Tag Archives: trackuseraction

Ford Vs. Tesla

Summary I am not particularly bullish – slightly bearish, in fact – on the auto industry, but I see a relative value play between Ford and Tesla. Ford had a very solid 2014 and should build on that in 2015, barring a macro economic downturn. Tesla ended 2014 on a low note and will continue to bleed money into 2015 and beyond. A pair trade could be a low-risk way to play F and TSLA and largely mitigate the risk of economic distress. Earlier this month, I began a new mock portfolio here on Seeking Alpha: the Pairs Trade Portfolio; today I continue it with trades on Ford (NYSE: F ) and Tesla (NASDAQ: TSLA ). A pair trade is a market-neutral hedge in which an investor essentially pits one company against another. Getting a return on a pair trade is not dependent upon a particular stock rising or falling necessarily, but dependent upon the relative price moves between two stocks (or other financial instruments). I won’t go into details about the hows and whys of pair trading here, as I have already described the theory in detail in a previous article. Please take a look at the link for more information on why pair trades might be a good investment. Previous articles with pair trades for the portfolio: The Auto Industry The industry is extremely sensitive to the global economy as a whole. By and large, people don’t have a pressing need to buy a car and the purchase can normally be put off for months and even years and therefore in tough economic times car sales plummet. I think that notion of “purchase delay” has never been more true than now due to the fact that automobiles are more reliable now than ever. Because of the auto industry’s reliance on a good economy, I’m actually somewhat bearish to neutral on auto companies right now. I predict the global economy will underperform expectations over the next couple of years (at least) with an excellent chance of stock market crashes and recessions. I wrote a piece about the top 7 economies – that account for 74% of world GDP – in an article titled ” The Ingredients For An Imminent Bear Market Are In Place ” in which I noted why I felt that US equities, in particular, were due for a fall. So, why am I buying Ford and shorting Tesla for my Pairs Trade Portfolio? Well, because the whole point of a pair trade is to make an investment that takes out the uncertainty of outside events. By buying Ford and selling Tesla, I am making a bet on Ford vs. Tesla and that is all. If Ford stock drops to $8 per share and Tesla drops to $50, I’ve made money. If I am completely daft about the state of the economy and Ford moves to $30 while Tesla moves to $300, then I’ve still made money, though obviously not as much as I would have being solely long. The phrase “market-neutral hedge” is critical when talking about a pair trade. Again, if the reader has lingering questions about it, please click on the link near the top of this article for more information. And now onward to discussion of the two companies. Ford’s Prospects I consider Ford to be the best risk/reward choice of the automakers for a number of reasons, but three big ones come to mind immediately: Lower gas prices means more large vehicle sales and the higher profits that go with them. Ford rules in the pickup arena and 2015 could be a banner year for F-150 sales given low gas prices along with a redesign of the truck. Asia/Pacific sales. Cheap valuation. As for pickup sales, Ford is still the king and will likely stay that way throughout 2015. In January 2015 , Ford sold over 54,000 F-Series trucks compared to 36,000 Chevy Silverado sales. It appears that the public is responding well to the revamped F-150 and I expect it to be the best selling vehicle in the US for the 34th year in a row in 2015. I want to go into the Asia/Pac region in a bit more detail as I consider that region to be extremely important in the long run. I wrote about it in a previous article on Ford, saying that: Ford is executing well in Asia Pacific, which is the region with the most growth potential for the next decade (at least). However, keep in mind that Asia Pacific is not currently a large component of Ford’s business. Units sold in the Asia Pacific region represented about 21% of the total units sold for the company in Q1 2014. However, the revenues by region are as follows: Asia Pacific: 7.8% of the company total; North America: 60.4% of the company total; Europe: 22.9% of the company total. Those numbers were from Q1 2014. Today I am looking at Ford’s most recent investor presentation and I see many highlights pertaining to the region including: Asia/Pac employment increased 25% from 2013 to 2014; China market share increased from 4.1% to 4.5% (Y/Y); Record profit in Asia/Pac in 2014; Revealed new global Explorer and the all-new Everest for Asia/Pac; Over 1 million units sold in Asia/Pac in 2014. Clearly, Ford’s strategy in Asia is working well and the company is picking up profits in the region at a record pace. The growth prospects are enormous in that region and it is one that I will continue to keep my eye on. Finally, the valuation of Ford is cheap based on analyst expectations . The stock’s forward P/E for 2015 and 2016 is at 10.0 and 8.7, respectively. I’ve already noted that I am still not fully bullish on Ford