Tag Archives: opinion

Reaves Utility Income Fund: Coming Dilution Will Likely Drive Down NAV And Market Price

Summary Management has recently filed for a rights offering with SEC. The rights offering is an offer to sell more shares, which will lead to further dilution of NAV and the market price of UTG. The current downward spiral of NAV along with rights offering suggests investors would be better served by avoiding UTG. ( click to enl arge) I wrote about Reaves Utility Income Fund (NYSEMKT: UTG ) back in July, suggesting that it offers a relatively safe 6% yield paid monthly. In that article, there was a table that showed that UTG had outperformed both the S&P Utilities Index and the Dow Jones Utility Average over a 5-year period ending 4/30/2015. However the fund has not been performing as well this past year. On that same chart, total return was a -0.17% for six months, whereas the S&P Utilities index returned -1.10% and the Dow Jones Utility Average returned 3.78%. A copy of the table is shown below: (click to enlarge) Source: UTG Semi-annual Report Reuben Gregg Brewer wrote 2 articles on UTG over the past several months that indicate things are not going well at this CEF. You can read these articles here and here on Seeking Alpha. In the first article, he reports that NAV is down 11.5% for the year and that market price is down 13%. He shows some concern in the article that UTG will have to do a ROC (Return of Capital) to maintain the dividend if things don’t turn around soon. UTG has been able to avoid making ROC dividend payments over the past few years. He maintains a positive attitude toward the CEF in this article in spite of the bad news while at the same time predicting a lower price. His last 2 statements in the first article are: ” That said, if you are looking for a bargain, I don’t think UTG is there just yet. But with market volatility kicking up, keep a close eye on UTG, because fickle investors may just give you the opportunity to buy in on the ‘cheap’.” The second article chronicles the rights offering that UTG is about issue to stockholders. On 10/6/2015 UTG announced that it filed with the SEC to offer additional common shares of the fund pursuant to a rights offering. One right per share will be given to each shareholder and 1 share of UTG can be purchased for every 3 rights held. UTG also has the option to issue up to 25% additional shares based on the common shares issued in the rights subscription. Reuben Brewer offered the opinion that this offering would work out for shareholders in the long run. He wrote: “If you are a Reaves shareholder this is probably a good deal for you. Will it be a good deal in the next six months? Maybe, maybe not. But longer term the CEF appears to be of the opinion that now is a good time to put money to work. And that should work out for you if you plan to stick around for some time.” Levis Kochin violently disagreed with Brewer in the comments section by stating that the rights offering is a reach for more management fees by Reaves Asset Management. He asserted further that this offering is stealing NAV from current shareholders by offering shares below NAV. Kochin is correct in that the rights offering is a further dilution of NAV and is not in the best interests of stockholders. To see the rights offering as a positive requires one to have a great deal of faith in the managers of the fund. Mr. Brewer believes management will use these additional funds to purchase shares of beaten down dividend companies and that it will eventually work out to the best interests of shareholders. He believes that history will repeat itself when it worked out well for shareholders the last time UTG did this in 2012. Operations this year has NAV dropping at about 1% a month. The Market price of UTG has dropped faster than NAV. As of 9/30/15 NAV has dropped 9.85% and the market price has dropped 10.93%. The performance table from UTG is shown below: (click to enlarge) Source: Reaves Utility Income Fund Website (performance) Conclusion: I am currently negative on UTG because of the impending dilution coming with the rights offering and the increasing number of available shares. The distribution of more shares will likely cause an imbalance of shares offered to sell as opposed to offers to buy. Both the NAV and market price of UTG will likely be soft for the next 6 to 12 months. Therefore I would definitely not be a buyer at the present time. But if you already own UTG, you may wish to hold on to keep collecting the monthly dividend and to wait out management hoping it will invest the new money wisely. In the accounts of retired folks, I let the investment ride to collect UTG’s monthly dividend. For folks that are not retired, I sold the issue and moved the money to other investments that appear more positive over the next few months.

Is The Argentina ETF A Good Buy Ahead Of The Runoff Election?

