Author Archives: Scalper1

Cancer Immunotherapy ETF Takes Curious Approach To Asset Allocation

Summary The Loncar Cancer Immunotherapy ETF was launched recently with the goal of targeting companies actively engaged in the treatment of cancer through immunotherapy. The fund’s investment in both healthcare mega-caps and biotech small-caps provide very different exposure to immunotherapy treatments. This fund looks more like a broader healthcare ETF than a pure play on cancer immunotherapy. The ETF world is becoming increasingly niche oriented lately and another niche ETF – the Loncar Cancer Immunotherapy ETF (NASDAQ: CNCR ) – recently joined the fray. Biotech has been a popular place to create a new product lately as ETFs targeting companies involved in genomics, drugs in late stage clinical trials and medical breakthroughs have all hit the market in the past 12 months. According to the fund’s fact sheet, the Cancer Immunotherapy ETF “is an equal-weighted index containing both large pharmaceutical and growth-oriented biotechnology companies that are leading in this approach.” It charges an expense ratio of 0.79% and equal weights the portfolio among 30 holdings. How it chooses those 30 holdings is what makes it curious. The fund commits around one third of its assets to some of the world’s biggest pharmaceutical companies that are developing immunotherapy treatment technologies. The remaining two thirds of assets are invested in biotechs that develop their own immunotherapy drugs and treatments. A look at the top holdings of the ETF shows a literal who’s who of the biggest healthcare companies in the world – Celgene (NASDAQ: CELG ), Pfizer (NYSE: PFE ), Amgen (NASDAQ: AMGN ) and Merck (NYSE: MRK ). As a result of the fund’s investment objective and stock selections, the ETF is one third invested in large- and mega-cap stocks and two thirds invested in small- and micro-cap stocks. The portfolio allocation and investing style suggests to me that this fund is more healthcare ETF and less cancer immunotherapy ETF. The mega-cap pharma companies in the portfolio may have cancer immunotherapy as part of their broad corporate strategy but by no means are these companies a pure play on this technology. Even the biotechs that are selected for inclusion in the portfolio have a somewhat low bar for what qualifies them for having exposure to cancer immunotherapy. As would be expected, these companies can have drugs in the pipeline whether they’re in later stage clinical trial or just starting out in the trial phase. But they also qualify if they have something as simple as a partnership with another company to work on developing immunotherapy treatment in the future. The fund’s portfolio makes it difficult to properly categorize this ETF. Its biotech allocation makes it a risky venture since many of these small companies may live or die on the success of a single drug. The significant exposure to the biggest pharmaceutical companies helps limit overall portfolio risk but provides little direct exposure to cancer immunotherapy since they have such broad, developed and diversified drug portfolios. Conclusion Investors looking for a pure play on cancer immunotherapy treatment technologies will likely be disappointed. The mega-cap presence in the portfolio provides a degree of safety for the fund but it also dilutes the exposure to immunotherapy. While many of the biotech holdings employ cancer treatment as a primary goal, there are a handful that have a more diversified drug pipeline further affecting the direct immunotherapy exposure. Individuals looking for more of a broad healthcare and biotech investment may find this choice in the ETF space intriguing but the level of direct exposure to cancer immunotherapy treatments makes this fund less than a pure play.

Asia’s Response To The Federal Reserve: Finding Value In Frontier And Emerging Markets