because I think those estimates don’t take into account the risk of a serious miss. But it is worth noting the price of the shares based on those analyst expectations. There is solid upside to the stock based on earnings alone if macro events don’t derail it. Tesla Prospects I’ll stick with the Asia theme to start off and note that in January 2015, Tesla sold about 120 cars in China. That linked article also notes that “Musk has previously said he expected China sales could rival those in the United States as early as 2015.” The shortfall is important not just because Tesla’s market in China is non-existent, but also it shows just how incredibly off the mark Musk was in his prediction. If there is one common theme amongst the Tesla stockholders, it is the unshakable belief in the “Temple of Elon.” He is not infallible. As for China, Tesla has, to date, wasted its time and money on the country since 2013 (when orders began there) as it has basically nothing to show for its efforts. Moving on to some financial considerations, the company is spending money at an alarming rate. For example: The company spent $970 million in capital expenditures in 2014 while the 2013 capex was $264 million. A poor Q4 performance saw it post a loss of over $100 million – the loss was nearly $300 million for the full year. The company burned through a considerable amount of cash in Q4: $465 million. Long-term debt and “other long-term liabilities” increased from $881 million in 2013 to $3.069 billion in 2014. In addition to the added debt, Tesla is diluting its stock steadily in order to fund operations (the large steps upward) and pay management (the slower, grinding upward slopes): TSLA Shares Outstanding data by YCharts We can clearly expect to see more dilution and more debt in for the next several years in order to fund operations, capex, and compensation. Elon Musk predicted GAAP profitability in 2020 and I estimate that (if and only if all goes well) Tesla will show solid positive cash flow a year or two before that. Until then Tesla will need a lot of additional financing. There’s nothing wrong, per se, for a company to spend lots of money, incur debt, and even dilute its stock. However, when a company does those things and has a stock price that is (still) quite high and full of expectations, the bar is set extremely high for that company to execute. In other words, Tesla better be spending all that money wisely. Some Valuation Comparisons Ford’s market cap is about $62 billion and Tesla’s cap is about $25.5 billion and thus Ford is valued at just under 2.5 times that of Tesla. Some of the charts comparing the two companies are actually comical, but I think they illustrate my point well. First, the difference in revenue: F Revenue (TTM) data by YCharts Ford has about 45x the revenue of Tesla. Tesla is growing revenue much faster than Ford, but is so far behind its more established rival. The cash from operations: F Cash from Operations (TTM) data by YCharts Tesla has bounced up and down from negative to positive and back to negative again as the company struggles to limit the bleeding. I showed Tesla’s dilution above, now let’s see Ford’s shares outstanding: F Shares Outstanding data by YCharts There is a bit of upward creep there over the last few years, but it is minor – especially compared to Tesla. None of the above charts should be of any surprise to an investor in either company, but I think they do serve to show us the amount of faith that Tesla investors have. For the company to be valued at 40% of Ford means that an incredible amount of success is priced into the stock. In my opinion, TSLA should be no more than 10% of Ford. Conclusion At this point, a lot of things have to go right for TSLA stock to be worth the price it currently commands. The company will add more debt and it will dilute the stock further. Not only must Tesla continue to grow revenues and deliver cars at a rapid pace, but it must soon start to give us a glimpse of a profitable future. Moreover, Tesla is about to encounter ramped up competition in its EV space. General Motors (NYSE: GM ) has announced the development of a 200-mile range electric car that should directly compete with Tesla’s Model 3, set to debut in 2017. I have no doubt that many, if not all, major manufacturers will be making similar announcements of long-range EVs throughout 2015, including Ford (heck, maybe even Apple). At some point in the not-too-distant future, carmakers will have multiple EVs in the stable including luxury and sport models. How can TSLA stock stay, or indeed rise from, the level it is at when the company will no longer be unique? Ford, for its part is reasonably predictable, at least relative to Tesla. The stock does not move quite “…as peacefully and leisurely as a python digesting a Valium addict.” (Tom Robbins from Skinny Legs and All ), but it does trade, in the main, based on fundamentals instead of sentiment and hope. The company has a long history of success and should continue to grow and expand its success into new locations and with new models, including EV models. Ford (and all established car makers) has the advantage of being able to invade Tesla’s market whenever and however it chooses. Ford can and will make EVs that compete more directly with Tesla than they do now and when a big company like Ford moves into a small company’s space, there is a tendency for bad things to happen to the smaller company. The Portfolio At 8 p.m. Eastern Time on February 17 I’m buying F and shorting TSLS in my Seeking Alpha portfolio. Here is what the mock portfolio looks like so far after three pair trades (note that I plan on adjusting, adding, and updating this for years): A wee profit! Nice to see, although fairly meaningless this early in the game. Be sure to click “follow” if you would like to get real-time alerts on my future articles. Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Beyond India: Look At These Overlooked Broad Emerging Market ETFs

