Author Archives: Scalper1

Chasing Beta Outside The U.S

Summary According to famous value investor Murray Stahl, beta is out of favor. The contrarian play is to seek out beta. The Powershares S&P Intl Dev Hi Beta ETF is one way to go long beta outside the U.S. Examination of its valuation and contents show how contrarian this bet really is and whether there is value. In his latest investment commentary , famous investor Murray Stahl says investors are now en masse shunning beta in favor of stability. This influx of funds into ETFs with stable prices further helps this category to stabilize. This powers a virtuous cycle that has led to large inflows to so-called low-volatility products or low-beta products. The contrarian thing to do is to go high beta. I don’t think it is a coincidence I’m finding lots of bargains among companies with highly volatile earnings patterns. The contrarian idea can be played through ETFs very easily and one option is the PowerShares S&P Intl Dev Hi Beta ETF (NYSEARCA: IDHB ). IDHB data by YCharts What is beta? Beta shows you the level of volatility in asset prices compared to a benchmark. The baseline volatility is that of the benchmark and it is equal to 1. Assets exhibiting more volatile prices have a beta above 1 and assets with more stable pricing profiles have betas below 1. It is all about movement and it doesn’t matter in which direction it goes. Portfolio Holding high-beta stocks isn’t easy. At times it requires nerves of steel. Often they are highly levered, as leverage amplifies underlying developments for better or for worse. This particular ETF is focused on developed markets ex-U.S. and ex-South Korea and within those markets targets specifically the 200 stocks with the highest beta over the past 12 months. Generally stocks with float under $100 million or less than $50 million of annual trading volume are excluded. So how does such a portfolio look in practice? Well, its top 10 holdings are: Penn West Petroleum (NYSE: PWE ), Alibaba Health Information Technology ( OTC:ALBHF ), Canadian Oil Sands ( OTCQX:COSWF ), Meg Energy Corp. ( OTCPK:MEGEF ), Det Norske Oljeselskap ASA ( OTCPK:DETNF ), Tullow Oil PLC ( OTCPK:TUWOY ) ( OTCPK:TUWLF ), Nokian Tyres PLC ( OTCPK:NKRKY ) ( OTC:NKRKF ), Raiffeisen Bank International AG ( OTC:RAIFF ) ( OTCPK:RAIFY ), Hargreaves Lansdown PLC ( OTCPK:HRGLF ) ( OTCPK:HRGLY ) and DNO ASA ( OTCPK:DTNOF ) ( OTCPK:DTNOF ). Most of the portfolio companies have large or medium market caps. Together these categories make up 68% of the portfolio. On average, the companies have one-third the market cap of the benchmark constituents, so on this front there is a clear discrepancy between the two. It makes sense that prices of small caps are somewhat more volatile, as their earnings are more profoundly impacted by a subset of real-world events. Financial services is the largest sector taking up 24% of the portfolio. This is 9% below the benchmark weighting. The ETF allocated 21.55% of its funds to the energy space, which is double that of its benchmark. A recovery in oil would definitely not hurt this ETF’s performance. One last important sector is basic materials at 14.39%. Another sizeable bet that is different from the benchmark. From a geographic diversification perspective, the ETF disappoints because 83% of the money is bet on companies in continental Europe and another 16% on companies in the U.K. In summary, this ETF is a short cut to bet on Europe / Energy and Leverage. Sounds good, doesn’t it? Valuation The concept of overweighing Europe / Energy and Leverage does not really excite me either, but looking at the ETF from a valuation perspective, it starts to look quite a bit more attractive. It doesn’t score well on forward earnings, but beats the benchmark easily on a present price/cash flow basis. It is also much more attractive on a price/sales basis and offers a slightly higher dividend yield. PowerShares S&P Intl Dev HI Beta ETF MSCI ACWI Ex USA Value NR USD Price/Forward Earnings 14.03 12.56 Price/Book 0.86 1.13 Price/Sales 0.56 0.82 Price/Cash Flow 3.49 4.02 Dividend Yield % 4.9 4.45 Data: morningstar Expenses The ETF’s expense ratio is about 0.35%, but Invesco agreed to waive 0.10% of fees until 2016. Probably in an attempt to increase the assets under management. The expenses are modest, especially considering it invests in mostly foreign issues. Bottom line Even if the contrarian play of going long beta but the idea of going long this ETF does not it is still a useful starting point for further research. Beta is a decidedly backward-looking way of evaluating stocks. If you can dig up companies that experienced high volatility in the past twelve months but where it’s smooth sailing from here on out and buy them at low price/cash flow multiples, you are doing great even if beta stays out of favor. For the brave and lazy, this ETF can serve as an all-in buffet. 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.

