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Dynegy: A Growth Story About To Begin

Dynegy has mainly expanded inorganically through acquisitions. Substantial free cash flow generation and margin improvement are preparing the way for upside. Be on the lookout for any dips on which to buy Dynegy’s shares. Small cap companies offer investors the benefit of potentially increased returns with the downside of increasing volatility and/or risk in the investor’s overall portfolio. This risk can be mitigated through the inclusion of large cap and mid cap stocks as well as diversification through the purchasing of stocks of many small cap companies. Another way to increase the stability of these small cap investments is to make these investments in industries that are more stable, such as utilities and/or industrial industries. These industries retain their stability through inelastic consumer and/or firm demands as well as diversification across multiple other industries. With the infusion of small cap status into a firm in these industries, investors can benefit from the growth of the small cap in addition to the stability that comes with being in steady industry. Small cap utilities companies are one such combination of capital appreciation and capital preservation. Dynegy Inc. (NYSE: DYN ) is one such company that possesses these two characteristics, and based on investor sentiment, the shares are essentially up for grabs. The company owns a series of power generating facilities across the Midwest, Northeast, and West coast regions on the United States, so the company is mostly specialized in terms of customer concentration. The company diversifies its energy facilities across multiple utilities submarkets, including coal and gas; this adds the benefit of indirect additional diversification to investors in that investors who purchase the company’s shares get that indirect diversification. Some of the company’s major business segments include its Homefield Energy segment and its Dynegy Energy Services business. From looking at the company’ stock chart, investors can see that the company’s shares have gone on a bit of a roller coaster over the past few years. Capital invested at the beginning of calendar year 2013 would have generated essentially a zero percent return on investment throughout 2015. The shares have gone from a low of about $17 all the way to a high of about $36, and the shares have fallen all the way down again, so the shares are a bit volatile. In technical terms, the 50-day moving average has danced around the 200-day moving average, with the former going above and below the latter multiple times throughout the course of the past three years. Most recently, the 50-day moving average has once again dipped below the 200-day moving average, which could indicate near-term downside, as the spread between the two indicators seems to be widening. (click to enlarge) Source: Stockcharts.com From a fundamental perspective, the company is in a solid financial position: liquidity ratios indicate that the company’s financial health is in good order. The current ratio, quick ratio, financial leverage ratio all have hit all-time highs. However, it also appears that the debt to equity ratio has also hit an all-time high as well, with the ratio at about 2.5. The reason for this is because of the way the company grows. The company has expanded mainly through inorganic growth, and it has accomplished this by using a substantial amount of debt to fund its acquisitions. Some of its more recent acquisitions include the acquisition of Duke Midwest for $2.8B , which is extremely large for a company with a market cap of just under $3B. Although this particular method of growth has worked for the company, the fact of the matter is that the company’s capital structure has changed to include about 75% debt, which is certainly a lot. Thus, as the number of financial covenants begins to mount up, the company will become limited in the activities it can conduct, including further acquisitions. The company will have to be careful to ensure that the amount of debt that it takes off will not cripple its operations. Positive aspects of the company is that it has been generating large amounts of free cash flow recently, which the company can either use to reinvest back into the company or distribute it to shareholders in the form of share buybacks or dividends. In fact, the company began a share buyback program for $250M, which the company has already completed half of, so it appears that the company is committed to keeping shareholders happy. The amount of free cash flow that the company has historically generated has been negative, so this is definitely a positive trend for the company. Furthermore, cost reductions have resulted in margins that are beginning to stabilize, which could also boost free cash flow in the mid-term. All-in-all, it appears that the company has an uncertain future. However, the shares have dipped all the way back to their original price in 2013, so now could be a good time to buy. The fact that the company’s margins are getting better and that the company is beginning to generate substantial free cash flow is always a good sign. Be on the lookout for any further share dips to buy on.

What Drives The Financial Sector?

