Fed will start raising rates in December and then will probably start raising rates at about .75% per year for the next 5 to 7 years, bringing interest rates eventually in line with the historical average rates. Who will suffer and who will benefit? Well, those who will suffer are: 1) Anyone owning commodities like gold, silver, oil, etc., as the US dollar (NYSEARCA: UUP ) will continue to rise, and since many of these commodities are priced in US dollars, they will fall. You can see evidence of that in the price of gold (NYSEARCA: GLD ), which just hit a 5-year low today on the news. (click to enlarge) So anyone owning commodities or the companies that mine them (NYSEARCA: GDX ) is in for some serious pain going forward. Now, the only thing that can save commodity producers and miners is if inflation starts its way back up. The Fed has to move quickly as the last time we had such low interest rates was in 1973, and from 1974 to 1980 inflation erupted and interest rates went from 3% to 19% in six years. We are currently in a deflationary period and there is little threat of inflation right now, but the Fed needs to get ahead of the curve and move because hyperinflation is serious business, and if one ever lets that genie out of the bottle, it is almost impossible to curtail it. 2) Bond holders (NYSEARCA: TBT ), insurance companies, dividend investors, car manufacturers and dealers, home builders, realtors, furniture/appliance manufacturers, utilities and companies doing buybacks will start feeling the pain coming up. Since investors will start getting higher interest rates on new bonds issued and with savings deposits at banks, with every quarter-point rate increase by the Fed, those holding older bonds will probably sell them to buy the new ones issued at a higher rate. So, what you will see is the opposite of how refinancing your house works, for example. When you refinance your home, you pay off your old mortgage and get a new lower rate. But when you refinance your bonds, you are looking for a higher rate of interest and thus will sell them to buy the new ones. So those holding older bonds will see investors in those bonds sell them, chasing the higher rate and buying new ones. When they sell, the principal of those older bonds goes down as the yield that each one pays has to match the new bonds. So, if rates keep rising, then more and more people will be selling their bond holdings. The biggest holders of bonds are insurance companies (NYSEARCA: IAK ), so insurers will feel the pain as the products each offers, like annuities, will need to pay higher rates of interest to stay competitive, while the principal value of each companies’ bond holdings will slowly decline. So for insurers, it’s a double-edged sword. Dividend investors will suffer as the army of investors chasing dividends will have another safer option to invest in to get interest (like CDs at banks) so companies such as utilities, master limited partnerships (NYSEARCA: AMLP ), REITs (NYSEARCA: IYR ), etc., will have to raise dividend rates, which means each will have to borrow more at the new higher rates to pay them. As each borrows more, the underlying business suffers as costs increase, but revenues and profits stay the same. In my opinion, interest rates will constantly rise at about .75% per year, thus those companies currently borrowing at zero interest rates will no longer be able to do so and thus will curtail buyback plans and stop raising dividend payouts. Management will actually have to grow their companies’ bottom lines and invest in growth. This action will be a paradigm shift and will spur capital expenditures, which will grow the manufacturing base, and those companies that make industrial equipment (NYSEARCA: IYJ ) may benefit. As interest rates rise, home prices will stop rising and demand will slow as mortgage rates will go up and that will hurt home builders and realtors (NYSEARCA: ITB ) as there will be fewer buyers and a lot more sellers. Those who have been successfully flipping houses will finally find an urgent need to dump their entire portfolios of homes in a hurry. Back in 2009, hedge funds bought millions of homes in foreclosure and have since seen those homes rise in value. I would assume these hedge funds will start flooding the markets by putting those homes all up for sale ASAP. So, if you were thinking of selling your home, you better move it. Utilities (NYSEARCA: IDU ) will start to tank as the only reason investors really buy them is for the dividend yield. Since maintenance CapEx charges on utilities have always been very high, utilities, in order to pay out a dividend, have always borrowed money to do so. Thus, each will suffer as interest rates rise and borrowing costs do so as well. The party for car manufacturers and dealers will soon be over as each will no longer be able to offer zero interest rate financing. I went and bought a new Toyota (NYSE: TM ) Tundra truck recently as I wanted to lock in the rate but will not be buying anything again for ten years. So if you are in the market for a car, go buy it soon. The same goes for furniture and home appliances; lock the rates in because you will not see these sweetheart deals anytime soon. Those who will benefit from rising interest rates are: 1) Stock pickers will benefit as investors start to rebalance their portfolios, removing those industries mentioned above and go for more growth and value investments based on each company’s Main Street operations instead of dividend payouts and buy backs. I have not been in a rush to buy anything as I knew this scenario and major paradigm shift was coming and that the markets would be effected as a rebalancing of portfolios will start soon. The companies I have bought have extremely high free cash flow and thus are not going to be much affected by rising interest rates. Most of them are duopolies like Lockheed Martin (NYSE: LMT ), Boeing (NYSE: BA ), Visa (NYSE: V ) and MasterCard (NYSE: MA ), while others operate with very little, if any, debt at all like FactSet (NYSE: FDS ) Biogen (NASDAQ: BIIB ), Michael Kors (NYSE: KORS ), Gilead Sciences (NASDAQ: GILD ) and Accenture (NYSE: ACN ) and have FROICs of 30% or higher. For those interested in more information on how I picked those stocks, you can find out more by going HERE . I also own Apple (NASDAQ: AAPL ) and here is my Friedrich Research on it that shows you why I bought it: (click to enlarge) Multinational firms may suffer due to the strong US dollar, so the smart investor may want to concentrate on those companies that buy supplies or have products manufactured outside (like Apple does) of the US, as the stronger dollar will buy more bang for the buck while those who export will suffer as customers overseas will be buying less as their currencies weaken. Going forward, what is coming up will be a stock pickers’ dream market, where those who should outperform are those who actually do the research and due diligence to get the story right. Investors will no longer be able to buy anything and watch it go up automatically, as the rising tide will now just be calm water and will no longer lift all boats. Investors will need to buy the right stocks and get the story right. The free ride of markets backed up by the Federal Reserve’s zero interest rates will be officially over when the Fed raises rates in December. The next few months will be a rebalancing of portfolios toward growth and value investing instead of index/dividend/buyback investing. Analysts, portfolio managers and stock brokers are now going have to actually work for a living as the free ride of just putting their clients’ money in index funds, bonds and ETFs and watching them go up every day automatically (as more and more people pile in) will no longer be profitable as the party there is over. As a result, more and more people will become confused at this paradigm shift, as most of them were not investors prior to 2004 and don’t know what a rising interest rate cycle is like. Once the Fed starts raising rates, it usually raises for 5 to 7 years, but the Fed will be raising for at least that much this time around, as it is starting from zero and that’s a long way away from the historical average rate. So, in conclusion, the tide will now start rolling out and you will finally see those who are naked and without a clue on how to invest, as they can no longer rely on the Fed Tide lifting all boats. Momentum investors will get crushed as those companies that buy other companies with zero debt will finally not be able to do so anymore, so mergers and acquisitions will come to a screeching halt as will IPOs. As for me, I am very excited as I will be using my Friedrich algorithm and slowly building a strong portfolio of growth/value investments that I can hold for a while as the Fed begins its moves in December. Those who will benefit are those who use logic and common sense, and more importantly, who know what they own and why. With the Fed out of the picture, as of December, logic and common sense should rule the day.