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Apple Teaches Another Lesson In ETF Weighting

Summary Apple’s stock price fell in response to disappointing numbers. Due to its large market capitalization, the company’s moves will affect sector ETFs, notably those that track the tech industry. Alternatively, investors can use ETFs that track equal-weight methodologies to diminish the effect AAPL has on a tech sector investment. By Todd Shriber & Tom Lydon Shares of Apple (NASDAQ: AAPL ) fell 4.3% Wednesday, and at one point during the session, the iPhone maker was lighter by $60 billion in market value, after the company “disappointed” Wall Street by reporting that fiscal third-quarter profit rose “slightly” to $10.7 billion from $7.74 billion on revenue of “just” $49.61 billion. Apple’s Wednesday woes are, predictably, having a dour effect on the exchange traded funds that feature heavy allocations to the iPad maker. For example, the Technology Select Sector SPDR ETF (NYSEARCA: XLK ), the largest technology ETF by assets, has an almost 18% weight to Apple, enough to have the fund trading lower by 1.5% today. XLK’s Wednesday decline, and those of rival technology ETFs with significant Apple weights, reminds investors of the potential dangers of owning a fund with large weights to just one or two stocks. “Apple is a top-10 holding in 98 equity ETFs according to S&P Capital IQ. Besides being the largest stock, ETFs tied to the S&P 500 index like Vanguard S&P 500 ETF (NYSEARCA: VOO ) and the Russell 1000 like the iShares Russell 1000 ETF (NYSEARCA: IWB ), the technology giant is more heavily weighted in popular tech-laden products,” according to S&P Capital IQ. The PowerShares QQQ Trust ETF (NASDAQ: QQQ ), the NASDAQ-100 (NDQ) tracking ETF, entered Wednesday with a roughly 14% weight to Apple, enough to send that ETF lower by more than 1%. The $2.9 billion iShares U.S. Technology ETF (NYSEARCA: IYW ) is perhaps the epitome of an “Apple ETF” with a 20.9% weight (as of July 21) to the stock. That big Apple weight was enough to drag IYW lower by almost 2% yesterday. As S&P Capital IQ notes, there are ways to maintain tech sector exposure via ETFs while mitigating Apple or any other single stock risk. The First Trust NASDAQ-100 Equal Weight Index ETF (NASDAQ: QQEW ) and the Direxion NASDAQ-100 Equal Weighted Index Shares ETF (NYSEARCA: QQQE ) are equal-weight alternatives to QQQ. No stock accounts for more than 1.2% of QQEW’s weight and QQQE had 1% weight to its constituents at the end of the second quarter, according to issuer data . Those ETFs lost about a third of a percent yesterday. The rub is that when Apple performs well, QQQE and QQEW will lag QQQ. Even with Wednesday’s slide, Apple is up more than 13% this year, helping QQQ to a 9% gain, better than double the returns of QQQE and QQEW. The $954.2 million Guggenheim S&P Equal Weight Technology ETF (NYSEARCA: RYT ) has a weight of less than 1.6% to Apple. That is less than the ETF’s weight to Facebook (NASDAQ: FB ), eBay (NASDAQ: EBAY ) and Visa (NYSE: V ). S&P Capital IQ has market weight ratings on QTEW and RYT. Direxion NASDAQ-100 Equal Weighted Index Shares ETF (click to enlarge) Tom Lydon’s clients own shares of Apple, Facebook and QQQ. Disclosure: I am/we are long QQQ, AAPL, FB. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Rio Tinto Is Stabbing Energy Resources Of Australia In The Back

