A volatile year for initial public offerings in 2015 is expected to flow into the new year, despite a record number of high-profile “unicorns” galloping across the terrain. Unicorns are privately held companies with valuations of $1 billion or more. Research firm CB Insights counts 144 of them, with a combined valuation of $508 billion. In most years, there would be high expectations that many of these unicorns would be very close to making — and
Summary The macro-economic struggles of Colombia are reminiscent of those within other countries in the Latin American region. China’s economic issues and commodity price declines have exacerbated the economic problems within Colombia and the rest of the Latin American region. Colombia’s economic struggles have affected the performance of the Global X MSCI Colombia ETF. Only 5 of the top 25 holdings in the fund have a positive YTD return. In order to fully understand the issues within the Colombian economy, it is important to review the economic struggle within the Latin American region. It is no secret that the Latin American region has had a very poor economic run in 2015. The economy in Venezuela is dealing with high inflation that could be seen in quite a few statistics such as the inflation rate , core inflation rate, consumer price index and food inflation. The economic struggle in Brazil can be seen in the following chart with regards to their GDP in their last several quarters. This economic statistic has resulted in a brutal performance for the iShares MSCI Brazil Capped ETF (NYSEARCA: EWZ ) in 2015. The fund has a -38.8% YTD return. (Source: Bloomberg ) The Latin American region has been in a downward trend for the last several years in terms of GDP. This can be seen in the next chart below: (click to enlarge) (Source: CNN Money) This chart is as of July 2015. Now it is projected that the Latin American region is expected to contract 0.2% for the year, according to FocusEconomics. Major catalysts to the economic struggle in the Latin American region include the current economic struggle in China and the decline in commodity prices. China has strategically resorted to domestic consumption in order to spark economic growth. This is not good news for a region that heavily consumes Chinese exports. It is no secret that the Chinese stock market index has practically fallen off a cliff since June 2015 . In addition, China has shown signs of slow growth with its recent import totals. China’s imports dropped 8.7% year over year to $143.13 million in November. In October, China’s imports dropped 18.8% year over year. This marks the 13th straight month of year-over-year decline for Chinese imports . Chinese exports declined 6.8% year over year in November. This was the fifth straight month of year-over-year decline for Chinese exports. The Chinese debt to GDP ratio reached a record high for the month of June . The depreciation of the Chinese yuan against the U.S dollar has weakened commodity demand in Latin America and devalued Latin American currencies. This can be seen in the chart below. Notice that the Colombian peso was affected the most. (click to enlarge) The decline in commodity prices is quite evident and can be seen in the following charts involving crude oil, heating oil, silver and gold. (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) Unfortunately, Colombia is right in the middle of the economic struggle in the Latin American region. The Colombian stock market has declined by over 31% YTD . Colombia has experienced a rise in inflation within the past few years. However, the increase in inflation has only accelerated within the past year. The following is the 1- and 5-year charts of the Colombia inflation rate as well as the country’s consumer price index. (click to enlarge) (click to enlarge) (click to enlarge) Thus, the central bank of Colombia has had to raise the interest rate for four consecutive meetings in order to curb the impact of increasing inflation. The interest rate is currently 5.75%. (click to enlarge) Thus, it is not surprising that Colombia has one of the worst performing country ETFs in the market in the Global X MSCI Colombia ETF (NYSEARCA: GXG ). The fund has a YTD return of -41.0%. Out of the top 25 holdings within the Global X MSCI Colombia ETF, only 5 holdings have generated a positive YTD return. These holdings have a combined portfolio weight of only 14.42%. It is not surprising that all of the fund’s price multiples fall short of their Morningstar benchmark totals. Value and Growth Measures Stock Portfolio Benchmark Price/Prospective Earnings 11.90 15.11 Price/Book 0.69 1.54 Price/Sales 0.69 1.04 Price/Cash Flow 1.93 5.42 Given the volatility of Colombian equities, it is no surprise that this ETF would have a greater standard deviation than its benchmark. Unfortunately, the fund is rampant with negative returns and ratios as seen in the fund’s 3- and 5-year volatility measures . 3-year Trailing Standard Deviation Return Sharpe Ratio Sortino Ratio GXG 26.78 -27.45 -1.05 -1.23 MSCI ACWI Ex USA NR USD 12.38 3.31 0.32 0.51 5-year Trailing Standard Deviation Return Sharpe Ratio Sortino Ratio GXG 23.81 -16.57 -0.64 -0.79 MSCI ACWI Ex USA NR USD 15.33 2.99 0.26 0.38 Bottom Line Given Colombia’s economic vulnerability at the moment, I think it would be best served to steer clear of this ETF due to its significant exposure to Colombian equities.
