Tag Archives: power

Terraform Power: No More Blood On The Streets, Time To Take Profit

Summary I suggested a long position in Terraform Power on November 20th as panic made the valuation very compelling. Recent newsflow has been positive and generated a 50% rally in the stock since my article was published. It is time to reassess the investment thesis and decide whether to keep or sell the position. Less than a month ago I wrote an article on Terraform Power (NASDAQ: TERP ) titled ” Terraform Power : buying when there is blood on the streets?” At the time the stock was trading at $8.4 and it has been on a rollercoaster since then with a lot of news coming in. At the moment of writing this article the stock is at $12.40 and, including the 35c dividend, generated a 52% performance in less than a month. That was quicker than I expected. But such a big move deserves some additional analysis in order to understand if the time has come to close the position. Recent newsflow A few days after my article, the company announced some management changes . This was not good news as the clear message sent to investors was that objective number one was to save the overall Sunedison / Terraform Power / Terraform Global Group. They called it “organizational alignment”; the way I read it was: TERP is in much better shape than Sunedison (NYSE: SUNE ) and needs to provide some help. As expected the stock reacted negatively once the decision was digested and understood: some of the risk is switching back to Terraform from Sunedison as the Group is trying to go back to the initial yieldco drop down strategy, thus putting at risk TERP’s balance sheet. My own reaction was frustration as the investment thesis was certainly weakened by the news. Luckily a few days later (December 1st) reputable hedge fund investor David Tepper of Appaloosa disclosed a very large position in the company and sent a letter to management highlighting his concerns on corporate governance: “Thus, it is obvious that the deterioration in TERP’s security prices and credit profile this month results from (among other things): (1) the transmission of financial stress related to its “Sponsor’s” ambitious growth objectives and over-extended financial commitments; and (2) TERP’s incomplete and selective disclosures”. Market reaction was massive and Tepper’s involvement acted as a confidence booster. What particularly pleased the markets was that such a high profile hedge fund manager built a significant stake (9.5%) and took an activist role (something he rarely does) to push for a change and more protection for TERP shareholders. It really looked like the older brother trying to protect the younger one from bullies. The market appreciated and I recovered all my confidence in the stock and the investment thesis. The third important announcement was the revision of the Vivint acquisition . I am not sure how much weight Tepper’s letter had in the revision but that was clearly another positive. The change in the terms was not massive (the price was reduced 13% or $123 mln) while the reduction in the commitment on future purchases was more significant, with positive elements such as the downward price adjustment to achieve minimum returns. Overall I would say this was a positive but not “massively” positive. Stock reaction The following chart shows the stock performance since my previous article: TERP data by YCharts As you can see there has been a lot of volatility and a dramatic recovery during the month of December. This recovery was exclusively newsflow driven as many stocks in the energy yieldco space suffered significant losses during the same period of time (KMI comes to mind). Change to the investment thesis At the time of my previous post Terraform Power was extremely unloved and panic was pushing investors out. It was trading around book value pre minorities and had a yield of 16.8%. At the moment the stock is trading significantly above book value and on a yield of 11.3%. I believe there is still some value in the stock but it is not such a compelling story anymore. I believe upside from here in the short term is limited, especially if we consider that, while the stock went up 55%, credit markets deteriorated further in December, putting a lot of pressure and scrutiny on highly leveraged balance sheets. As a result I believe it is time to cash out and wait for better opportunities to arise.