Best And Worst Q4’15: Small Cap Blend ETFs, Mutual Funds And Key Holdings

Summary The Small Cap Blend style ranks last in Q4’15. Based on an aggregation of ratings of 28 ETFs and 642 mutual funds. VB is our top-rated Small Cap Blend style ETF and PCOEX is our top-rated Small Cap Blend style mutual fund. The Small Cap Blend style ranks twelfth out of the twelve fund styles as detailed in our Q4’15 Style Ratings for ETFs and Mutual Funds report. Last quarter , the Small Cap Blend style ranked last as well. It gets our Dangerous rating, which is based on an aggregation of ratings of 28 ETFs and 642 mutual funds in the Small Cap Blend style. See a recap of our Q3’15 Style Ratings here. Figures 1 and 2 show the five best and worst-rated ETFs and mutual funds in the style. Not all Small Cap Blend style ETFs and mutual funds are created the same. The number of holdings varies widely (from 23 to 2053). This variation creates drastically different investment implications and, therefore, ratings. Investors seeking exposure to the Small Cap Blend style should buy one of the Attractive-or-better rated mutual funds from Figures 2. Figure 1: ETFs with the Best & Worst Ratings – Top 5 (click to enlarge) * Best ETFs exclude ETFs with TNAs less than $100 million for inadequate liquidity. Sources: New Constructs, LLC and company filings 5 ETFs are excluded from Figure 1 because their total net assets are below $100 million and do not meet our liquidity minimums. Figure 2: Mutual Funds with the Best & Worst Ratings – Top 5 (click to enlarge) * Best mutual funds exclude funds with TNAs less than $100 million for inadequate liquidity. Sources: New Constructs, LLC and company filings The Boston Trust & Walden Funds Mid Cap Fund (MUTF: WAMFX ) and the Boston Trust & Walden Funds SMID Cap Innovations Fund (MUTF: WASMX ) are excluded from Figure 2 because their total net assets are below $100 million and do not meet our liquidity minimums. The Vanguard Small-Cap ETF (NYSEARCA: VB ) is the top-rated Small Cap Blend ETF and the Putnam Capital Opportunities Fund (MUTF: PCOEX ) is the top-rated Small Cap Blend mutual fund. VB earns a Neutral rating and PCOEX earns a Very Attractive rating. The State Street SPDR Russell 2000 Low Volatility ETF (NYSEARCA: SMLV ) is the worst-rated Small Cap Blend ETF and the ProFunds Small Cap Fund (MUTF: SLPSX ) is the worst-rated Small Cap Blend mutual fund. SMLV earns a Dangerous rating and SLPSX earns a Very Dangerous Rating. The Goodyear Tire & Rubber Company (NASDAQ: GT ) is one of our favorite stocks held by VB and earns our Very Attractive rating. Since 2010, the company has grown after-tax profits (NOPAT) by 18% compounded annually and doubled its NOPAT margin. Goodyear has also improved its return on invested capital ( ROIC ) from 5% to 9% over the same timeframe. Despite the impressive profit growth, GT remains undervalued. At its current price of $35/share, GT has a price to economic book value ( PEBV ) ratio of 1.0. This ratio means that the market expects Goodyear to never meaningfully grow NOPAT over the remaining life of the corporation. If Goodyear can grow NOPAT by 7% compounded annually for the next five years , which is well below the historic growth rate, the company is worth $49/share today – a 40% upside. Ruby Tuesday (NYSE: RT ) is one of our least favorite stocks held by Small Cap Blend ETFs and mutual funds and earns our Dangerous rating. Since 2010, Ruby Tuesday’s NOPAT has declined by 11% compounded annually while its NOPAT margins have fallen from 9% in 2010 to 3% on a trailing-twelve-month basis. Ruby Tuesday’s ROIC has followed this downward trend and is currently a bottom quintile 3%, down from 6% in 2011. To justify the current price of $5/share, Ruby Tuesday must grow NOPAT by 5% compounded annually for the next 12 years . This expectation is awfully optimistic for a business that has failed to grow profits at all over the past five years. Figures 3 and 4 show the rating landscape of all Small Cap Blend ETFs and mutual funds. Figure 3: Separating the Best ETFs From the Worst ETFs (click to enlarge) Sources: New Constructs, LLC and company filings Figure 4: Separating the Best Mutual Funds From the Worst Funds (click to enlarge) Sources: New Constructs, LLC and company filings D isclosure: David Trainer and Thaxston McKee receive no compensation to write about any specific stock, style, or theme.

