Author Archives: Scalper1

CEMIG: What’s The Weather Like?

Summary CEMIG seems very cheap, but faces several easy-to-spot problems. One of those problems is clearly cyclical and temporary. It’s the weather. Beyond a general overview of the issues CEMIG faces and offering a long-term opinion, this article also considers the importance of the weather in trying to establish a CEMIG position. On paper, CEMIG – Companhia Energética de Minas Gerais (NYSE: CIG ) is an extremely appealing equity. Here’s a utility that has a current dividend yield of 10.6% and trades for 4.4x its 2016 EPS consensus. Sure, CEMIG is in Brazil. And Brazil is in the dumper due to an implosion in commodity pricing (namely crude and iron ore), on which its exports long relied. Also, Brazil’s government budget is slowly turning into a deficit, on account of both the economy and higher social spending: (click to enlarge) Source: Tradingeconomics.com, government budget Plus, of course, CEMIG faces its own travails, having lost 3 hydroelectric concessions which are likely to drive its earnings down by ~50% . And then there’s the fact that CIG is an ADR, reflecting the behavior of CEMIG as quoted in São Paulo … in Brazilian Reais. You see, the real has been doing its best impersonation of a banana republic currency – both on account of the commodity implosion, the resulting economic slowdown and the slowly-eroding budget balance: (click to enlarge) Source: Xe.com There is, thus, a lot of trouble to go around. I could however say there’s one bright spot here on the currency front. While the commodity implosion had a very negative impact on exports, the Real implosion made sure that imports fell hard as well. The end result is that Brazil is still holding on to a positive balance of trade: (click to enlarge) Source: Tradingeconomics.com, balance of trade The main economic risk is thus reduced to the chance that the budget deficit deteriorates so much that Brazil resorts to money printing and turns this manageable situation into a Venezuela . Barring that, we could argue that the Real is fairly valued or even undervalued (if some of the commodity weakness in oil and iron ore goes away). At this point, we could thus argue that taking into account the economic outlook, Real, valuation (EPS consensus) and the loss of concessions, CIG should be at an attractive long-term level. And that would probably be right. But there’s yet another factor. The Weather You see, Brazil is supposedly in the midst of its worst drought in the last 80 years ( I , II ). A drought which was made worse by the weak 2014 rain season (starting in November 2014). Now, a drought here is a serious matter, because Brazil relies heavily on hydroelectric power – and CEMIG relies even more on it (though that will now be reduced by the loss of 3 hydro concessions): (click to enlarge) Source: CEMIG Presentation The drought, as I said, was made worse by a weak 2014 rain season. A drought is clearly a temporary factor, so buying stock affected by it could make sense long-term. But usually, you wouldn’t want to necessarily be doing so right away if you thought that there was still significant pain ahead. In that regard, it pays to check how this rain season is going, as it will affect hydroelectric power generation throughout 2016. We do have a way of monitoring how it’s been doing: Source: NOAA, National Weather Service As it were, the answer about the weather is “not so good”. The most important state for CEMIG is Minas Gerais and the adjoining smaller states, and those are clearly seeing under-average rainfall during this rain season as well. Source: Company Presentation So, for timing purposes, we do know that more fundamental deterioration likely still lies ahead for CEMIG even if the present share levels already look attractive for the longer-term. On The Other Hand CEMIG does get a lot of its profits from generation. But it also gets 1/3rd of EBITDA from transmission, and that ought to be defensible: (click to enlarge) Source: Company Presentation This is yet another factor telling us that, longer-term, CEMIG should be attractive – though it probably won’t mitigate further short-term fundamental weakness coming from the weather. Conclusion Some of the problems CEMIG faces are structural, like the loss of 3 important concessions. Others seem discounted, like the massive Real plunge (unless the government goes all Venezuela on us). Taking into account these problems and the earnings impact, it would look like CEMIG is already at an interesting level for longer-term investments (the 2016 EPS consensus puts the company at 4.4x earnings, and should already account for the concession losses – but not for further fundamental deterioration). However, to further refine the timing of buying CEMIG shares, one of the largest problems with CEMIG remains, though it’s clearly cyclical and temporary. I’m talking about the weather. On that front, it looks likely that the fundamental newsflow over the next 3-9 months will remain rather negative – since if it’s not raining a lot right now, it will be hard to compensate for most of 2016. On this account, it might also happen that CEMIG will further cut its dividend or entirely eliminate it (temporarily) – which is another possible “ugly newsflow” event. Putting it all together, CEMIG is trading at an interesting long-term level given the depressed valuation. Weather considerations are mainly for trying to establish the best possible entry point, in spite of the stock already looking attractive long-term.

Yelp In For 2016 Revenue ‘Upside,’ SunTrust Says

Yelp (YELP) got a modest price target boost from SunTrust Robinson Humphrey, which said on Wednesday that the crowdsourced consumer review website can grow even in the face of rising competition for local advertising dollars from Facebook (FB), Alphabet (GOOGL)-owned Google, Amazon.com (AMZN), TripAdvisor (TRIP), Priceline Group (PCLN), Groupon (GRPN) and others. SunTrust said that it had transferred coverage of Yelp to analyst Matthew Thornton

Closing The Books On 2015

Summary So 2015, how’d you do? Did you beat the market? An advisor, among other things, needs to prevent clients from doing themselves in out of emotion or any other unintentionally self-destructive behavior. An individual investor needs to manage this for themselves, which is doable with a whole lot of self-awareness. By Roger Nusbaum, AdvisorShares ETF Strategist The transition from the old year into the new is always busy for tax reasons, reviewing the old year and game planning for the future. So 2015, how’d you do? Did you beat the market? Those are common questions for this time of year and while those may seem to be important they are less important than the humbler “did you screw anything up beyond repair?” An advisor, among other things needs to prevent clients from doing themselves in out of emotion or any other unintentionally self-destructive behavior. An individual investor needs to manage this for themselves, which is doable with a whole lot of self-awareness. The reason not screwing up is arguably more important than anything else is that the stock market averages 7-8% annualized over long periods of time, but year to year it is a guess as to what the market will do. Seven or 8% can be a sufficient growth rate over long periods of time and of course 7-8% includes all the great years and the terrible years. If nothing else, if an investor doesn’t panic and just holds on to capture most of that 7-8% then they have a good chance of having enough money when they need it. This is essentially the argument for the stock market being less risky over longer periods versus shorter periods which then places more importance on savings rate and lifestyle than market performance… unless there is a major screw-up. In 2015, a major screw-up could have come from chasing yield with too much exposure to MLPs. The space has obviously been decimated in 2015. Someone who had 3-5% in MLPs all the way down had a meaningful portfolio drag but with a properly diversified portfolio could easily be pretty close to the market and pretty close can get the job done. The person who heeded one of the countless articles from a couple of years ago suggesting 15-25% in MLPs has a much bigger problem. In most years, there are market niches that blow up, this year it was MLPs and in the future there will be others. From the advisor’s perspective, explaining why there was an MLP in the portfolio is infinitely easier than explaining why 20% was in MLPs. From the perspective of the individual investor, it becomes an inconvenience as opposed to a now what do I do situation. The idea of not screwing up might seem boring and like a low bar but for most investors boring is exactly what they want even if they don’t realize it and what good is beating the market (huge assumption there by the way) with an inadequate savings rate? Relying on the market to bail out an investment plan is to rely on what is out of the investor’s control and that is a bad bet.