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General Electric’s Asset Sales Are Creating A Natural Gas Buy With A Dividend

Summary Black Hills Corporation has announced the acquisition of SourceGas Holdings LLC from GE/Alinda Capital. The Acquisition is a continuation of GE’s selloff of assets in a broader strategy to streamline the firm. Black Hills expects the purchase to increase their customer base by 55%. That kind of increase in business is going to have real effects on their earnings per share. What’s Going On? I have written previously about General Electric’s (NYSE: GE ) continued exit from the Finance industry. Most recently, Black Hills Corporation (NYSE: BKH ) has announced its acquisition of SourceGas Holdings LLC. SourceGas is managed by GE energy Financial Services and Alinda Capital Partners. SourceGas has 4 utilities in the United States that serve over 400,000 customers in the western United States. It also has a 512-mile intrastate natural gas pipeline that operates in Colorado. SourceGas was created in 2007 when GE and Alinda Capital made a purchase from Kinder Morgan Inc. (NYSE: KMI ). What’s So Good About It? The $1.8 billion deal is a continuation of General Electric streamlining its business. I am a continued advocate that a streamlined General Electric focusing on its core strengths is going to be a great business to own. The firm will be much better situated to react to economic changes in a timely manner. This acquisition also brings a whole new investment into play. It is a sweet deal for Black Hills Corporation. The firm is no slouch to begin with. The past three years have seen growing net income, improving balance sheets, and improved cash flows. The SourceGas Holdings purchase will increase Black Hills’ customer base by 55% . The company has noted that the effective purchase price will actually be lower due to tax benefits incurred by the acquisition. This is a continuation of the progressive integration of 19 utility systems in the last 10 years. President and CEO David R. Emery spoke strongly about the acquisition strengthening the growth of Black Hills. “SourceGas is a great strategic fit, adding to our strong utility base and providing operational and financial benefits to all the customers and communities we serve. We are excited to significantly expand our presence in Colorado, Nebraska, and Wyoming, and look forward to serving customers and developing new relationships in Arkansas. The transaction continues our proven record of growth in the utility business through targeted acquisitions — over the last decade, we have successfully integrated 19 electric and natural gas systems in support of this growth strategy.” For a utility firm like Black Hills, the importance of natural gas purchases cannot be stressed enough. Natural Gas officially surpassed coal this week as the largest US electric source. The move to buy SourceGas is part of a bigger strategy for the firm to diversify its power sales due to declining wholesale volumes . Stacy Numeroff (an analyst at Bloomberg) noted that “gas utilities do not face the same threats to load growth from distributed generation as their electric counterparts.” It is very encouraging that the utility firm is working to get in on the better growth offered in gas utilities. It is also worth noting that while Black Hills has experienced declines in power sales over the past few years, their net income has increased every year since 2011 demonstrating management’s ability to react to market moves. The one concerning thing about Black Hills’ acquisition is the $720 million that will be added to their current $1.2 billion in debt. The 55% increase in their customer base seems positive enough to let this debt be acceptable, but it is still a concern. As of now, the deal is expected to be completed in early 2016. Mark Maloney (a manager at Manulife Asset Management LLC) pointed out that “Black Hills has a strong track record of accumulating small utilities over the years and they’ve been very successful.” Do You Invest? In the last seven quarters , Black Hills has had 5 earnings beats, with one miss. The question is whether or not the acquisition of SourceGas is going to have a positive effect on earnings per share. The company has stated that it will add “meaningfully” to earnings. With the SourceGas deal increasing its customer base by more than half, I don’t see how it can’t have awesome outcomes for earnings per share. It’s worth noting that 1-year earnings per share growth is already ahead of its 5-year growth rate. The P/E is right along with the Multiline Utilities average, so Black Hills is not costing you any premiums. The 1-year price target of $55.50 seems obtainable if this deal plays out. If you can stomach the debt situation, good net income, improving balance sheets and cash flows on top of the growth potential from this acquisition make for a nice future play with a 3.5% yield cherry on top. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