Summary Energy Resources of Australia lost almost US$500M in market capitalization after deciding not to go ahead with the Rangers 3 Deeps zone. The company is currently processing low-grade stockpile which should keep the lights on. The company is now an excellent call option on the uranium price as it has existing infrastructure and is trading at less than $2 per pound in the ground. Introduction I’m a believer in uranium and whilst I don’t think we’ll see substantially higher prices this year or even next year, I’d still like to be positioned to benefit from an expected uptick in the sexiness of uranium-related investments. I can be patient and have been keeping an eye on several uranium companies. Energy Resources of Australia (OTCPK: EGRAF ) is one of them, and the share price has tumbled after major shareholder Rio Tinto (NYSE: RIO ) decided not to get ahead with providing financial support for the development of the Ranger 3 Deeps zone. That’s a pity, but maybe there’s an opportunity here for people who are patient. Energy Resources of Australia is a – surprise, surprise- Australian company and I’d strongly recommend you to trade in the company’s shares through the facilities of the Australian Stock Exchange where it’s listed with ERA as its ticker symbol . The average daily volume is 2.2 million shares. The company is still processing stockpiles but won’t develop the underground mine In the second quarter of this year, Energy Resources produced 390 tonnes of uranium (861,000 pounds) which would generate almost $40M in revenue based on today’s spot price. That’s still pretty decent but not a lot and that’s due to the fact ERA is basically just processing its (low-grade) stockpiles. The average grade of the processed ore in the second quarter was just 0.09% (10% lower compared to the previous quarter) whilst the total amount of ore it milled also decreased due to a planned mill shutdown. Source: annual report This is part of the plan to wind down operations at the Ranger mines and connected to the rehabilitation plan for the area. As part of its original agreement with the governments, ERA was operating the mine under the ‘Ranger Authority’ agreement which is expiring in 2021. Unfortunately this is one of the stumble blocks for the company to even consider developing the Ranger 3 Deep zone. Earlier this year, ERA has halted all development activities at the underground uranium resource as the uranium price was too low to justify spending any more cash on that part of the project. On top of that, partner Rio Tinto also pulled out, stating the project no longer meets its investment criteria. (click to enlarge) Source: annual report A real double-whammy for Energy Resources of Australia, and as you can imagine its market capitalization fell off a cliff and whereas the company was worth A$800M just three months ago, it lost 75% of that value since then! And that’s a pity, as there’s a lot of uranium down there It’s understandable nobody wants to throw tens and hundreds of millions of dollars at an underground uranium mine at a moment the uranium price is so low even the open pit mines are struggling to stay afloat. So, yes, I do understand the reasoning behind the decision to not advance the Ranger 3 Deeps zone as the result of the previously published pre-feasibility study was disappointing. The pre-feasibility study was based on an updated resource estimate using a cutoff grade of 0.11% uranium compared to a previously used cut-off grade of 0.15% U3O8. Yes, the lower cut-off grade has indeed increased the total resource base of the project which now contains 96.5 million pounds of uranium, but unfortunately this also caused a sharp 20% reduction in the average grade which dropped to 0.224%. Source: annual report This was quite disappointing as everybody knows in this investment climate it’s all about generating returns on investments and keeping the payback period short. In the past it used to be a game of ‘my resource estimate is bigger than yours’, but that era is over and investors are focusing on decent internal rate of returns. The Rangers 3 Deeps zone might not be mined in the near future, but fortunately the uranium resources aren’t running away. According to its most recent financial statements, ERA had a working capital position of A$350M (more than its current market capitalization) and this should keep the company afloat for a little bit longer. The average rock value per tonne of ore is $175/t based on the spot price and almost $250/t based on the long-term uranium price. That’s the equivalent of almost 7 g/t gold so I do believe there is value down there (literally). Investment thesis Buying shares of Energy Resources of Australia is buying a call option on the uranium price as the Rangers 3 Deeps project definitely won’t be developed at the current uranium price. It doesn’t mean the project is worthless and ERA might just ‘sit’ on it until the outlook for uranium improves again. ERA is now valued at US$1.75 per pound of uranium in the ground and that’s not expensive, considering the resource is located in a safe region. I might initiate a very small position in the next few days or weeks as a speculative bet on the uranium price. Keep in mind this company has a higher than average risk profile and even though I do think this mine will eventually be developed, there’s no way I can guarantee it will indeed happen. Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks. Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in EGRAF over 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.

Get 7% Yield From Just Energy

Summary The company’s business model does not depend on commodity prices. Energy demand is quite inelastic, providing consistent returns for Just Energy. Strong cash flows can support the dividend going forward. Just Energy (NYSE: JE ) is a retailer of electricity, natural gas and green energy. It is headquartered in Canada, but has operations in the United States, Canada, and the U.K. Utility companies like Just Energy are usually shielded from commodity volatility. This enables them to deliver superior returns even when commodities underperform. Despite this characteristic, the shares slid 35% from its 2014 high to a price of $5.23 today. This is providing you with the opportunity to snatch up the shares at a yield of 7.4%. Of course, a higher yield often means that investors are apprehensive about the viability of future distributions. Today we are going to analyze whether you should share this concern. The Business Just Energy was able to grow its revenue by 11% and operating profit by 7% in FY 2015. This follows a trend of steady growth since 2012. The factor contributing to the stable growth is the company’s business model. The company essentially earns a margin on its “products,” much like a typical retailer. It purchases energy from suppliers, and then profits from the difference between the purchasing price and what customers are willing to pay. Hence, commodity fluctuations do not play a huge role in the company’s operation. Because demand for energy is relatively inelastic from a consumer’s perspective, Just Energy should be able to consistently deliver returns in the future. The Financials Currently the company has 146.6 million shares outstanding, which translates to roughly C$73 million in expected dividends annually. High cash flows are critical for dividend investors. In FY 2015, the company generated C$96 million from operations, meaning that the coverage ratio is 1.32x. This is fairly decent, but there are better news. The company’s working capital accounts increased by C$44 million in FY 2015, while this eroded operating cash flow for the year, typically the same changes will not occur next year, sometimes they can even be reversed. For example, in FY 2014, the working capital accounts decreased by C$46 million, resulting in an inflated operating cash flow; this year the opposite has occurred. I estimate that the long-run average cash flow from operations should be C$140 million when it is adjusted for working capital changes. This will comfortably cover the current level of distribution. If we turn our attention to capital expenditure, we will find a positive number for FY 2015. Of course, this is not the norm. What caused the “negative” capital expenditure is the sale of its water heater unit in 2014. The core capital expenditure was only C$43 million, which was amply covered by the operating cash flow. Conclusion Given Just Energy’s stable business model, the company should be able to generate consistent returns in the future. Due to its strong cash flow, it is unlikely that dividends will go away any time soon. If you are an income investor looking to add a long-term holding, Just Energy may be worth your consideration. 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.