Tag Archives: yahoo

FVD: Great Sector Allocations For This Dividend Growth ETF

Summary FVD offers a dividend yield of 2.17%, which is fairly low for being included in the discussion of dividend ETFs. The top several holdings include heavy exposure to the major oil companies. The expense ratio is quite dreadful. The sector allocations look great for a dividend ETF, which seems ironic given the weak yield on the fund. The First Trust Value Line Dividend ETF (NYSEARCA: FVD ) looks great for sector allocations, pretty good for individual companies, and weak for yield, and painful for the expense ratio. That is one of the most mixed bags I’ve found when reviewing dividend ETFs. I’ve found ones that are good, ones that seem poorly designed, and ones that are all around average. I rarely see such strong contradicting signals though. Expenses The expense ratio is a .75% on the gross level and .70% on the net level. Is it any surprise I’m not loving the expense ratio? Dividend Yield The dividend yield is currently running 2.17%. That seems strange for a dividend ETF, but I’ve seen low yields on dividend ETFs before so I won’t dwell on it. Holdings I grabbed the following chart to demonstrate the weight of the top 10 holdings: I love seeing Exxon Mobil (NYSE: XOM ) as a top holding. Investors may be concerned about cheap gas being here to stay, but I think money in politics will be around decades (centuries?) longer than cheap gas. Bet against big oil at your own peril. I can say the same about liking Chevron (NYSE: CVX ) and ConocoPhillips (NYSE: COP ). These companies offer investors a good way to benefit from high as prices which would generally be a drag on the rest of the economy and on the personal expenditures of consumers. As we go farther down the list there are a couple of high quality equity REITs incorporated into the portfolio. I should note that while these allocations are fairly far down the list, their allocations are still higher than .58% and the second heaviest weighting is only .63%, so being far down on the list doesn’t mean much in terms of weighting. The high quality equity REITs I see here are Realty Income Corporation (NYSE: O ) and Public Storage (NYSE: PSA ). Realty Income Corporation is a monthly pay equity REIT that runs a triple net lease structure. In short, they are buying up commercial properties and renting them out to businesses. The company has exceptionally high credit standards and screens applicants to reduce their risk of having renters default on the contract. Public Storage on the other hand has a fairly simple business in terms of renting out storage space. This can be a fairly attractive space because there aren’t too many REITs competing in the space which reduces the need for price based competition. Sectors (click to enlarge) The very heavy allocation to utilities is great for investors that don’t already have the exposure in their portfolio. Utilities tend to have a lower correlation with the rest of the domestic market and generate significant income for shareholders which causes them to also have some correlation with the bond markets since investors interested in income are able to pick between bonds and utilities. The high allocation to financials is a bit higher than I’d like to see since equity REITs are only a few of the positions. Most of the financials exposure is coming from the more traditional sources such as banks. Heavy exposure to consumer staples is another positive aspect in my opinion since it makes the portfolio more resistant to selling off during negative market events. Telecommunications usually gets a much heavier weight in dividend portfolios due to the presence of AT&T (NYSE: T ) and Verizon (NYSE: VZ ), but the weighting strategy for this fund giving most equity positions allocations around .6% has resulted in those two companies combining to be only 1.14% of the portfolio. Suggestions I wouldn’t mind seeing this portfolio show a slightly higher allocation to a few dividend champions such as Pepsi (NYSE: PEP ) or Coke (NYSE: KO ). I wouldn’t mind seeing the oil companies get slightly higher allocations either. The final modification would be increasing the presence of sin companies in the portfolio by overweight companies like Altria Group (NYSE: MO ). Of course, this runs contrary to the ETF’s strategy of aiming to have their holdings be roughly equally weighted. Conclusion Overall I like the portfolio that has been created, but the weighting methodology creates the possibility of material changes in the allocation from period to period. There are several companies that were selected by the ETF’s methodology that also meet my definitions for attractive dividend payers, but I’d really like to see the strategy implemented with a lower expense ratio even if that required sacrifices such as less frequent rebalancing of the portfolio.