How To Avoid The Worst Sector ETFs: Q4’15

Summary The large number of ETFs has little to do with serving your best interests. Below are three red flags you can use to avoid the worst ETFs. The following presents the least and most expensive sector ETFs as well as the worst overall sector ETFs per our Q4’15 sector ratings. Question: Why are there so many ETFs? Answer: ETF providers tend to make lots of money on each ETF so they create more products to sell. The large number of ETFs has little to do with serving your best interests. Below are three red flags you can use to avoid the worst ETFs: Inadequate Liquidity This issue is the easiest to avoid, and our advice is simple. Avoid all ETFs with less than $100 million in assets. Low levels of liquidity can lead to a discrepancy between the price of the ETF and the underlying value of the securities it holds. Plus, low asset levels tend to mean lower volume in the ETF and larger bid-ask spreads. High Fees ETFs should be cheap, but not all of them are. The first step here is to know what is cheap and expensive. To ensure you are paying at or below average fees, invest only in ETFs with total annual costs below 0.54%, which is the average total annual costs of the 196 U.S. equity sector ETFs we cover. Figure 1 shows the most and least expensive sector ETFs. ProShares and Direxion each provide two of the most expensive ETFs while Fidelity and Vanguard ETFs are among the cheapest. Figure 1: 5 Least and Most Expensive Sector ETFs (click to enlarge) Sources: New Constructs, LLC and company filings Investors need not pay high fees for quality holdings. The PowerShares KBW Property & Casualty Insurance Portfolio (NYSEARCA: KBWP ) earns our Very Attractive rating and has low total annual costs of only 0.39%. On the other hand, the Schwab U.S. REIT ETF (NYSEARCA: SCHH ) receives our Neutral rating due to its poor holdings. No matter how cheap an ETF, if it holds bad stocks, its performance will be bad. The quality of an ETFs holdings matters more than its price. Poor Holdings Avoiding poor holdings is by far the hardest part of avoiding bad ETFs, but it is also the most important because an ETF’s performance is determined more by its holdings than its costs. Figure 2 shows the ETFs within each sector with the worst holdings or portfolio management ratings . Figure 2: Sector ETFs with the Worst Holdings (click to enlarge) Sources: New Constructs, LLC and company filings PowerShares appears more often than any other providers in Figure 2, which means that they offer the most ETFs with the worst holdings. Our overall ratings on ETFs are based primarily on our stock ratings of their holdings. The Danger Within Buying an ETF without analyzing its holdings is like buying a stock without analyzing its business and finances. Put another way, research on ETF holdings is necessary due diligence because an ETF’s performance is only as good as its holdings’ performance. Barron’s agrees . PERFORMANCE OF ETFs HOLDINGs = PERFORMANCE OF ETF Disclosure: David Trainer and Kyle Guske II receive no compensation to write about any specific stock, sector, or theme.

