Author Archives: Scalper1

Encryption Battle Pits Apple, Google Vs. Government

The terrorist attack in Paris this month that left at least 130 dead is igniting more debate on the already hot-button issue of encryption. A legislative fistfight in the U.K. over Internet surveillance could buoy similar measures in the U.S., where law enforcement has long clamored for access to Apple (AAPL), Microsoft (MSFT) and Alphabet (GOOG)-owned Google encrypted communications, an analyst told IBD. U.S. counterterrorism officials renewed

Playing The Ratings Game

By Alan Gula Care to take a guess at Lehman Brothers’ credit rating right before its bankruptcy? I’ll give you some help. Investment-grade ratings range from AAA down to BBB- (on the Standard & Poor’s ratings scale). Anything below investment grade (BB+ and below) is considered high yield , which is also known as speculative grade, sub-investment grade, or “junk.” The higher the credit rating, the higher the perceived credit worthiness. In other words, high-rated companies can probably pay you back. Thus, you’d assume Lehman Brothers had a solidly junky rating – perhaps CC – reflecting the high risk of default during the credit crisis… right? Actually, Lehman had an “A” rating right before it went bust! The major ratings agencies – Standard & Poor’s, Moody’s Investors Services, and Fitch Ratings – took a lot of flak for this egregious misjudgment. To be sure, credit ratings still provide valuable information. In fact, looking up the credit rating and reading the commentary from the ratings agencies is a great place to begin when evaluating a stock. You can access Standard & Poor’s ratings for free by registering on their site. Just keep in mind that the ratings agencies may have missed some material risks. Therefore, we should really take notice when a company has a high-yield rating. Yet, most equity investors are unaware of the credit ratings of their holdings. For example, the following table shows three real estate investment trusts (REITs) that are in the S&P 500. Equinix Inc. (NASDAQ: EQIX ), Crown Castle International Corp. (NYSE: CCI ), and SL Green Realty Corp. (NYSE: SLG ) specialize in data centers, wireless communications towers, and commercial properties, respectively. I guarantee that the vast majority of retail investors in these stocks have no idea that the S&P’s long-term issuer rating of these REITs is sub-investment grade. It’s easy to see why these REITs have relatively low ratings, too. Their net debt (debt minus cash) to EBITDA (earnings before interest, taxes, depreciation, and amortization) ratios are all at least 4.0 times, which is high. The average net debt/EBITDA in the S&P 500, excluding financials, is 1.36 times. At a time when many high-yield bonds are coming under significant pressure, investors need to be vigilant . I’m not saying that these companies will default on their debt. However, I do think these REITs should have much higher yields to compensate investors for the additional risk, which is being ignored. The cost of debt capital will likely rise for most high-yield issuers during the next few years. This will be a painful process for unsuspecting equity investors in highly leveraged companies. Most stock watchers fail to appreciate the inextricable linkage between the credit and equity markets. Keep in mind, very few companies have rock solid balance sheets like Johnson & Johnson (NYSE: JNJ ), which is AAA rated. Sadly, many people’s idea of “research” involves pulling up a stock chart and (improperly) drawing some trend lines. If that’s the extent of your analysis, then you shouldn’t be investing in individual stocks. Stick with exchange-traded funds (ETFs). If you insist on individual stocks, at least do some credit analysis on your portfolio. You’ll thank me when defaults spike, sending shockwaves through the credit – and equity – markets. Link to the original post on Wall Street Daily

