Author Archives: Scalper1

Learn Why Traders Love Utilities ETFs

By Jonathan Jones and Tom Lydon The Utilities Select Sector SPDR (NYSEArca: XLU ) , the largest utilities exchange traded fund, is up nearly 14% year-to-date, by far the best performance among the sector SPDR ETFs, and more upside could be coming for utilities stocks and ETFs, reports ETF Trends . Utilities sector fundamentals remain strong. However, utilities have been underforming due to the sector’s inverse relationship to rising interest rates – when rates rise or investors fear higher rates, utilities typically underpeform, and vice versa. Most investors view utilities as a reliable, income-generating asset that exhibit some bond-like characteristics. As interest rates declined, the sector appealed to many income investors for its relatively higher yields. ETFs like XLU got a boost this week when the Federal Reserve opted to not raise interest rates. Further buoying interest rate-sensitive sectors such as utilities is the notion that the Fed will only be able to raise rates twice this year. “Big utility stocks trade at an average of 17 to 18 times projected 2016 earnings, which isn’t cheap considering annual industry earnings growth is generally in the low- to mid-single-digit range. The sector now trades at a premium to the S&P 500, which fetches about 16 times estimated 2016 operating earnings. The utilities ETF (TICKER: ) yields 3.8%, compared with 2.2% for the S&P,” according to Barron’s . Some investors see opportunity with rate-sensitive assets such as XLU and real estate ETFs, noting that 10-year yields are overbought and sentiment against the likes of XLU is at bearish extremes, which could create opportunity from the long side with the utilities sector. Looking at XLU’s chart “you can see that the horizontal trendline near $45 has acted as a very influential level of support and resistance over the past 1.5 years. The breakout (shown by the blue circle) and the subsequent retest of the trendline and its 50-day moving average are technical signals that suggest that the bulls are in control of the momentum and that prices could be headed higher. Most active traders will likely look to enter a position as close to the trendline as possible to maximize the risk/reward of the trade. From a risk management perspective, technical traders will likely set their stop-loss orders below the horizontal trendline or the 200-day moving average ($43.23) depending on risk tolerance,” according to Investopedia . Defensive sectors, such as consumer staples, telecom and utilities, often trade at multiples that are richer than the broader market. That is the price to pay to play defense. Utilities Select Sector SPDR Click to enlarge Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Red Hat Earnings Report Ahead: Amazon A Threat In Linux Landscape?

There’s a notion out there, says Deutsche Bank analyst Karl Keirstead, that Amazon ’s ( AMZN ) flavor of the Linux open-source operating system is about as good as other Linux distributions — and since it’s free and Amazon Web Services (AWS) offers good support, converting is cheap. So does that stand to hurt Red Hat ( RHT ), which reports its fiscal fourth-quarter 2016 earnings after the stock market close Tuesday? “Bottom line, we conclude that the number of migrations from RHEL (Red Hat Enterprise Linux) to Amazon Linux remains quite modest and mostly confined to small enterprise customers,” Keirstead wrote in a research note March 13. “Larger RHEL-centric customers have only a small mix of workloads on AWS, they value OS consistency across their hybrid infrastructures, they prefer support from RHT and/or view the cost savings of a switch as being too modest to be worth the hassle. “These advantages appear to more than offset a view that AMZN Linux is at/near functional parity with other Linux distributions.” Keirstead reiterated Deutsche’s buy rating for Red Hat with a 95 price target, which might take Red Hat a couple of months to achieve if it stays on the same upward trajectory that it’s maintained since bottoming out Feb. 8 at a two-year low of 59.59. On Friday, Red Hat stock closed up 1.9% to 74.09, up 3.2% for the week, 24% above that Feb. 8 nadir, and just 12% off a 16-year high set Dec. 30. Trading above its 50-day moving average, Red Hat stock is still below its 200-day line near 75. But it looks like Red Hat is rebounding firmly from the Software Sag of ’16 that battered many of Red Hat’s rivals and tech players in January through early February. Red Hat stock gets an IBD Composite Rating of 84 out of a possible 99, factoring in earnings, sales, stock performance, institutional ownership and other metrics. Enterprise software developer Salesforce.com ( CRM ) carries an 81, Microsoft ( MSFT ) ranks 76, software giant Oracle ( ORCL ) earns a 61 and SAP ( SAP ) a 70. For its Q4 ended Feb. 29, analysts polled by Thomson Reuters expect Red Hat earnings per share up 9% from a year earlier to 47 cents minus items, matching the company’s guidance. Analysts expect revenue up 16% to $537 million, which also would match the midpoint of the company’s guidance of between $535 million and $539 million, and rival the year-ago sales growth rate of 16%. At those levels, Q4 would be Red Hat’s first quarter decelerated to single-digit growth since EPS flattened at 42 cents in fiscal 2015’s Q3. It would be the 16th consecutive quarter of mid-to-high-teens sales growth. In a research note issued Thursday, Robert W. Baird analyst Steven Ashley warned that Red Hat’s long-term revenue growth in Q4 could have fallen below expectations as seen in historical, sequential long-term growth weakness every three years, going back to Q4 2007. This is due to what he theorizes as three pools of larger deals that renew every three years in Q4, with the most recent cohort in Q4 being smaller than the others. “We believe this nuance (if correct) is truly just ‘noise’ and short-term billings should remain strong,” Ashley said. He models Q4’s total billings growth (long-term and short-term) at a 10% year-to-year improvement vs. the 12% consensus. “Where could we be wrong?” Ashley asked. “Signing a bunch of ‘new’ large three-year deals could augment the smaller renewal pool.” He tipped his hat to Baird’s outperform rating on Red Hat with an 80 price target.      