U.S. Geothermal: A Messy Micro-Cap With No Catalyst In Sight

Summary HTM showed up on a screen for long ideas, but I find the stock unattractive: Slow growth, potential dilution, no dividend, and no EPS. My attempt to value the stock valuation relies on EV/EBITDA, and it’s a messy affair to reconcile the minority interests and company adjustments. The biggest risk to this short idea is that a strategic buyer might make a bid, since HTM is a pure play in geothermal. US Geothermal (NYSEMKT: HTM ) recently showed up on a micro-cap screen designed by Marc Gerstein, Director of Research at Portfolio123 . The screen uses a combination of value and momentum factors to identify attractive stocks while avoiding what Marc calls “dumpster fires.” As a side note, Marc and I started our careers three decades ago as stock analysts at Value Line. His stock screening process is not only sound, but it is far better than anything I could design. So the first step was to take a quick look to see if the screen had netted a fish or just an old tire. (Finding junk in the net is usually caused by bad data, and does not indicate a flaw in the screening process.) (click to enlarge) Minority Interests Dilute Earnings U.S. Geothermal , Inc. operates power plants in the Western U.S., and is a pure play on geothermal energy. Unfortunately, HTM only owns a 60% interest in its largest, most profitable plant: Neal Hot Springs in Oregon. Likewise, it has a 50% interest in the plant located at Raft River, Idaho. For a granular analysis of the plants at HTM, please see All Quiet on the Geothermal Front .The minority partners take a big cut of earnings, so potential investors should keep this in mind as they read HTM’s financial statements. Capital Constrained It is hard to see the firm growing significantly without raising capital or diluting current shareholders. This article on SA described it well: U.S. Geothermal Is an Open-Ended Story . I cannot add much to this well-written analysis, except to say that it the author used a value approach that makes sense to me and didn’t conflict with anything I discovered about the firm. The firm has a number of projects in the pipeline, but these take a long time to develop and do not always come to fruition. HTM gets government incentives to develop plants, including a $65-million loan at 2.6% interest from the Department of Energy. The reliance on tax breaks and government loans is both an opportunity and a risk that is inherent to renewable energy projects. Valuation I find HTM a hard stock to evaluate, since it has no dividends and GAAP EPS hover around $0.00 (that’s not a typo). So I had to resort to EBITDA (earnings before interest, taxes, and amortization). As of August 11, 2015 the company is guiding analysts to net income before taxes of $3 to $6 million–quite a wide range. This works out to adjusted EBITDA of $11 million, so the company maintains that stock is selling for about 6x EBITDA. (Source: Page 22 of company presentation here .) But this excludes net debt, as we shall see below. Total assets of U.S. Geothermal as of 6/30/15 were $231 million. Total debt was $97 million, and minority interests were $45 million. Throw in some short-term liabilities of $6 million and miscellaneous items, and total liabilities come to $145 million. Shareholder equity was $86 million, so I calculate enterprise value of $231 million. The company presentation uses data from December 31, 2014, so the enterprise value would be $233 million, rather than $231 million. (click to enlarge) Then the adjustments start. As shown above, U.S. Geothermal adjusts the year-end assets and liabilities to reflect minority interests to come up with the “USG portion” of each. This makes sense to me. The firm also adjusts asset values upward from $233 million reported at year-end 2014 to $375 million. I cannot vouch for this, since I have not followed the trail of breadcrumbs to confirm whether or not this contains reasonable assumptions. So I will I use unadjusted asset values of $233 million, rather than $375 million. Granted, it is possible that the company has bona fide reasons to make adjustments to its asset base up to $375 million. If I were shorting the stock, I’d look into this to make sure that there weren’t saleable assets that are undervalued. But the problem with this logic is that if the asset base really is this high, then the company’s return on assets is even lower than I calculate. In any case, adjusted for minority interests, U.S. Geothermal has debt of $71 million and equity of $171 million. This comes to an enterprise value of $242 million. Based on this, and on the firm’s projection of 2015 adjusted EBITDA of $11 million, U.S. Geothermal is not earning a particularly good return on assets: $11 million/$242 million amounts to a 4.5% return on total assets. The company may have a higher return on equity, which came to 15% according to year-end 2014 numbers as calculated by Reuters. But for a highly-leveraged utility, we need to look at returns on total assets, and it is not encouraging. 4.5% seems like a low return, which may explain why the firm cannot afford to pay a dividend. (click to enlarge) Above is page 24 of a company presentation, and it shows that the current stock price is 5.8x forward EBITDA of $11 million. This seems cheap. But it does not include the company’s portion of long-term debt, which is $71 million. Personally, I find that misleading. Would a Buyout Make Sense? As of November 4, 2015 the stock had a price of $0.58, giving the firm a market cap of $62 million. Any buyer of U.S. Geothermal would assume the company’s liabilities, and this includes its portion of long-term debt. If we assume that a buyer would pay at least 10% premium for the stock, we have equity of $68 million. Add $71 million of long-term debt, and the buyer would have to pay $139 million for the whole shebang; this is the Enterprise Value that would matter to a buyer. Using the company’s forward, adjusted EBITDA of $11 million for 2015, a takeover offer of $139 million would amount to an EBITDA/Enterprise Value multiple of 12.6x. Not cheap, but not expensive. Therefore, I do not see a buyout offer as a big catalyst for the stock. Nevertheless, given the company’s tiny capitalization and niche focus, the stock could eventually become a takeover target: A large utility might buy HTM for strategic reasons, and a private equity investor might add value by injecting capital, buying out minority interests, or breaking up the company and selling off assets. I have no reason to think that a buyer is waiting in the wings, but short sellers should keep this risk in mind. Short Interest According to Nasdaq , as of 10/15/2015 HTM has a short interest of 780,207 shares. With daily volume of 190,000 shares, it would take 4 days for the shorts to cover. There are 107 million shares issued and outstanding, and the float is about 105 million. The fully diluted shares are 126 million. I have to note that it is notoriously difficult to short micro-cap stocks, and the services of a good prime broker will be essential. (There are no active options for HTM.) As a side note, insider purchases of the stock show up on Yahoo as positive, but the executives receive significant grants and gifts. This stock compensation is not cheap, and it reflects the skills of the current executive team. A strategic buyer of U.S. Geothermal may decide that it can consolidate operations and save money by cutting executive pay. This is a minor consideration, but worth mentioning. Bottom Line HTM shares may be suitable for investors who like renewable energy. There is no dividend, so investors have to be very patient. And there is no guarantee that the project pipeline will pan out, so investors have to be risk tolerant. Given current valuation and the potential for dilution, I think the potential risk/reward is tilted toward the short side. 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.