GREK: A Deal Is Near, But The Game Is Not Over Yet

Summary A deal between Greece and its creditors is near, but the Greek parliament must accept austerity measures by Wednesday. Greek banks need liquidity but the ECB won’t provide it to them if the parliament doesn’t pass the measures. Bank shares represent 25% of GREK’s portfolio and they may push its share price significantly upwards as well as downwards. GREK has a lot of upside potential after the new deal is closed, but investors should monitor steps of Greek government closely, as the Greek politicians are highly unreliable. As I wrote back in March , the Global X FTSE Greece 20 ETF (NYSEARCA: GREK ) has a significant upside potential, after the current situation is resolved. A lot of things have changed, but the situation hasn’t been resolved yet. GREK lost half of its value over the last 12 months, but the decline has slowed down significantly over the last couple of months. The $9 line wasn’t breached and the recent developments indicate that it maybe won’t be retested anytime soon. But the Greek debt saga hasn’t ended yet and the current optimism may turn into a huge sell off as soon as on Wednesday. Do we have a deal? Although the deal between Greece and its creditors is close, the game is still not over. After 17 hours of negotiations, there is an agreement that Greece will not have to leave the eurozone and that it will get another €86 billion, but the Greek parliament must approve austerity measures by Wednesday. The Greeks have to reform their VAT system, reduce pensions and make some immediate budget cuts. Greece will also create a trust fund that will manage state assets worth approximately €50 billion. The fund should be based in Greece but it will be managed by an external agency. The assets held by the fund should be privatized and the proceeds should be used primarily for debt repayments. It is expected that shares of Greek banks will represent a big part of the assets, as the Greek government will buy new shares of the banks in order to refinance them. The shares will be transferred to the fund subsequently. All of the measures must be accepted by the Greek parliament by Wednesday. And it is not sure whether all of the proposals will really pass, as there is a lot of Greek politicians who are against the austerity measures. Tsipras will need votes of the opposition, as he can’t rely on support of his own party. The Wednesday deadline is important also for the cash-strapped Greek banks. They desperately need liquidity from the ECB but it is expected that the ECB won’t provide them any liquidity if the austerity measures are not accepted by the parliament on Wednesday. If the measures pass on Wednesday, the GREK share price should start to realize its upside potential. Although there is a significant danger that there will be some complications. In this case the EU will probably postpone the deadline by a couple of days (the EU is really great in postponing deadlines and Greece is really great in missing deadlines) in order to enable another voting, but the reaction of investors may be very nervous. A breakage of the $9 level isn’t excluded. GREK composition and growth prospects The table below shows complete holdings of GREK, as of July 10. The biggest holding is Coca-Cola HBC ( OTC:CCHBF ) that represents almost 21% of GREK’s portfolio. A strong position has also Hellenic Telecommunications Organization ( OTC:HLTOY ). Both of the companies should be relatively stable. The problem is that GREK also holds a lot of bank shares. Source: own processing, using data of globalxfunds.com The National Bank of Greece (NYSE: NBG ), Alpha Bank ( OTC:ALBKY ), Eurobank Ergasias ( OTC:EGFEY ) and Piraeus Bank ( OTC:BPIRY ) represent almost 25% of GREK’s portfolio. These shares may lead the rally if the austerity measures are accepted and the ECB provides liquidity to Greek banks. On the other hand if there are some complications, shares of banks will be most probably the biggest losers. Conclusion I still believe that GREK has a significant upside potential, in the longer term. After the austerity measures are accepted, we can expect a relief rally. But the investors should be careful, as the Greek politicians have shown that they are highly unreliable. They had agreed to make some economic reforms in the past, but they violated their promises only a couple of months later. Even if the Greek parliament accepts the current proposals, there is no warranty that the Greek government will play by the rules. In this case, GREK shareholders should be prepared to liquidate their positions as soon as possible, to avoid losses similar to those recorded by GREK over the last 12 months. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

The Low Volatility Debate: SPLV Vs. USMV