For the past one year, India has been dominating the broad emerging markets, thanks to the enormous ascent of its stock market on pro-growth political hopes, declining inflation – which was once a botheration for the economy – and the latest interest rate cut to spur growth. While its supremacy is still prevalent in the emerging market space, one might be concerned about the overvaluation issues associated with the Indian stocks and the related ETFs. Presently, the biggest and broader emerging market ETF – the Vanguard FTSE Emerging Markets ETF (NYSEARCA: VWO ) and the broader U.S. market SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) sport a P/E (TTM) of 12 and 17 times, respectively, while iShares MSCI India Index ETF (BATS: INDA ) has a P/E (TTM) of 19 times. Secondly, a drastic slump in oil price played its role in facilitating the India ETFs’ upward journey. This was because the country imports more than 75% of its oil requirements. With global oil prices falling about 50% in the last six months, Indian foreign reserves found real reasons to cheer about. However, it remains to be seen how the Indian economy handles the situation when the oil price bottoms and reverses the trend. Also, some analysts believe that the not-so-enthusiastic December 2014 corporate results, a later-than-expected rebound in the investment cycle and overvaluation with respect to the future profit growth potential might stress out the Indian market. Given this situation, some cautious investors might begin to reconsider their emerging market investments and look for broader exposure, rather than sticking to any particular nation. After all, the emerging market space should continue to enjoy cheap money inflows, thanks to QE starting in the eurozone and the easy money policy in most developed nations, despite the likely beginning of policy tightening in the U.S. this year. In light of this, we have highlighted four overlooked ETFs that are tracking emerging markets from around the world (See all emerging market equities ETFs here ). Market Vectors MSCI Emerging Markets Quality ETF (NYSEARCA: QEM ) This fund has attracted $5.3 million in AUM. It charges a 50 bps fee per year, and trades in a paltry volume of around 1,500 shares a day, ensuring additional cost in the form of a wide bid/ask spread. The product tracks the MSCI Emerging Markets Quality Index, and holds 201 stocks in its basket (Read: QEM: A Higher Quality Emerging Market ETF? ). The ETF is slightly tilted toward the top four firms – China Mobile, Tencent Holdings, Taiwan Semiconductor and Samsung Electronics – that collectively make up for more than 20% of total assets. Other firms hold not more than 3.01% share, suggesting modest diversification across each security. The holding pattern reflects the fund’s focus on Asian countries like China (20.7%), India (13%), Taiwan (13.0%), South Korea (12%) and South Africa (11.1%), which take the top five country spots. In terms of sector holdings, Information Technology dominates the portfolio at 34%, followed by Consumer Staples (16.8%), Telecommunication Services (12.6%) and Financials (11.5%). The fund has gained 6.2% since the start of the year (as of February 13, 2015) and more than 8.5% in the last two weeks. The fund yields 2% annually (as of the same date). Behind its decent performance is quality exposure across a number of deserving sectors in the emerging markets and a focus on high-quality criteria like high return on equity, stable year-over-year earnings growth and low financial leverage. The fund trades at a P/E (TTM) of 15 times. iShares MSCI Emerging Markets EMEA Index ETF (NASDAQ: EEME ) This fund has amassed about $8.8 million in assets so far, and trades in volumes of 2,000 shares a day, resulting in additional cost in the form of a wide bid/ask spread over and above the expense ratio of 49 bps a year. The fund is tilted toward South Africa (46.2%), Russia (20.9%), while the third country, Turkey, gets a meager allocation of 9.64%. As far as sectoral diversification is concerned, Financials gets about 34% of the basket, followed by Energy (16.6%) and Consumer Discretionary (14.8%). The latest cease-fire between Ukraine and Russia and the record rally in the South African stocks led the fund way higher. The fund has gained 4.2% so far this year (as of February 13, 2015) and about 6.6% in the last two weeks. The fund yields 3.1% annually (as of February 13, 2015). It trades at a P/E (TTM) of 10 times. ALPS Emerging Sector Dividend Dogs ETF (NYSEARCA: EDOG ) The product tracks the S-Network Emerging Sector Dividend Dogs Index, which gives