Summary The financial sector is the second largest component of S&P 500. Its performance to a large extent is a combination of long equities and short bonds. XLF’s performance clearly illustrates the diversification benefit an investor achieves as opposed to individual stock investment. With a 16.5% share, financial sector stocks currently account for the second largest part of S&P 500, trailing only behind the information technology sector. According to ETFdb , there are 41 ETFs tracking U.S. financial stocks. By far the largest of them is the Financial Select Sector SPDR ETF (NYSEARCA: XLF ), which has $18.5 billion of assets under management (AUM), exceeding the total number for the remaining 40 funds combined. In this article I would like to probe the main contributors to XLF returns, splitting them into two categories. The first one contains broad market forces, or so called factors, driving the ETF’s performance. The second category includes the largest individual holdings, which set the tone for overall funds performance. Factor analysis Analyzing daily price changes from the last 12 months, the simple factor analysis on risk analysis tool InvestSpy gives the first insight into the driving forces behind XLF returns. Using asset classes as explanatory variables, the results table looks as follows: The practical interpretation of this output is that to replicate performance of $1,000 invested in XLF as closely as possible, an investor would need to buy $1,000 of the Vanguard Total Stock Market ETF (NYSEARCA: VTI ), whilst shorting $580 of the Vanguard Total Bond Market ETF (NYSEARCA: BND ), $80 of the SPDR Gold Trust ETF (NYSEARCA: GLD ) and $10 of the United States Oil Fund (NYSEARCA: USO ). The important takeaway is that essentially XLF acts as a combination of long equities and short fixed income. The coefficients estimated by this basic factor analysis enable one to project potential performance of XLF in various market scenarios, incorporating views about stock and bond markets. Largest holdings XLF has 87 holdings, which range from banks to insurance companies to real estate investment trusts. Whilst 82 of these positions have a weight below 3%, each of the largest 5 holdings accounts for more than 5%. This means that 37% of the AUM is invested in only 5 stocks, naturally making them the primary drivers of the fund’s returns. Wells Fargo & Company (NYSE: WFC ) – 8.7% weight Berkshire Hathaway Inc. Class B (NYSE: BRK.B ) – 8.4% JPMorgan Chase & Co. (NYSE: JPM ) – 8.2% Bank of America Corporation (NYSE: BAC ) – 6.1% Citigroup Inc. (NYSE: C ) – 5.4% Over the last 12 months, these five stocks contributed 0.70% to XLF total return of 1.2%. Four out of five largest holdings are banking stocks, which, upon further inspection, demonstrate fairly similar risk characteristics: Source: InvestSpy All four banking stocks have a beta coefficient above 1, showing higher than average sensitivity to the broad market movements. Their annualized volatility ranging from 19.2% to 24.8% substantially exceeds that of the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ), which stood at 15.0% over the same period. BRK.B is a bit of an outlier here and exhibits more contained risk parameters, largely due to the fact that it is to a certain extent a funds in its own right, heavily tilted towards value stocks. Further analysis of the correlation matrix reveals that the same BRK.B is the position that is most correlated to the S&P 500 index with a coefficient of 0.87. Comparing with other top holdings, BAC appears to be the position that is most independent. Source: InvestSpy One observation from both tables in this section is that XLF demonstrates two main features of a pool of individual stocks. First, it has lower annualized volatility and maximum drawdown than its individual holdings, which is a great illustration of the diversification effect. Second, it is significantly more correlated to the broader stock market than its individual holdings as the idiosyncratic risk becomes reduced in a portfolio. Conclusion Putting all pieces together, XLF tends to behave as a combination of long stocks and short bonds. The performance of the financial sector can be projected incorporating investor’s outlook for both of these markets. Furthermore, 37% of the fund is concentrated in 5 mega cap stocks, four of which are banks. Whilst these stocks individually are more volatile than the broad market, putting them together in one basket reduces volatility, beta and drawdown metrics. Unless an investor has a strong preference for a specific financial stock, XLF performance brings all the benefits that one may expect from a sector ETF.