Summary The Low Volatility Anomaly describes portfolios of lower volatility securities that have produced higher risk-adjusted returns than higher volatility securities historically. Two ETFs – SPLV and USMV – have amassed $5B apiece in assets under management seeking to capitalize on this anomaly. This article discusses the relative differences in how these funds are constructed and how these discrepancies can impact their respective risk-return profiles. I recently reprised my series on five buy-and-hold strategies that have historically produced better absolute and risk-adjusted returns than the broader market. The third of these five strategies was about the Low Volatility Anomaly, or why lower risk stocks have historically outperformed their higher risk counterparts. A reader in the comments section of the article asked why I preferred the Powershares S&P 500 Low Volatility ETF (NYSEARCA: SPLV ) over the iShares MSCI USA Minimum Volatility ETF (NYSEARCA: USMV ). Given the increasing popularity of low volatility strategies, I thought that this would make an excellent topic for Seeking Alpha Readers. (For readers looking for a primer on Low Volatility Strategies prior to delving into a review of the top two domestic fund choices, please reference the links in the article or read Making Buffett’s Alpha Your Own .) What are the differences in the strategies? Given that these are both passive funds seeking to replicate the returns of an index, the answer to this question will be driven by the differences between the two benchmarks. SPLV seeks to replicate the S&P 500 Low Volatility Index, which is constituted by the one-hundred least volatile stocks in the S&P 500 (NYSEARCA: SPY ) as measured by the standard deviation of the security’s daily price returns over the trailing year and rebalanced quarterly. In contrast, the MSCI USA Minimum Volatility Index is calculated by optimizing its parent index the MSCI USA Index for the lowest absolute risk subject to constraints to maintain replicability, investability, and to limit turnover and industry concentrations. What have the risk and return profiles of these indices been historically? Below is a cumulative return series of the two indices since the earliest dually available data points. You can see that the S&P Low Volatility Index has outperformed by 55bp per annum. (click to enlarge) Drilling down further into these index return series, I have tabled some summary risk and return statistics for the return profiles of these two indices. In addition to higher cumulative returns over the matched sample period, the S&P 500 Low Volatility Index had lower variability of returns and a smaller peak-to-trough drawdown. The underlying indices are of course uninvestable, with the exchange-traded funds seeking to replicate these index returns the best way for retail investors to follow these strategies. Respectively, the ETF tracking these indices have only been outstanding since May and October 2011. It is difficult to determine the efficacy of either strategy in a market characterized by such strong returns over the short life span of these funds. I have graphed the cumulative returns of these ETFs since USMV’s later inception below: (click to enlarge) While the index data is necessarily backcasted, I believe that the longer time series for the indices, which featured three economic recessions and two large stock market drawdowns, is more informative than the history of the exchange-traded funds, which have existed only during a historic bull market. I hope that this analysis is valuable to Seeking Alpha readers interested in low volatility strategies but who might not have access to the historical return data. How does the composition of these two funds differ today? Despite the very strong correlation noted in the historical return series above, the composition of the two indices is quite unique. I examined the industry concentrations, top holdings, and index fundamentals in this section. Industry Concentrations The MSCI USA Minimum Volatility Index constraint to keep sector weightings within 5% of the market-weighted index gives it a more diversified set of industry exposures than the S&P Low Volatility Index, which is industry agnostic and formed from the one-hundred stocks in the S&P 500 with the lowest realized volatility. Readers likely share my surprise that financials dominate the Low Volatility Index. Also of note, utilities, traditionally a defensive, low beta industry, are under-represented. When I wrote about Low Volatility Stocks in mid-2013 , utilities represented more than a quarter of the Low Volatility index. You can bet that the Low Volatility Index was relatively underweight financials prior to the financial crisis as rising return volatility would have seen these stocks excluded from the portfolio. An industry-agnostic tilt towards lower volatility stocks is likely what caused the relative outperformance of the Low Volatility Index relative to the Minimum Volatility Index through the stock market slump in 2008- early 2009. Top Holdings There is some decided overlap between the top holdings, but the interesting part of this chart is less about how they are similar but rather how they are