ETF Update: March Came In Like A Lion, Will It End Like A Lamb?

Welcome back to the SA ETF Update. My goal is to keep Seeking Alpha readers up to date on the ETF universe and to gain some visibility, both for the ETF community and for me as its editor (so users know who to approach with issues, article ideas, to become a contributor, etc.). Every weekend, or every other weekend (depending on the reader response and submission volumes), we will highlight fund launches and closures for the week, as well as any news items that could impact ETF investors. This was a relatively slow couple of week for launches, or maybe it was just the first time in a while that closures outnumbered launches. I’m starting to worry that my prediction from October of 2000 trading ETFs by June was maybe a bit of a reach. My March Madness bracket is already shot as well, so it wouldn’t be the first time I made an outlandish call. There is still time, but if we are going to have more than a 100 launches in the next two months, I might need to start stockpiling coffee. Fund launches for the week of March 7th, 2016 SSgA launches a gender diversity fund (3/8): On International Women’s Day, we saw the launch of the SPDR SSgA Gender Diversity Index ETF (NYSEARCA: SHE ), a well-timed launch if ever there was. This fund the largest 1,000 U.S. listed companies that have significant gender diversity in the ranks of their senior leadership. “This fund empowers investors to encourage more gender diverse leadership and support better long-term social and economic outcomes in support of gender diversity,” said Kristi Mitchem, executive vice president and head of the Americas Institutional Client Group for SSGA in a press release . PureFunds introduces 2 niche technology funds (3/9): The PureFunds Drone Economy Strategy ETF (NYSEARCA: IFLY ) tracks the Reality Shares Drone Index, which includes companies that manufacture, supply and/or utilize drone technology. The PureFunds Video Game Tech ETF (NYSEARCA: GAMR ) will focus on tracking companies that provide the software and hardware for the video gaming industry, including firms that are not directly related to the industry, but do play a role in its success. This is not PureFunds’ first step into a sub-sector technology fund, as the PureFunds ISE Cyber Security ETF (NYSEARCA: HACK ) has gained 733.96M in assets under management since its launch in November 2014. Invesco PowerShares rolls out a new fund of funds ETF (3/10): The PowerShares DWA Tactical Multi-Asset Income Portfolio (NASDAQ: DWIN ) is an income-focused fund that will track other ETFs (mainly PowerShares funds) utilizing an index from Dorsey Wright. According to the DWIN homepage, “the Index is designed to select investments from a universe of income strategies with the criteria for inclusion based on a combination of relative strength and current yield.” The current holdings are the PowerShares High Yield Equity Dividend Achievers Portfolio (NYSEARCA: PEY ), the PowerShares Preferred Portfolio (NYSEARCA: PGX ), the PowerShares Build America Bond Portfolio (NYSEARCA: BAB ), the PowerShares Global Short Term High Yield Bond Portfolio and the PowerShares Emerging Markets Sovereign Debt Portfolio (NYSEARCA: PCY ). Fund launches for the week of March 14th, 2016 First Trust launches a follow-up fund for FV (3/18): The First Trust Dorsey Wright Focus 5 ETF (NASDAQ: FV ) has gained over $4.5B in assets under management since launching in March 2014, so it comes as no surprise that First Trust decided to launch a similar fund with a twist. Like the first fund, the First Trust Dorsey Wright Dynamic Focus 5 ETF (NASDAQ: FVC ) is designed to provide targeted exposure to the five First Trust sector and industry-based ETFs that DWA believes offer the greatest potential to outperform the other ETFs in the selection universe. However, the fund also has the option for risk management via cash equivalents represented by 1- to 3-month U.S. At its launch, roughly 50% of the fund was made of equity ETF holdings. Fund closures for the weeks of March 7th and 14th, 2016 Recon Capital FTSE 100 ETF (NASDAQ: UK ) Precidian MAXIS Nikkei 225 Index ETF (NYSEARCA: NKY ) ProShares Managed Futures Strategy ETF (NYSEARCA: FUTS ) PowerShares KBW Capital Markets Portfolio ETF (NYSEARCA: KBWC ) PowerShares KBW Insurance Portfolio ETF (NYSEARCA: KBWI ) PowerShares China A – Share Portfolio ETF (NYSEARCA: CHNA ) PowerShares Fundamental Emerging Markets Local Debt Portfolio ETF (NYSEARCA: PFEM ) Have any other questions on ETFs or ETNs? Please comment below and I will try to clear things up. As an author and editor, I have found that constructive feedback is the best way to grow. What you would like to see discussed in the future? How can I improve this series to meet reader needs? Please share your thoughts on this first edition of the ETF Update series in the comments section below. Have a view on something that’s coming up or a new fund? Submit an article. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.