Hedging Via Index Funds: 5 Winning Funds And 5 Surprising Losers

Summary I looked at a large collection of index ETFs, calculating their correlations with the S&P 500. I found five winning hedges and five losing hedges. Two ETFs in particular showed almost zero correlation to the US stock market: EEM and TAN. During the 2008 bear market, I lived in both Taiwan and China – at separate times, of course. While in Taiwan, I often heard complaints from the Taiwanese regarding poor American business practices: “Your banks went and screwed everything up for everyone.” Yet, while in China, I heard no such complaints. The people there seemed happy with their economy. The difference? Correlation. Market connection. While today, the US stock market is strongly correlated to that of China’s, a number of years ago it wasn’t. Perhaps China’s economy just recently became big enough to sync to the US economy. In that case, perhaps some other countries out there have stock markets uncorrelated to ours. If so, index funds on those markets would provide good hedging opportunities for bear markets, market corrections, and market crashes. My last study on investments uncorrelated to the US market unveiled some surprising results – you can read it here . Now, I intend to tackle a request from one of the readers of that last article: (click to enlarge) The request was to find CEFs, index ETFs, and sector ETFs uncorrelated to the S&P 500. In fact, these are actually three requests. I’m going to be tackling the question of index ETFs in this article, perhaps moving onto the former in the next article; and the sector ETF request is easily tackled – no sector ETFs are uncorrelated to the market. So, the main question is, “What index ETFs are uncorrelated with the S&P 500.” Immediately, my mind turns to indexes in certain countries. Later, I will show my findings on which countries have stock markets uncorrelated with the US market. But I will also look at other indexes unrelated to geography. Correlation First, we must define correlated. In a previous article, I spent some time talking about the theory behind correlation determinations. I direct you to that article if you wish to learn more. For now, let me just explain how I determined whether an investment was correlated to the S&P 500. I imported index data, ^GSPC, via Yahoo Finance using R, statistical software. Then, I imported various index ETFs that I thought might have low correlations. I ran correlation calculations on the index ETFs vs. ^GSPC, using a 5-year time frame. Any investment with a correlation between -0.3 and 0.3 was considered uncorrelated. In this way, the index ETFs chosen as Winners (those suitable for hedging) change a maximum of 20% per significant market move. The Close Calls, in contrast, change in the range of 20-40% when the market moves. The idea is to compose a portfolio of index ETFs that can act as a hedging portion of your portfolio. The end result was four ETFs uncorrelated with the market, with one index ETF in particular having two near-zero correlation funds. Some of the Winners and Close Calls may surprise you. Winners iShares MSCI BRIC ETF (NYSEARCA: BKF ) and iShares MSCI Emerging Markets ETF (NYSEARCA: EEM ) . Money has been flowing out of emerging markets, yet emerging markets might just offer a strong hedging opportunity. Of particular interest is the slight, but significant, difference between BKF and EEM. While these two ETFs are strongly correlated, EEM has a near-zero correlation with the S&P 500, while BKF has a -0.25 correlation. Overall, I don’t think this difference is very important for most investors. Their yields are approximately the same: 2.4% for EEM and 3% for BKF. Either investment would be a good hedging tool, allowing exposure to emerging markets and providing dividends. However, the holdings of these funds differ to some extent. BKF heavily weights the its major holdings, with 40% of its holdings in China and 30% being financial services. Its biggest holdings are Chinese financial services, such as banks and insurance companies. In contrast, EEM more evenly disperses its holdings. In addition, because it is not forced to invest in BRIC countries, the fund’s two biggest holdings are Korean and Taiwanese companies: Samsung ( OTC:SSNLF ) and Taiwan Semiconductor Manufacturing (NYSE: TSM ). Also, in stark contrast to BKF, which only hold stock in developed countries, EEM dedicates 30% of its portfolio to developed markets, which equates to more exposure to technology stocks in this case. iShares MSCI South Korea Capped ETF (NYSEARCA: EWY ) : Surprisingly, this Korean ETF is uncorrelated to the US market. As you would expect, 40% of this fund’s holdings is dedicated to tech