Summary The increasingly strong USD and China’s currency devaluation in August have resulted in substantial FX losses for a large number of countries in Asia. However, the extremely high level of growth and future potential in Asia can offset this risk in certain cases. As the Fed may increase interest rates soon, investment in Asia should be a strategic approach of investing in countries with high growth and a strong performing currency. This article presents Vietnam, Pakistan, India, and the Philippines as superior options for investors. As my research primarily focuses on international companies, examining the inherent FX risk is one of the most crucial aspects for considering investment. FX risks are justifiable if there is a strong growth trend in the given country, and most importantly if valuation is low. China’s devaluation in August created a global FX nightmare, and put pressure on the FED to consider the global implications of hiking interest rates. Each country’s response to this devaluation provides a clear example of the varying strengths of each currency, and this factor, coupled with the country’s macroeconomic potential, provides enough for investors to discern how to find good value in global equity. A flurry of conservative value based opportunities has emerged in global equity in Asia, for investors who are willing to take a long term horizon. Despite the Fed receiving global pressure not to hike interest rates, it appears that the Fed will not be deterred from hiking interest rates . Therefore, FX risk is one of the most relevant factors to consider at the moment, as markets in Asia may become gloomy soon. Despite this threat, good value can certainly be found in Asia at the moment, and a sell off would create a flurry of value based investment opportunities. Finding Growth While Avoiding FX Risks The performance of countries’ currencies this year, especially in response to China’s devaluation this August, provides an excellent means for investors to assess where good value can be found in Asia. Countries that have already displayed slowed economic growth, and have had substantial FX losses, should certainly be avoided. Malaysia presents the largest area of concern, due to the poor performance of the country’s currency and the increasing political risk . The iShares MSCI Malaysia ETF (NYSEARCA: EWM ) has had a YTD decline of 22.67% Slowed growth in Thailand, and the poor performance of its currency and stock market, also make Thailand a destination that can be considered less superior. The iShares MSCI Thailand ETF (NYSEARCA: THD ) has had a YTD decline of 14.14% . Based on an investigation of growth combined with exchange rate movements, I am most bullish about the upside potential of Vietnam, India, Pakistan, and the Philippines due to the combination of high economic growth and the acceptable performance of the country’s currencies. The high level of growth in these countries can be considered strong enough to offset the FX risk. In addition to high GDP growth, the trends of increased consumption in all of these countries can also be considered positive drivers: Vietnam Vietnam’s appeal for investment lies in a wide variety of factors, including its stock market’s high discount compared to other countries in Asia, high consumption and retail sales growth, high GDP growth, its high youth population, and high dividend yields for listed equity. Its P/E is approximately 12, yet a flurry of value based opportunities with single digit P/Es can be found in the country’s stock market. Vietnam’s economic growth is already substantial, yet its inclusion in the TPP can serve as an economic catalyst for the company’s GDP growth to reach 11% by 2025 . Vietnam’s low wages have caused it to have a new competitive advantage over China, resulting in a shift of manufacturing to Vietnam and a substantial increase in the country’s exports . Based on the existing trends of growth, coupled with the inevitable future growth of Vietnam’s economy, the country can certainly be considered a superior destination for value investing, as its soon to be status as an emerging market and the removal of the FOL may both serve as catalysts for higher valuation in the stock market in the future. Investors can take advantage of Vietnam’s high discount and growth by investing in VinaCapital Vietnam Opportunity Fund ( OTCPK:VCVOF ) or Vietnam Holding Ltd. ( OTC:VNMHF ). Pakistan Pakistan’s stock market index gain of 13.86% necessitates a closer look at the value associated with investing in this country, as its stock market was one of the best performing stock markets in Asia. Most impressive is the fact that low valuation can still be found in a wide number of companies on the Karachi Stock Exchange, and the Global X MSCI Pakistan ETF’s (NYSEARCA: PAK ) P/E is currently only 8 . Terrorism in Pakistan has not been able to deter the rapid and consistent ascent of the country’s stock market , and it is further edifying to note that there has been a 70% decrease in terrorism over the past 9 months. High levels of growth can be found in strategic industries, such as the construction industry, and particularly in the cement industry, which experienced growth of nearly 57% in the past year . FDI into Pakistan has increased substantially in the past years, and China has recently signed agreements for $28 billion of investment in Pakistan, which will be part of $45 billion economic corridor. Although Pakistan is a very contrarian suggestion, its relatively superior performance in Asia certainly merits it as a relevant suggestion. The Philippines While the Philippines high growth and future potential cannot be denied, the relatively higher valuation of its stock market makes it a less superior choice, as compared to Vietnam and Pakistan. The P/E for the iShares MSCI Philippines ETF (NYSEARCA: EPHE ) is currently 18 . The fund primarily invests in the financial services, consumer products, and real estate industry, which is a strategic approach considering the high levels of growth in consumption and the real estate industry. The real estate industry is perhaps one of the most strategic areas for investment in the Philippines, as its growth is heavily being driven by business process outsourcing, increased retail centers, tourism, and the emergence of townships outside of Manila. The ETF’s performance has not been terrible, with a YTD loss of only 7.3% , and a large portion of the fund’s holdings have low liquidity or high valuation. Therefore, the best approach to investing in the Philippines is through this ETF, while I would respectfully suggest the relative superiority of Vietnam and Pakistan. India India is another excellent option for investors to consider, as its economic growth surpassed the growth of Vietnam, The Philippines, and Pakistan. The country’s currency has been gradually improving, and a 4.74% loss of its currency is not strong enough to offset the appeal of investing in India. The high GDP growth, consumer spending growth, and retail sales growth is being heavily driven by the country’s demographics, as it contains the world’s largest youth population . In previous articles, I have suggested the Market Vectors Small Cap ETF (NYSEARCA: SCIF ) and EGShares India Small Cap ETF (NYSEARCA: SCIN ) as superior investment vehicles, due to the ETF’s strong earnings growth and relatively lower valuation. The average P/E for both of these ETF’s is 11.5, which can certainly be considered a strategic approach to India’s economic growth. One strategic industry in India to consider is India’s biotechnology industry, which is projected to grow by 30% annually until 2025. Investors can access the growth of India’s biotechnology by investing in Dr. Reddy’s Laboratories (NYSE: RDY ). As one of the highest growing countries in Asia, with extremely favorable demographics, a value based approach to India certainly has its merits. India is a country that will be able to stand strong amidst market volatility in Asia. Conclusion The Fed’s decision to potentially hike interest rates in December does present a relevant short term threat to markets in Asia. While a sell-off would certainly be negative for markets in Asia, it could also be seen as force that would create a flurry of value based investment opportunities in Asia. There will certainly be dark areas in Asia in the near future, yet the markets of Vietnam, Pakistan, the Philippines, and India can certainly be considered bright spots in Asia. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Glamour Stocks And Anchoring On The Changing P/E