Company is strategically making all correct decisions and augmenting its power assets portfolio. ROE will improve in future, driven by rate increases and costs savings. AEP’s attempt to increase regulated operations will provide cash flow stability and will support dividend growth. American Electric Power (NYSE: AEP ) remains a compelling investment prospect for investors. The company has been making correct strategic decisions to strengthen its business operations and improve its risk profile. The company has been working to improve its earned ROE, increasing its regulated business operations, and scaling down its un-regulated operations, which I think will augur well for its stock valuation. Recently, AEP filed a settlement agreement with the Public Utilities Commission Ohio (PUCO), regarding its proposed Power Purchase Agreement (NYSEARCA: PPA ) plan for its 3GW of merchant power generating assets; I think this is a positive development, as it would provide more stability to its revenues, earnings and cash flows. Moreover, the company might plan to sell its remaining 5GW of merchant assets, not included in the PPA plan, which will allow it to use sale proceeds to make more investments in regulated transmission business. In addition, the stock valuation stays attractive, as it is trading at discount to its peers. Growth Catalyst AEP has been aggressively working to strengthen its business by increasing its regulated business exposure. In this regard, the company filed an agreement with PUCO, and PUCO is expected to provide a ruling on the settlement agreement in early 1Q2016. The agreement calls for 8-year PPAs at a 10.4% ROE for its 3GW of merchant power generation. In addition, the agreement includes converting coal plants to gas, building 900MW of renewable energy portfolio and up to $100 million in customers’ credit over the 8-year period. The agreement will provide stability to the company’s merchant power assets, as in the past these assets performance was negatively affected by low and volatile power prices. The agreement filed by AEP is very similar to the recent settlement agreement for FirstEnergy (NYSE: FE ). Other than the recent agreement filling for its 3GW of merchant assets, I think the company will opt to sell its remaining 5GW of merchant assets, not covered under a settlement agreement, to become a full regulated utility company. The sale of the remaining 5GW of merchant assets will not only provide stability to the company’s revenues and earnings, but will also give AEP an opportunity to use the sale proceeds to the sale to reinvest in the business, and grow its regulated operations. If the company opts to sell its remaining 5GW of merchant assets, it could generate $1.8-$2.35 billion in sale proceeds, which it could re-invest into its regulated transmission business. Also, the company can use the sale proceeds to buyback shares, but I think, this is an attractive option, as redeploying sale proceeds to expand regulated operations as it will strengthen its business model. In the long run, the company could also consider to undertake acquisitions, which will provide offer incremental transmission business opportunities. In addition, if the company opts to sell its 5GW merchant assets and re-invest proceeds in transmission business, long-term earnings could grow in a range of 5%-7%, better than its management long-term earnings guidance of 4%-6%, which is based on its transmission planned capital investments of $5.7 billion over the next three years. AEP has a plan to make capital investments worth $13 billion over the next 3 years, out of which 96% will be directed at regulated operations, which will strengthen its regulated business, and increase its regulated rate base. The graphs below displays planned capital investments and regulated rate base growth for AEP. (click to enlarge) Investors Presentation Separately, the ROE of the company is likely to improve in the coming years because of rate increases. The company received $45 million and $99 million rate increases at its two subsidiaries, Kentucky Power and APC’s, respectively. In additions, the company’s earnings growth will be supported by its on track cost savings measures; it is expected to save $205 million in costs, as displayed below. Investors Presentation Summation AEP is strategically making all correct decisions and augmenting its power assets portfolio in a way that will strengthen its long-term performance. The company’s ROE will improve in the future, driven by rate increases and costs savings. Also, the company’s attempt to increase its regulated operations will provide cash flow stability and will support its dividend growth; AEP offers a yield of 4.1%. Furthermore, the stock valuation currently remains compelling, as it is trading at a forward P/E of 15x , versus the industry average forward P/E of 16x . I think the stock valuation will expand, and the valuation gap will close as AEP will evolve into a fully regulated utility company.