Tag Archives: alternative

Recent Volatility Providing Potential Buying Opportunity In The Biotechnology Space

Summary IBB was pulled back roughly 20% from its 52-week high this week with shares plunging from $400 to $320 per share during the recent market weakness. Persistently low oil prices, fear of an imminent rate hike and weakness in China have indiscriminately pulled down all indices over the past week. These external events are largely extraneous to the biotechnology sector and thus may present a buying opportunity throughout pullbacks if adding to a position or initiating a new position. Medical and prescription drug expenditures are projected to grow at an average rate of 5.8% and 6.3% annually through 2024, respectively. Taken together, this may present a potential buying opportunity especially given the recent market volatility. Introduction: The confluence of persistently lower oil prices, fear of an imminent rate hike and more notably weakness in China have indiscriminately plummeted all indices over the past week. These external events are largely extraneous to the biotechnology cohort yet this group has been taken along for the downhill ride with the broader indices. The biotechnology sector has been on an unprecedented performance streak in both annual and cumulative performance over the past 10 years and accentuated during the latest 5 year timeframe however lately this streak has been tested during the recent market volatility. The biotechnology sector can be highly volatile, however I posit that this cohort has not only established itself as a secular growth sector but these latest events are unrelated to the biotech sector and thus this recent pullback may provide a potential opportunity to add to a current position or initiate a position over time as this correction unfolds. Using The iShares Nasdaq Biotechnology ETF (NASDAQ: IBB ) as a proxy, based on annual and cumulative performance throughout both bear and bull markets, IBB may provide the opportunity investors have been waiting for in the face of the current market downturn. IBB is touched down to register a 20% decline from its 52-week high, shares have plunged from $400 to $320 at one point per share during the recent market weakness, presenting a potential buying opportunity. Growth expenditures as a rational for buying on major pullbacks: Per the Centers for Medical and Medicaid Services, medical expenditures are projected (from 2014 through 2024) to grow at an average rate of 5.8% per year. This translates into 1.1% faster than GDP throughout this time period thus the healthcare expenditures as a percentage of GDP are expected to rise from 17.4% in 2013 to 19.6% by 2024. Despite several years of growth below 5%, health spending is projected to have grown 5.5% in 2014. Faster health spending due mainly to ACA health insurance coverage and rapid growth in prescription drug spending. The domestically insured is projected to have increased from 86% in 2013 to 89% in 2014 as 8.4 million individuals are projected to have gained coverage. Post 2014, national health spending is projected to grow at a 5.3% clip in 2015 and peak at 6.3% in 2020. Given these projections, this scenario bodes well for the biotechnology sector as more individuals have access to health coverage and prescription drugs. In terms of prescription drug expenditures, spending is projected to have grown 12.6 percent in 2014 to $305.1 billion. Driving growth were new specialty drugs and increased prescription drug use among people who were newly insured. Prescription drug spending growth is projected to average 6.3% annual growth from 2015 through 2024. Taken together, as the biotechnology sector continues its innovation and continuous supply of medications to treat and cure many different diseases coupled with the growth in overall medical spending may present an investment opportunity especially given the recent market volatility. Secular growth case for buying on major pullbacks: In addition to case outlined above (e.g. highlighting the disconnect between the events bringing down the broader indices and the biotechnology sector on a whole) the biotech sector has displayed its resilience in both bear and bull markets with secular growth. The returns for IBB have been very impressive in both annual and cumulative performance, unparalleled by any major index. Over the past 10 and 5 year time frames, IBB has posted cumulative returns of over 360% and 325%, respectively. These results are unrivaled by any major index, outperforming on a 10 year cumulative basis of 295%, 240% and 300% for the S&P 500, Nasdaq, and Dow Jones respectively (Figure 1). These returns are accentuated during the previous 5 years. IBB notched cumulative returns of 325%, outperforming the S&P 500, Nasdaq and Dow Jones by 245%, 215% and 265%, respectively (Figure 2). IBB has cumulatively outperformed