stocks, which can promise decent growth. The yield here is rather low, at 1.22%. Samsung, which makes up 30% of this ETF, has been underperformer in EWY’s portfolio for the past few years. If this were an ex-Samsung ETF, I could see it easily outperforming the fund as it is currently composed. Nevertheless, EWY is a good opportunity for both hedging and profiting from South Korea’s economy, which is set for a comeback. iShares MSCI Malaysia ETF (NYSEARCA: EWM ) : Malaysia was another country I checked, and I found this particular fund to be both uncorrelated to the S&P 500 and quite similar to the emerging market funds in terms of its portfolio allocation. EWM is 30% financial services, with Malaysian banks as its main holdings. This fund also gives you significant exposure to Malaysia’s utilities and consumer industries, and has a sweet yield of 3.76% Guggenheim Solar ETF (NYSEARCA: TAN ) : This ETF tracks the MAC Global Solar Energy Index. The holdings are about half US-based. Unlike the above funds, this ETF’s portfolio consists mainly of small and mid-cap stocks. TAN has a near-zero correlation with the S&P 500 – 0.04, to be exact – which is likely a product of it being cut both across a sector and across geography. The main countries involved in this portfolio are, unsurprisingly, the US and China. With a 2.15% yield, this is a great hedging opportunity, and is a suitable choice if you’re bullish on solar energy, which seems poised for a rebound since its fall in 2011. Close Calls In this section, we look at investments that made 20-40% movements in response to market moves. These are “Close Calls” – ETFs that you’d think would be uncorrelated to the general market, but which actually show a small or moderate correlation. They might still be good investments, but are not appropriate for hedging. iShares MSCI Mexico Capped ETF (NYSEARCA: EWW ) : With its disgusting ticker name, EWW is one of those geography-based index ETFs that I thought might be uncorrelated to the US market. Of course, that was wishful thinking, as Mexico and the US have a strong trade connection. However, the correlation is quite low, at 0.34. With Mexico becoming stronger in the world economy, EWW is a decent emerging market investment vehicle, but should not be used for hedging. iPath MSCI India Index ETN (NYSEARCA: INP ) : Listed as an ETN, INP tracks the MSCI India Total Return Index. India still shows a correlation with the US market, making this ETN a poor choice for hedging. However, depending on your outlook of the country, this might be a good choice. Personally, I’d choose BKF over this, as you’d still have exposure to India, be more diversified across geography and gain dividend payments. Guggenheim China Small Cap ETF (NYSEARCA: HAO ) : While all the China ETFs I checked were strongly correlated to the US market, this fund consisting of small-cap Chinese stocks shows a much lower correlation than the rest. If you want to invest in China, but fear a drop in the US market could damage your portfolio, HAO is a bit safer than other Chinese ETFs. Strange that a small-cap ETF would be safer, but for Americans, that seems to be the case. Fidelity MSCI Energy Index ETF (NYSEARCA: FENY ) : The energy market seems to be doing its own thing, regardless of the market. However, the market is generally moving upward while energy prices drop. Thus, checking the correlation between the two might be enlightening. The correlation between FENY and the market is small, but it’s there. A general market decline, then, should predict a slight increase in the energy market. FENY might be a good choice if you’re expecting a market correction or crash, and if you’re speculating that the energy market has hit its true bottom. Global Commodity Equity ETF (NYSEARCA: CRBQ ) : Much like the energy market, the commodity market has been moving opposite to the S&P 500, but appears rather uncorrelated. In fact, the correlation here is -0.44. The dollar, which is correlated to the market, is inversely correlated to the commodity market, which explains this moderate correlation. With its low liquidity, you should only buy this if you have no better way of investing in commodities and want to hold this ETF for the long term. I Want Your Input Obviously, I simply don’t have the time to cover every industry. While reading this article, you probably thought of at least one investment that should have gone in my “Winners” section. Let me know about it in the comments section below. Request a Statistical Study If you would like for me to run a statistical study on a specific aspect of a specific stock, commodity, or market, just request so in the comments section below. Alternatively, send me a message or email.