Entergy Corp. Reports Solid Cash Flows From Operations

Summary This utility with a 5.14% dividend yield deserve a closer look. The decline in natural gas prices has led to a droop in wholesale electricity prices, harming Entergy’s profits. We use the company’s trailing 12 month P/E to get a better price comparison with industry peers. Regularly generating cash profits is an essential component of successful businesses. It only makes sense that’s how many investors wish to see their investments perform as well: as cash machines. Shark Tank investor “Mr. Wonderful” Kevin O’Leary agrees, emphatically stating, “cash is king.” And dividend payers like Entergy Corporation (NYSE: ETR ) churn that stuff out. The utility sector has recently crashed, with many companies trading at or near 52-week lows. Choosing the strongest companies from the lot is a fantastic opportunity to lock in great long-term deals on serious cash machines. Entergy Corp. trades at $66.69 per share, near its 52-week low of $61.27. Their dividend yield is a juicy 5.16% at this price level. During the third quarter, Jim Simons’ hedge fund increased their holdings in this company by 1.02 million shares – that means his research team concluded the company is trading at a discount to its intrinsic value. A clear indication that Entergy is worthy of further investigation. Entergy Corporation serves the growing suburban markets of Texas and operates in Arkansas, Mississippi, and Louisiana. They also distribute natural gas which is becoming more commonly looked upon as a commodity of growing importance in man’s fight against climate change, even as natural gas producers themselves are not presently thriving due to vast oversupply. The company is off of its 1-year high by 27.5% as the utility sector has generally gotten whacked by the market since February of this year. Financial Results & Removing A Big Non-Cash, One-time Impairment Charge Focusing on their operations, the company has announced the shut down of two loss-making power plants. The impairment write-offs and writedowns associated with the closure of the Pilgrim and FitzPatrick nuclear power plants took third quarter results to a net loss of $4.04 per share. I’d like to get closer to the Price-to-Earnings figure without this one-time charge baked in. After we removed the one-time charge we can easily compare the per share price ratios of Entergy Corp with its industry peers. First we’ll take a look at what third quarter 2015 results look like with and without the unusually high impairment charges, then we are going to bake-in Other Income, Interest Expense, and Income Taxes to arrive at an earnings figure that is comparable to industry peers. Note: The company’s 2012, 2013, and 2014 annual reports indicate asset impairment charges of ($ in millions) $255,524, $241,537, and $179,752, respectively. We will use the average of these three annual figures, divided by 4, to estimate the typical impairment charges per quarter. This will allow us to take a view of the profitability of the company aside from the plant write-offs associated with management’s work to improve operations. The average of the indicated impairments for 2012, 2013, and 2014 is $225,604. Divided by 4, that’s $56,401 of average quarterly impairments — the figure used in the image below. Time to review operating expenses with and without the recent quarter’s decommissioning related impairments: Taking another step closer to an industry-comparable earnings per share figure we’ll add in Other Incomes of $43,179 and subtract the quarter’s Interest Expense of $171,349. Our income before income taxes comes to $492,617. On Entergy’s very profitable 2014 they paid 38% tax on the aforementioned figure. Taking income taxes into account for the quarter we come to our net-of-decommissioning write-off 3rd quarter net earnings figure: $305,423. Finally, we will now find our remapped, industry peer comparable earnings per share and price-to-earnings figures for the 179,151,832 common stock shares outstanding: Retuned 3rd Quarter 2015 Earnings Per Share of $1.70 I selected Southern Company and FirstEnergy Corp. as they are among those enjoying profitability and similar dividend yields. Other peers in the energy utility sector include NRG Yield, Inc. (NYSE: NYLD ), Calpine Corp. (NYSE: CPN ), The AES Corporation (NYSE: AES ), and American Electric Power Co., Inc. (NYSE: AEP ). Entergy’s retuned Trailing P/E of 12.24 compares favorably to larger and slightly larger peers Southern Company (NYSE: SO ) and FirstEnergy Corp. (NYSE: FE ). Entergy enjoys a higher dividend yield and a competitive price-to-sales ratio with its market capitalization neighbor First Energy. Another favorable indicator is the firm’s Price-to-Sales ratio below the average of its peers. Cash Flow from Operating Activities Cash flows from operating activities, net of nuclear fuel purchases and resale, and net of financing costs, bring us to 3rd Quarter cash earnings of $329,628,000. This figure far exceeds their quarterly common stock dividend of $.85 per share, or approximately $154,038,000 inclusive of preferred dividends. It appears that the company can reliably generate enough cash to pay its dividends. Marketplace Interest in Entergy Corporation When a hedge fund with a small army of highly-qualified analysts and access to 3rd party consultants at costs of hundreds of thousands of dollars takes interest in a company by executing significant buy orders, I get interested too. Now, there’s no way to know the exact reasons for the following recent purchases I will outline below but you can be generally assured that these guy’s goal is to make money in a long position through the receipt of dividends and capital appreciation. As mentioned earlier in this article, Jim Simons’ hedge fund added 1.02 million shares of Entergy Corp during the second half of this year. That’s a 70% increase in the size of their position in the company, bringing Jim Simons’ funds’ total position to 2.47 million shares. Millennium Management increased their position by $54 million during the most recent quarter. They own 1,525,275 shares with a value of $99 million. Buying by Hedge Funds far exceeded selling during the second half of the year reported as of September 30th, which is a bullish indicator of smart money sentiment. Conclusion I like Entergy Corp.’s at its yield of 5% and greater. They serve a diverse geography from Texas, to Louisiana, Arkansas, and New York, among other locales. Their earnings figures are solid aside from the one-time decommissioning charge associated with the closure of money-losing nuclear power plants in Plymouth, MA and the FitzPatrick plant of New York State. The Plymouth plant closure is expected to be complete during the first half of 2019 and FitzPatrick’s closure during early 2017 at the latest. Most of the company’s production of electricity is by nuclear power plant. Their profitability has suffered with the collapse in the price of natural gas because it has brought down the wholesale price of electricity in their markets. In general, Entergy’s free cash flow should easily support its quarterly dividend for a long time coming. Utilities such as these folks are the classic example of long-term cash machines. Due to my belief that the marketplace has generally underappreciate Entergy’s ability to reliably pay its dividend, tempered by a reluctance to catch a falling knife where we don’t know whether or not natural gas prices will continue to drag on electricity prices, I rate Entergy Corporation a hold. If natural gas — hence wholesale electricity prices — start climbing again and all else stays the same, Entergy Corporation becomes a clear and even a screaming buy. Click +Follow next to my username to get the latest research beamed to your inbox in realtime Additional disclosure: This article represents the opinion of the author as of the date of this article. This article is based upon information reasonably available to the author and obtained from public sources that the author believes are reliable. However, the author does not guarantee the accuracy or completeness of this article. It is merely the author’s interpretation of the information contained in the article. The author may close his investment position at any point in time without providing notice. The author encourages all readers to do their own due diligence. This is not a recommendation to buy or sell a security