Socially Responsible Investing: 3 Funds That Are Beating The Market

There’s a powerful trend emerging in the investing world. Investors are building portfolios based on their morals and values. Dubbed “socially responsible investing,” or SRI, these investors align their investments with their values by avoiding companies with poor environmental, social or governance practices. Like their counterparts, sustainable investors also want to earn a good financial return on their investment. They don’t want to sacrifice performance for social impact. And these days, they don’t have to. For the last several years, the returns on socially responsible investments have risen sharply – and many are beating the S&P 500 What’s driving the boom in Socially Responsible Investing? Socially responsible investing funds have been enjoying increasing popularity, largely due to the emergence of “impact investing” – a feel good concept that started in the U.K. The difference between the two is that socially responsible investing avoids investments that are inconsistent with the values of the investors while impact investing actively pursues a specific positive impact. For example, funds that don’t invest in companies that make alcohol, tobacco, gambling and weapons are considered socially responsible investments. A more targeted approach, impact investing addresses specific issues like sustainability, women’s rights, the environment and more. Just how popular is SRI? In 1995, there were only 55 mutual funds that engaged in SRI, with $12 billion in assets. Today there are nearly 500, with assets exceeding $500 billion. What’s In It for Investors? Socially responsible investing looks a lot different than it did just a decade ago. As SRI has evolved, the advantages for investors are numerous: SRI investors now have more investing options, with the number of funds growing rapidly. There is also increased diversification of the investments within the funds themselves, which results in less risk to the investor. Investors can now invest in socially responsible Exchange Traded Funds (ETF). There are funds of various market capitalizations and investors can choose from domestic, foreign and global funds. Investors can select a fund whose strategy and social responsibility agenda are similar to that of their own social and financial objectives. Socially Responsible Investing Is Beating the Market Socially responsible investing no longer means you have to sacrifice returns on your investment. The once meager returns of socially responsible investments have improved considerably, even beating the S&P 500. Consider the following: The Index which tracks the equity performance of socially responsible funds, Focus iShares MSCI USA ESG Select Social Index Fund (NYSEARCA: KLD ), has outperformed the S&P since 1990, with an average annual total return of 10.46% compared with the S&P 500’s 9.93%. Benchmark performance of the MSCI KLD 400 Social Index, which includes firms meeting high Environmental, Social and Governance (ESG) standards, has outperformed the S&P 500 on an annualized basis by 45 basis points since its inception (10.14%, compared to 9.69% for the S&P 500; July 1990-Dec. 2014). Not all SRI funds beat the index, but it is remarkable how closely most of them track the market as a whole. Here are some ways to add socially responsible investing to your portfolio. At the time of this writing, I do not own a position in any of the funds mentioned in this article. Socially Responsible Investing: iShares MSCI KLD 400 Social ETF For investors looking for an easy way to add socially responsible investing to their portfolio, the iShares MSCI KLD 400 Social (NYSEARCA: DSI ) is worth a look. DSI posted a 35.5% return in 2013 – beating the S&P 500. DSI posted a 12.2% return in 2014, underperforming the S&P 500 by less than 2 points. The ETF’s underlying index tracks 99% of all the stocks in the United States and includes firms with a variety of market caps. The socially responsible ETF currently tracks 400 different firms and charges 0.50% in expenses. Technology and health care firms make up the bulk of DSI’s holdings. Socially Responsible Investing: iShares MSCI USA ESG Select ETF Investors wanting to eliminate the volatility of owning smaller firms from their portfolios should consider the iShares MSCI USA ESG Select ETF. The $350 million ETF includes U.S. large-cap and some mid-cap stocks which have been screened for positive SRI characteristics. It currently includes almost a hundred different stocks – with top holdings in 3M (NYSE: MMM ), Microsoft (NASDAQ: MSFT ) and renewable energy utility NextEra Energy (NYSE: NEE ). Expenses for KLD are also 0.5%. The socially responsible investing fund has consistently posted solid returns over the last several years. In 2013, KLD posted a 31% return, which was slightly less than the benchmark index, although KLD had beaten the index for the past 5 years. In 2014, KLD posted a total return of 13.5%. Socially Responsible Investing: Huntington EcoLogical Strategy ETF The often overlooked Huntington EcoLogical Strategy ETF (NYSEARCA: HECO ) focuses on various firms making efforts on environmental issues and sustainability. It’s a well-diversified, moderate risk, capital appreciation fund. HECO focuses on “ecologically focused companies,” firms that have positioned their businesses to respond to increased environmental legislation, cultural shifts toward environmentally conscious consumption and capital investments in environmentally-oriented projects. HECO holds more than 50 different companies including Starbucks (NASDAQ: SBUX ) and Texas Instruments (NASDAQ: TXN ). The returns have been strong. HECO returned nearly 30% in 2013 and narrowly outperformed the benchmark in 2014. Expenses for the ETF are slightly high at 0.95%. Final Thoughts You don’t have to give up performance to invest with your conscience and make a difference. Serious investors interested in socially responsible investing no longer have to sacrifice investment returns for their morals. And the easiest way to add SRI to your portfolio is an Exchange Traded Fund such as the funds mentioned above. The information provided is for informational purposes, not a recommendation. As always, investors should consider their own financial objectives and time horizon when making investment decisions. Diversification and asset allocations are important considerations. Sources: 5 ETFs for the Socially Responsible Investor by Dan Kaplinger Socially Responsible Investing With ETFs by Greg Lessard Socially responsible investing has beaten the S&P 500 for decades by Jennifer Openshaw.