Argentina has been on investors’ radar lately for the much-awaited election results that can make or break its fate for the coming four years. The country’s economy is in dire straits, with cooling growth, higher inflation, declining currency and debt default issues. Naturally, a probable change in political power, which might bring about a shift in economy policies, has drawn investors’ attention. In such a backdrop, a poll was held on October 25. But the election did not led to a clear winner, and thus led to a runoff. Notably, Argentina’s outgoing leftist president, Cristina Fernandez, was constitutionally debarred from fighting for the third successive term , and her party’s candidate shocked with a feeble performance. And Conservative opposition’s pro-business candidate Mauricio Macri’s unexpected strength in the poll box set the stage for a runoff on November 22 . Marci will rival FPV candidate Daniel Scioli, who is, in fact, backed by Cristina Fernandez. The first round of elections was a neck-to-neck competition, with Daniel Scioli getting 36.86% and Macri receiving 34.33% votes. Sergio Massa, a past partner of Cristina Fernandez de Kirchner who shifted allegiance to the opposition, could be the wire-puller after capturing 21.34% of the votes, with analysts suspecting that he might tie up with Macri to form the government, as per NY Times . Since Mauricio Macri is viewed as a proponent of free markets, a runoff lifted the Argentine equities. However, citizens are receiving online warnings that they might lose out on social welfare if Macri wins. Basically, Scioli has a leftist approach. He is, thus, repeatedly referring to the free-market policies of the 1990s that led to the 2002 economic crisis, per Reuters . However, Macri’s political pledge is to revamp investment and curb inflation, while simultaneously maintaining the required social programs. Market Impact As the first round of election went against the opinion poll and Mauricio Macri emerged as a dark horse to capture the close second position, investors started to look for growth prospects in Argentina. Several analysts went long on these stocks. The only ETF targeting the nation – the Global X MSCI Argentina ETF (NYSEARCA: ARGT ) – added about 22.9% in the last one month (as of November 2, 2015), of which 11.7% returns came in the last 10 days. Can it Run Further? The second round of elections will take place on November 22. And with Scioli still maintaining the lead, hopes are still alive for him to win. Sergio Massa’s 21% voters will matter the most now, as they could swing the balance. If Macri wins, the Argentina ETF is sure to see a nice rally. If not, then too the stocks will likely enjoy a decent run on hopes of a political change ahead of the runoff election. Investors should also note that Scioli is apparently more market-friendly than Fernandez, under whose governance the country’s growth slackened. So no matter who wins, the Argentina ETF might see a rebound in the near term. ARGT is still 13.7% down from the 52-week high (as of November 2, 2015), and thus, has room for further advancement if speculations over Macri’s win persist. So, investors with a stomach for risks can take a look at the ETF. The fund presently has a Zacks ETF Rank #5 (Strong Sell), with a High risk outlook. Let’s wait for November 22 to see what lies ahead for ARGT in this uncertain time. ARGT in Focus The ETF tracks the MSCI All Argentina 25/50 Index, which measures the performance of the 30 largest and most liquid companies that are listed in Argentina or perform most of their operations in the country. Holding 30 stocks in its basket, the fund is highly concentrated on the top four firms at 60%, while other firms do not hold more than 5.68% share. The fund has amassed $15.2 million in its asset base, and trades at an average daily trading volume of nearly 12,000 shares. The product charges 74 bps in fees and expenses. Original Post