The Vanguard Utilities ETF Is On My Holiday Shopping List

Summary The expense ratio and dividend yield are both great. The dividend yield could be further enhanced by changing the weighting structure to emphasize utility companies with stronger yields. The Federal Reserve meeting on December 16th may include a rate increase that could create some nice sale opportunities on utilities. As we prepare for the holidays, I’m getting my shopping list ready. One of the additions to my list is the Vanguard Utilities ETF (NYSEARCA: VPU ). I’ll take investors through my reasoning for putting this on the list as a potential acquisition for the middle of December or later. Expense Ratio The ETF is posting .12% for an expense ratio. What else is there to say? That is a solid expense ratio and makes this fund one of the cheapest options for exposure here. Largest Holdings The diversification within the ETF is pretty weak. For a very long term holder it might make sense to replicate the ETF by just buying the underlying securities and taking higher trading costs to eliminate the expense ratio. However, an expense ratio of only .12% would be difficult to beat without a fairly long time horizon or a large volume of commission free trades in the account. (click to enlarge) The major holdings here are the same ones I would expect to see. Duke Energy Corporation (NYSE: DUK ) is a fairly huge utility company and frequently at the top of the list for utility ETFs. All around this appears to be a reasonable portfolio for an investor that wants to get more utility companies into their portfolio without having to buy the companies individually. Top Dividend Yields The following chart demonstrates the top 10 utilities for dividend yield that have increased their dividend for at least the last 5 consecutive years: Symbol Company Name Yield Years CNP CenterPoint Energy 5.34% 10 SO Southern Company 4.81% 15 DUK Duke Energy Corp. 4.62% 11 PPL PPL Corp. 4.39% 14 STR Questar Corp. 4.07% 36 ALE Allete Inc. 4.02% 5 DGAS Delta Natural Gas 4.01% 11 ED Consolidated Edison 3.95% 41 AEP American Electric Power Co. 3.95% 6 NWN Northwest Natural Gas 3.91% 60 There is quite a bit of cross over between the list as DUK, PPL, AEP are on the top 10 holdings and the 10 utilities for high yields. Because VPU is using a market capitalization weighting scheme, their top holdings are dominated by the largest capitalization utility companies. Using a market capitalization weighting scheme is great for keeping expenses low and maintaining a passive style, but the strategy does nothing to boost the dividend yield of the portfolio. If the price of shares in a utility is increasing but their dividend is not, that utility will see their ranking within the portfolio increase. While I’d prefer to see a focus on utility companies that offer a strong combination of high yields and expected growth in their dividends over the next several years, I’m still consider VPU as a potential holding due to the very low expense ratio and desire to maintain diversification in my portfolio. Looking For Utilities With the Federal Reserve poised to raise rates in December, it seems like a great time to be fishing for good prices on utility companies with an eye to keep buying as long as rates are going up and prices are going down. Utilities tend to have a significant correlation with bonds and an increase in rates will generally send share prices lower. To put that a different way, an increase in bond yields will drive an increase in utility yields. If the price of the utility is falling simply because bond yields are moving higher and the utility yield needs to move in a similar fashion, that is a fine buying reason for me. VPU or Individual Utilities If my portfolio was large enough to plan on buying 10 individual utilities with material allocations to each, I’d be treating individual utilities as being a superior plan to simply buying into VPU. However, going into December I am also looking to beef up my position in equity REITs with the Schwab U.S. REIT ETF (NYSEARCA: SCHH ), and my international positions with the Schwab International Small-Cap Equity ETF (NYSEARCA: SCHC ) or the Schwab International Equity ETF (NYSEARCA: SCHF ). Since I won’t have a great deal of cash left over, I would be more likely to look at taking VPU rather than buying up the individual securities. Conclusion Utility companies can act as a form of income investment because of their strong dividend yields. Unlike buying into a bond portfolio investors can expect that the level of dividends will be increasing over time which makes up for the portfolio having more risk than a simple bond portfolio. I’ve added VPU to my list of ETFs to keep an eye going through December and into early 2016 as a possible candidate. I won’t make those moves in the next few days, but I’ll be looking to see if shares fall hard after the Federal Reserve meeting on December 16th.