different. Despite the USMV index having 64% more holdings (164 vs. 100), it is still slightly more concentrated in its top holdings. Because the index weights of SPLV are the inverse of their trailing one-year volatilities rebalanced quarterly, the fund is much more close to equal-weighted because stock volatilities are likely to be less divergent than a capitalization-weighting. Like low volatility strategies, equal weighting is also one of my five factor tilts that have historically produced higher risk-adjusted returns than the market . Readers should also note that Exxon Mobil (NYSE: XOM ) is in the top ten holdings of USMV whereas no Energy stocks are included in the one-hundred constituents in the S&P Low Volatility Index. Falling oil prices have led to more volatile returns in that space, excluding those stocks from the Low Volatility Index. USMV is required to maintain an Energy exposure to keep the index from deviating outside of its industry band with the parent index. Exxon and its fortress balance sheet represent a whopping 48% of the Energy sector weight for USMV. Index Fundamentals The average index fundamentals are relatively similar. Lower volatility stocks currently trade at incrementally higher multiples than the market, and their more steady business profiles lend to higher dividend yields. Multiples throughout the market are stretched, and investors should be asking whether the premium multiple in low volatility stocks is attractive given their higher downside protection. Some might counter that it is a valuable feature while others might contend that this downside protection is now priced too expensively. I remain in the former camp. As I wrote in my 10 Themes Shaping Markets in the Back Half of 2015 : “Stretched equity multiples domestically will necessitate that valuations be driven by changes in earnings, tempering further price gains. As equity prices rise, investors may look to opportunistically rotate into underperforming rate-sensitive assets and lower volatility assets.” Conclusion For me, the S&P Low Volatility Index’s construction is a simple and transparent way to access a low volatility bent. I am not seeking to minimize volatility, but generate higher risk-adjusted returns, which the S&P Low Volatility Index has done historically versus both the broader market and the MSCI USA Minimum Volatility Index. There are certainly cases to be made for USMV. The replicating ETF is lower cost (15bp to SPLV’s 25bp), and has more constituents and less industry concentration. This greater diversification has not led to lower risk however in the historical study. You want to be incrementally overweight more defensive industries as markets are correcting. In a great 2011 paper, ” Benchmarks as Limits to Arbitrage: Understanding the Low Volatility Anomaly “, the authors concluded that behavioral biases towards high volatility stocks coupled with delegated investment management with fixed benchmarks without the use of leverage flattens the relationship between risk and return. If benchmarking is an impediment to capturing the Low Volatility Anomaly, why would I want my Low Volatility fund exposure to have more rigid industry constraints. Since the S&P Low Volatility Index is less constrained, its industry concentrations can swing meaningfully. I discussed previously the sharp reduction in utility exposure, which has likely been a function of that sector’s greater interest rate sensitivity and a pickup in interest rate volatility. Investors may look at the current higher allocation of utilities in USMV or lower allocation to financials and determine that industry mix is preferable to them. In analyzing the funds in this manner, they can be viewed more as complements than substitutes. Both of these funds have their merits, and I applaud the fund families’ efforts to provide low-cost solutions to retail investors seeking to capture the Low Volatility Anomaly. Hopefully, readers now better understand the differences in index construction and how that manifests into different risk-return profiles Author’s Postscript As an aside, this article was prompted by reader feedback. Intelligent discussion and debate is what transitions Seeking Alpha from a collection of articles into a community. Please share your thoughtful observations that you believe could further this research as we all try to “Seek Alpha” together. Disclaimer My articles may contain statements and projections that are forward-looking in nature, and therefore inherently subject to numerous risks, uncertainties and assumptions. While my articles focus on generating long-term risk-adjusted returns, investment decisions necessarily involve the risk of loss of principal. Individual investor circumstances vary significantly, and information gleaned from my articles should be applied to your own unique investment situation, objectives, risk tolerance, and investment horizon. Disclosure: I am/we are long SPLV, SPY. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.