Glamour stocks – Over the long-term, value investing as a style outperforms growth (if you’re looking for the evidence to support this statement, you can find it here , here and here ). We’ve known this to be the case for the past five decades. Why then does growth remain a popular strategy? This question formed the basis of a recent study conducted by Anderson, Keith P. and Zastawniak, Tomasz. The results of the study were published at the end of October in a paper entitled, Glamour, Value and Anchoring on the Changing P/E . Citation: Anderson, Keith P. and Zastawniak, Tomasz, Glamour, Value and Anchoring on the Changing P/E (October 23, 2015). Available at SSRN . Glamour, Value and Anchoring on the Changing P/E It has been known since 1960 that a portfolio of low P/E ‘value’ shares will produce better returns than a portfolio of high P/E ‘glamour/growth’ shares (Nicholson, S.F. 1960. Price-earnings ratios. Financial Analysts Journal, 16(4): 43-45.). Many studies have attempted to establish why this is the case but most of these studies have had one key flaw. Indeed, the studies in question have all revolved around the belief that value shares are riskier than glamour shares, which isn’t true. Shleifer and Vishny (Lakonishok, J., Shleifer, A. & Vishny, R. 1994. Contrarian investment, extrapolation, and risk. The Journal of Finance, 49(5): 1541-78.) concluded that value shares are not fundamentally riskier than glamour shares and they went on to give one possible behavioral explanation as to why investors may prefer glamour stocks: they want to appear more prudent. In other words, because glamour shares have been going up in the period before buying, their acquisition is easier to justify. Anderson, Keith P. and Zastawniak, Tomasz argue that a different behavioral explanation is behind the value/glamour split – a well-known feature of investors’ own bounded rationality: anchoring . “Investors may anchor on the P/E ratio currently attached to a stock when they invest in it. Having bought the stock, they expect the P/E to change slowly, if at all. As time goes on, the P/E decile changes, and different prospects for returns attach to each decile. If there is a differential drift in the P/E and hence returns between value and glamour stocks that is not expected by investors, this could account for why glamour investors end up disappointed.” – Glamour, Value and Anchoring on the Changing P/E . (click to enlarge) (click to enlarge) Glamour stocks vs. value Source: Brandes Institute titled, ” T he Role Of Expectations In Value And Glamour Stock Returns. ” Glamour stocks: Three questions With this hypothesis in place, Anderson, Keith P. and Zastawniak, Tomasz focused their research on answering three fundamental questions: Is there justification for the P/Es of value and glamour shares to change at different rates and the fact that value shares outperform glamour shares? What are the observed changes in P/Es and the returns that attach to them, and do investors’ decisions appear to be affected by anchoring ? Can glamour shares’ returns match or exceed those of value shares over any time period? With respect to question one, the study finds that by applying option pricing theory and Merton’s model to prices, and thus P/Es, of value and glamour shares can indeed be expected to move differently. The answer to question two is that glamour shares give three times the returns of value shares if they stay in the same decile, but they have a much greater tendency to move decile, which seems to be the reason behind value’s historical outperformance. Moreover, glamour investors appear to be underestimating the tendency of their shares to change P/E decile by at least 18%. This helps answer question three. Based on the study’s research, glamour investors will be subject to unimpressive returns whatever their time horizon. Glamour stocks: Key findings The major findings of Anderson, Keith P. and Zastawniak, Tomasz’s paper are rather interesting. The paper concludes that the main reason many investors continue to buy glamour shares is because they perceive the high P/E ratios of glamour stocks to be more permanent than they really are. A result of investors’ own behavioural bias of anchoring on the high initial values. However, glamour stocks whose P/E remained elevated throughout the study did outperform value stocks over the same period. Nevertheless, the tendency for the P/E of glamour stocks to change suddenly, and without notice, explains why glamour investors have, and will continue to see poorer returns than those following a value strategy. Disclosure: None