exposure to a basket of large-cap and high-yield stocks domiciled in the emerging markets. The index takes up an equal-weighted approach to assign weights to securities (Read: ALPS Debuts Dividend ETF in Emerging Market Space ). The index applies the “Dogs of the Dow” theory in the stock selection process. The product looks to hold about 50 stocks with this approach. The ETF offers a solid level of diversification, as both sector and country exposure is limited to five securities. Russia (11.2%), South Africa (10.4%), Brazil (10.3%), China (10%) and Thailand (9.65%) are some of the nations that the fund puts heavy weight on. EDOG has generated about $11.3 million in assets, and trades in 10,000 shares a day. It charges 60 bps in fees. The fund is up 6% in the YTD frame (as of February 13, 2015), while it yields 3.2%. The need for higher yield should be the key to the fund’s future success. EGShares Emerging Markets Domestic Demand ETF (NYSEARCA: EMDD ) EMDD seeks to tap the exponentially rising domestic demand of the emerging market space. The fund puts heavy weight on South Africa (20.2%), China (19.2%), Mexico (16%) and India (11.1%). It has an asset base of $35 million, and trades in volumes of more than 5,000 shares a day. The fund charges 85 bps in fees. Holding about 50 stocks in its portfolio, the fund does not put more than 5.37% assets in one stock. EMDD was up 5% so far this year, and has added about 3.5% in the last two weeks. The P/E (TTM) of the fund stands at 17 times.

Fidelity Strategic Dividend & Income Fund Gets Results

Summary FSDIX is a multi-asset fund that has held up very well versus newer multi-asset ETFs. FSDIX aims for capital appreciation in addition to income, so yield is relatively low at 2.34 percent. FSDIX is less volatile than the competition. The Fidelity Strategic Dividend & Income Fund (MUTF: FSDIX ) was established in December 2003. The fund offers investors a multi-asset approach to income, with five major asset classes included in the portfolio. A 2.34 percent yield puts the fund’s yield not far above that of the broader market, but it comes with wider diversification and lower volatility. Manager Outlook With over two decades of experience in the financial investment industry, Joanna Bewick has served as the portfolio’s lead manager since 2008. She is assisted by co-manager Ford O’Neil who has been with Fidelity since 1990. Both of them also manage the Fidelity Strategic Income Fund (MUTF: FSICX ). The fund’s default allocations are 50 percent common stock, 15 percent convertible securities, 15 percent in REITs or other real estate-related investments, and 20 percent preferred stocks. The lead managers believe the U.S. economy will continue to improve across the majority of economic sectors. They also see the economy as being in a mid-cycle expansion, which creates an expectation of moderate corporate earnings growth. The managers believe asset classes have a fair to slightly rich valuation. Although the quantitative easing program has ended, their expectation is that any interest rate adjustments by the Federal Reserve will be gradual and data dependent. Recent low inflation numbers provide the Fed with more leeway for keeping rates low in the near term. This creates a situation where domestic bond yields are more attractive than the returns of other sovereign bonds. While they predict that dividends and income are likely to play more of a role in total returns than capital appreciation, the increased volatility may create more investment opportunities. The result is a continued bias towards dividend paying stocks, which still comprise the largest portion of the fund, due to their current income and secondary potential for capital appreciation. The fund will also maintain a normal weighting of REITs on a risk-adjusted basis as long as the macroeconomic environment remains steady. While the fundamentals of this asset class remain strong and could produce significant returns, the weighting minimizes the impact of rising interest rates that could hamper returns. Managers believe that it may be difficult to find opportunities to deploy cash in the shrinking convertible securities market, which may cause an underweighting of this asset class. They also expect to remain underweight preferred stock until valuations become more advantageous. Managers will rebalance the fund based on market conditions. Asset Allocation and Security Selection The fund seeks to provide investors with reasonable current income with the potential for capital appreciation. With an investment strategy focused on equity securities that provide current income and have the potential for capital appreciation, the no-load fund tends to concentrate on value stocks. The portfolio invests in domestic and foreign issues. When building the portfolio, lead and sub-portfolio managers evaluate securities based on the macroeconomic environment, investor sentiment and fundamentals, as well as their current and historic valuations. The team manages risks and shift allocations based on a bull-or-bear case for each asset class. Over the past quarter ending December 2014, the fund continued to favor dividend paying equities. Veteran investor Scott Offen, who has been with Fidelity since 1985, manages the common stock sleeve. His focus is on