Sell Shell, Buy These Names Instead

Shell is still a great company, but recently it has over-reached. This places it at a disadvantage. We are switching instead to a trio of much better-positioned companies. There are three quality energy companies I bought last month and one I sold. It wasn’t easy selling Shell (NYSE: RDS.B ). I’ve made big money on it before; indeed, the very first article I wrote for Seeking Alpha was about Shell being defrauded by Russia. But lately, Shell seems to be doing enough on its own to warrant concern. Shell’s economic mistakes of paying top dollar for BG ( OTCQX:BRGYY ), insisting on continuing to pursue the high-cost deepwater drilling in the Arctic, just ending with a more than $2 billion writeoff, and spending $2 billion on heavy oil in Alberta only to shut it down show a management that has lost its way in search of the “big score.” We aren’t “big score” portfolio managers. We are slow and steady advisors who like to see incremental gains during bull markets but buy big when we see serious value, typically after a market or individual stock decline. Shell started out just fine, but it is no longer thinking protection and steady growth. With these recent missteps and a return on invested capital that has recently declined to 7.3%, I believe that Shell’s marvelous dividend might now be in jeopardy. We will sell our RDS.B but retain exposure to the oil and gas industry by buying firms that are even cheaper in price per revenues and earnings. Because (in two of the three cases) they have a lower profile to most investors, they are actually down a greater percentage than Shell. All enjoy the same or better credit quality. We anchored this trio with Chevron (NYSE: CVX ). Unlike Shell, Chevron continues to be a company that moves slowly and inexorably toward better returns. Almost alone among the major international energy firms, CVX did not rush into Iraq, Burma, Russia, et al. during the boom times for oil and gas. The company picks its geopolitical partners well (perhaps because it was burned once in Ecuador it is now twice shy). Like us, Chevron chooses steady returns over big scores (that often aren’t.) This is reflected in its return on capital, which is among the highest in the energy sector. Also like us, CVX takes the long view. Its new production, particularly from the Gulf of Mexico and western Australia will provide a growth engine for Chevron for years to come. In fact, two liquefied natural gas (LNG) projects in Australia, Gorgon and Wheatstone will be the primary drivers of Chevron’s international growth in the coming years. These two projects will marry CVX’s massive natural gas finds offshore Australia with the insatiable demand for LNG in Japan and other Pacific Rim nations, lessening their dependence on Russian or Middle Eastern oil and gas. LNG, with both a high and a long plateau production profile (and little capital expenditure), will provide significant cash flow to support reinvestment or increased shareholder returns. We also placed in this troika two lesser known firms, both on the NYSE, that have fallen considerably more than Shell, giving us the opportunity for an even greater rebound when oil and gas firms spring to life again. No matter what the prevailing opinion, we don’t know if the day will come in 2016, the current consensus, or tomorrow if terrorists take production offline in one of the top producer nations. That’s why we buy at least some positions today. The first name we bought is Range Resources (NYSE: RRC ). The biggest risk I see to Range is the Pennsylvania legal and regulatory environment. Pennsylvania has had declining manufacturing revenues for years and is currently facing an underfunded pension plan crisis. By fortuitous happenstance, however, it was discovered a few years back to rest above what may be the most valuable of all the shale oil and gas formations in the country. Rather than say “thank you, Mother Nature” for this windfall and the high-paying jobs it creates, local regulators have slow-rolled many projects and local governments have banned drilling outright. They’ll catch on — or be forced from office. In my opinion, Range has the best position of any energy company in the Marcellus and other smaller formations in Pennsylvania. As fracturing and drilling become more sophisticated, I believe these local objections will wither as they realize the safety of these operations is high, the jobs created are a windfall, and the returns will allow them to bail themselves out of their pension difficulties. Plus, Range has the highest number of the lowest cost multi-year leases of any major firm in the Marcellus shale region. With drilling inventory lasting at least through the year 2035, Range has large blocked-together acreage with low royalty, operating, and development costs. Range will be in the catbird seat as oil and gas prices recover. Antero Resources (NYSE: AR ) is also a big player in the Marcellus formation, including that portion which sits under West Virginia, as well as in the Utica formation in eastern Ohio. Just as CVX has positioned for LNG sales to the Pacific Rim from its facilities in Oz, the major players in the Utica and Marcellus stand to benefit in coming years from LNG deliveries to Europe. Europeans currently get most of their natural gas from Russia. If you are a German or Latvian or Bulgarian shivering in the winter, who would you rather depend upon a supply without geopolitical demands attached, U.S. companies or the bullying and capricious Russian government? Production costs are quite low for Antero. In fact, Morningstar estimates that AR’s natural gas production is still quite profitable at $2.50 per mcf, and breakeven at the current pre-winter spot price. As we approach winter in the upper Midwest and Northeast, of course, that price typically rises. I think it is likely to do so this winter, in particular, with so little new drilling and so many operations shut in. Antero will benefit. In times of pricing pressure, the lowest cost producers always benefit. I believe the quality of Antero’s assets, coupled with management that holds a slow and steady hand in production as well as new exploration, assures them of continued success. Please note: My expectations for increased revenue, earnings and stock price are not based on higher oil and gas prices, but on the lower costs I see as shale, exploration, and transport technologies reduce expenses. Disclaimer: As Registered Investment Advisors, we believe it is essential to advise that we do not know your personal financial situation, so the information contained in this communiqué represents the opinions of the staff of Stanford Wealth Management, and should not be construed as “personalized” investment advice. Past performance is no guarantee of future results, rather an obvious statement but clearly too often unheeded! We encourage you to do your own due diligence on issues we discuss to see if they might be of value in your own investing. We take our responsibility to offer intelligent commentary seriously, but it should not be assumed that investing in any securities we are investing in will always be profitable. We do our best to get it right, and we “eat our own cooking,” but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about.