ETFs And Stocks To Add On Solid Jobs Data

After weak back-to-back months of job growth in nearly two years, U.S. hiring numbers came in stronger than expected in October, easily dodging the impact of a global slowdown and a struggling manufacturing sector. The U.S. economy added 271,000 jobs in October, much above the market expectation of 180,000. This marks the strongest pace of a one-month jobs gain in 2015, and came from increased employment in the higher-paying sectors, in particular, professional and business services. Meanwhile, unemployment dropped to a new seven-year low to 5% from 5.1% in September, and average hourly wages accelerated nine cents to $25.20, bringing the year-over-year increase to 2.5% – the sharpest growth since July 2009. The robust data suggests that the U.S. economy is rebounding strongly after a lazy summer, and is continuing to outpace the other economies. Additionally, solid pay gains will increase consumer spending in the crucial holiday season, which will translate into stepped-up economic activities. Market Impact This has bolstered the chance of an interest rates hike, the first in almost a decade, in December. The jobs data even supports the comments of the FOMC meeting held in October and the latest Fed testimony that hinted at a December lift-off if the U.S. economy remains on track. As a result, the stock market has seen a big rotation in trade, and this trend will likely continue at least in the near term. This is especially true as investors are taking money out of the income-yielding sectors like utilities and REITs and putting them in the sectors like financials that are expected to benefit from the rising interest rates. On the other hand, yields on two-year Treasury bonds soared to the highest levels in more than five years, while the U.S. dollar climbed to a seven-month high against the basket of major currencies. Further, staffing stocks also have seen smooth trading. Given this, we have highlighted three ETFs and stocks that are the direct beneficiaries of the job gains and will likely see smooth trading in the days ahead. ETFs to Consider PowerShares DB USD Bull ETF (NYSEARCA: UUP ) A healing job market and the resultant improving economy will pull in more capital into the country and lead to appreciation of the U.S. dollar. UUP is the prime beneficiary of the rising dollar, as it offers exposure against a basket of six world currencies – the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. This is done by tracking the Deutsche Bank Long US Dollar Index Futures Index Excess Return plus the interest income from the fund’s holdings of U.S. Treasury securities. In terms of holdings, UUP allocates nearly 58% in euro and 25.5% collectively in Japanese yen and British pound. The fund has so far managed an asset base of $994.9 million, while it sees an average daily volume of around 2.1 million shares. It charges 80 bps in total fees and expenses, and added 1.2% on the day following the jobs report. The fund has a Zacks ETF Rank of 3 or “Hold” rating, with a Medium risk outlook. Deutsche X-trackers MSCI EAFE Hedged Equity ETF (NYSEARCA: DBEF ) The strength in the greenback and global monetary easing is once again compelling investors to recycle their portfolio into the currency hedged ETFs. For those seeking exposure to the developed market with no currency risk, DBEF could be an intriguing pick. The fund follows the MSCI EAFE US Dollar Hedged Index and holds 916 securities in its basket, with none accounting for more than 1.98% share. However, it is skewed toward the financial sector, which makes up for one-fourth of the portfolio, while consumer discretionary, industrials, consumer staples and healthcare round off the top five with double-digit exposure each. Among countries, Japan takes the top spot at 22%, closely followed by United Kingdom (18%), France (10%) and Switzerland (10%). The ETF has AUM of $13.9 billion, and trades in solid volume of more than 3.9 million shares a day. It charges 35 bps in fees per year from investors, and gained 0.6% on the day. DBEF has a Zacks ETF Rank of 3, with a Medium risk outlook. iPath U.S. Treasury Steepener ETN (NASDAQ: STPP ) As yield rise, bonds and the related ETFs falls. But this product directly capitalizes on rising interest rates and performs better when the yield curve is rising. The ETN looks to follow the Barclays US Treasury 2Y/10Y Yield Curve Index, which delivers returns from the steepening of the yield curve through a notional rolling investment in U.S. Treasury note futures contracts. The fund takes a weighted long position in 2-year Treasury futures contracts and a weighted short position in 10-year Treasury futures contracts. STPP charges 0.75% in fees and expenses, while volume is light at around 1,000 shares a day. Additionally, it is an unpopular bond ETF, with AUM of just $2.5 million. The note surged 2.4% following the robust jobs data. Stocks to Consider In the stock world, the direct beneficiary of healthy hiring is the staffing industry. The industry bodes well at least in the near term, given the superb Zacks Industry Rank (in the top 5%) at the time of writing. Investors seeking to ride out the optimism could look at a few top-ranked stocks having a Zacks Rank #1 (Strong Buy) or #2 (Buy) with a Growth Style Score of B or better using the Zacks Stock Screener . Cross Country Healthcare Inc. (NASDAQ: CCRN ) Based in Boca Raton, Florida, Cross Country is a leading healthcare staffing services’ company which primarily focuses on providing nurse and allied, and physician staffing services and workforce solutions to the healthcare market. The stock has seen solid earnings estimate revisions of 7 cents for the current quarter over the past 30 days. Full-year earnings are expected to increase at a whopping rate of 286.1% versus the industry average of 19.4%, reflecting massive growth prospects. The stock rose 7.3% in Friday’s trading session, and currently has a Zacks Rank #1 with a Growth Style Score of “A”. Heidrick & Struggles International Inc. (NASDAQ: HSII ) Based in Chicago, Illinois, Heidrick & Struggles International is one of the leading global executive search firms. With years of experience in fulfilling clients’ leadership needs, it offers and conducts executive search services in every major business center in the world. The stock has seen upward earnings estimate revision by a couple of cents for the current quarter over the past one month. The company is expected to post earnings at a growth rate of 179.3% annually this year. HSII gained 3.7% on Friday, and has a Zacks Rank #1 with a Growth Style Score of “A”. TrueBlue Inc. (NYSE: TBI ) Based in Tacoma, Washington, TrueBlue is a leading provider of staffing, recruitment process outsourcing and managed services in the United States, Canada and Puerto Rico. This company has also seen rising estimates of four cents for the ongoing quarter, and expects to grow earnings at rate of 24.5% annually for the full year. The stock was up 3.7% in the Friday session, and has a Zacks Rank #2 with a Growth Style Score of ‘B’. Original Post