mega-cap dividend paying stocks of companies with wide economic moats, with a portfolio yield 50 percent greater than the S&P 500 and lower volatility. In addition to boasting a 3 percent yield, a strong selection of individual securities in consumer discretionary, energy and industrials helped this sub-portfolio outpace the benchmark and boost the fund’s overall returns. Adam Kramer manages the fund’s preferred stock and convertibles sleeves. Through his acumen, the fund has held up better during recent stock market declines. While the yields on preferred shares were attractive, their long durations were considered a negative factor. The resulting underweighting proved advantageous as this sector underperformed the overall market. The main drag on results was the concentration in banks, healthcare and cable TV. Another modest advantage was Kramer’s underweighting of convertible securities as this asset class also underperformed. This decision was based upon the manager’s belief that good investment opportunities were more difficult to obtain as the overall number of available issues decline. Information technology and industrial securities generated the most drag on this sub-portfolio. Minimizing exposure to these two underperforming asset classes provided a modest advantage for the overall fund. Managed by Samuel Ward, the real estate-related sleeve held a neutral weighting of REITs. This position was a contributor to the fund’s overall performance as the sector had a tremendous run. The greatest contributors were the fund’s investments in apartment and office REITs, which outperformed relative to the benchmark index. While the managers believe that fundamentals remain strong, they remain vigilant on interest rates and the possible negative impact that rising interest rates could have on the sector. Portfolio Composition and Holdings As of December 2014, this four-star Morningstar rated fund has $4.82 billion in assets under management. Compared to its goal of a neutral mix, the fund is slightly overweight common stocks and preferred stocks, while being underweight convertibles. Individual holdings are concentrated in financials, information technology, healthcare and consumer staples. The fund is underweight telecommunications and materials. While 95.84 percent of holdings are domestic securities, the portfolio has a small exposure to Europe and Asia, as well as a slight exposure to emerging markets. The market capitalization of the portfolio is 52.48 percent giant, 23.75 percent large and 16.15 percent mid cap, as well as 6.52 percent small and 1.09 percent micro cap. The fund has a P/E ratio of 18.73 and a price-to-book ratio of 2.59. The fund’s top five holdings are securities issued by Exxon Mobil (NYSE: XOM ), Chevron (NYSE: CVX ), Proctor & Gamble (NYSE: PG ), Johnson & Johnson (NYSE: JNJ ) and IBM (NYSE: IBM ). These holdings comprise 11.85 percent of the total portfolio. Roughly 9 percent of assets are in fixed income, the specialty of lead and co-managers Bewick and O’Neil. The fixed income portion of the portfolio is concentrated in debt instruments rated BBB, BB and B, with a focus on maturities between three and seven years. The fund’s average duration is 3.91 years with a 30-day yield of 2.34 percent. Historical Performance and Risk Earning a high average return rating from Morningstar, FSDIX has delivered annualized returns of 14.48 percent, 13.85 percent and 13.87 percent over the past 1, 3 and 5 years, respectively. This compares to the category averages of 8.63 percent, 11.58 percent and 11.32 percent over the same periods. FSDIX has a low risk rating from Morningstar. The fund’s three-year beta and standard deviation of 0.98 and 6.64 compare favorably to the category ratings of 1.29 and 8.45. The SPDR Dividend ETF (NYSEARCA: SDY ) has a standard deviation of 9.26, making FSDIX less volatile than plain vanilla dividend funds. Fees, Expenses and Distributions The fund does not have any 12b-1, front-end or redemption fees. The low 0.74 percent expense ratio is below the category average of 0.92 percent. FSDIX supports automatic account builder and direct deposit functions. It has a minimum initial investment of $2,500 for both taxable and non-taxable accounts. Conclusion FSDIX is a multi-asset fund that offers a yield similar to a dividend ETF, but with lower volatility. Income growth hasn’t been great given the fact that certain asset classes, such as preferred shares, do not pay rising dividends. Shares fell 41 percent in 2008, so while they are less volatile, they aren’t without risk. However, some of those losses were excessive due to fears about bank solvency during the crisis, which hit preferred shares hard. In a more typical and milder bear market, the fund should hold up better than the broader market. FSDIX fund fills a niche for investors who want slightly higher income along with their capital appreciation, plus lower volatility. Investors who want to go the ETF route can check out some of the best multi-asset ETFs . FSDIX compares favorably to these funds thanks to a heavyweight towards equities and the fact that the equity heavy Guggenheim Multi-Asset Income ETF (NYSEARCA: CVY ) was stung by exposure to energy-related holdings. (click to enlarge) Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.