all indices by roughly 3-fold and 2.5-fold over the 10 year and 5 year time frames, respectively (Figures 1 and 2). (click to enlarge) Figure 1 – Google Finance comparison of IBB returns relative to the S&P 500, Nasdaq, Dow Jones over the previous 10 years (click to enlarge) Figure 2 – Google Finance comparison of IBB returns relative to the S&P 500, Nasdaq, Dow Jones over the previous 5 years IBB has displayed impressive resilience in the face of the market crash in 2008, the bear markets of 2011 and the very volatile market thus far in 2015. During the market crash of 2008, IBB posted an annual return of -12.2% while the S&P 500, Nasdaq and Dow Jones posted returns of -37.0%, -40.0% and -31.9%, respectively (Figure 3). During the bear market of 2011, IBB posted an annual return of 11.7% while the S&P 500, Nasdaq and Dow Jones posted returns of 2.1%, -0.8% and 8.4%, respectively (Figure 3). Thus far during the highly volatile market of 2015, IBB posted an annual return of 13% while the S&P 500, Nasdaq and Dow Jones posted returns of -5.8%, -0.8% and -8.6%, respectively (Figure 4). These data suggest that IBB outperforms during bear markets and thus has established itself as a secular growth sector and in the face of unrelated economic events may provide a buying opportunity. (click to enlarge) Figure 3 – Morningstar comparison of IBB annual returns relative to the Nasdaq over the previous 10 years (click to enlarge) Figure 4 – Google Finance comparison of IBB annual performance thus far in 2015 relative to the S&P 500, Nasdaq and Dow Jones Conclusion: As the confluence of these economic events seemingly disconnected in bringing down the biotechnology sector coupled with expenditure growth in overall health and prescription drug spending, it may be a good time to consider capitalizing on this correction via adding to existing positions or initiating a new position in this cohort given this opportunity. Being opportunistic and capitalizing on the recent volatility on pullbacks to slowly add to or initiate a position may be the opportunity investors have been waiting on to pounce on IBB. Data suggests, provided a long-term position that volatility within the biotech sector is negated by its long-term performance that is unparalleled by any major index. This sector provides high returns unrivaled by any major index with moderate risk (based on its resilience during the bear markets of 2008 and 2011 and thus far in 2015) and volatility. IBB may be providing investors with a great opportunity to add or initiate a position for any long portfolio desiring exposure to the biotechnology sector with a long-term time horizon given the recent market conditions. References: CMS.gov Statistics Trends and Reports Disclosure: The author currently holds shares of IBB and is long IBB. The author has no business relationship with any companies mentioned in this article. I am not a professional financial advisor or tax professional. I wrote this article myself and it reflects my own opinions. This article is not intended to be a recommendation to buy or sell any stock or ETF mentioned. I am an individual investor who analyzes investment strategies and disseminates my analyses. I encourage all investors to conduct their own research and due diligence prior to investing. Please feel free to comment and provide feedback, I value all responses. Disclosure: I am/we are long IBB. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

A Closer Look At Suburban Propane Partners’ Results And Cash Flows As Of 6/30/15

SPH benefited from lower oil prices; it did not pass on to its customers all the benefits of lower propane costs thus increasing gross margin to 57% in 3QFY15 . Distributions coverage at 1.09x in the TTM ended 6/30/15; sustainable DCF shows a marked improvement over the prior TTM period. SPH has demonstrated less volatility and has performed better than the Alerian MLP Index over the past 12 months. SPH may not provide substantial distribution growth and may underperform the index if we see sustained increases in MLP price levels. But the ~10% yield appears secure, the valuation multiple is lower, and it is less leveraged. This article focuses on some of the key facts and trends revealed by results recently reported by Suburban Propane Partners LP (NYSE: SPH ). The quarters are noted with an FY designation because SPH’s fiscal year ends in September. Its third quarter of fiscal 2015 ended on 6/30/15 and is designated as 3QFY15. The article evaluates the sustainability of the partnership’s Distributable Cash Flow (“DCF”) and assesses whether SPH is financing its distributions via issuance of new units or debt. SPH is organized into 3 principal business segments. The propane segment, which generates the bulk of SPH’s revenues and cash flows, is primarily engaged in the retail distribution of propane to residential, commercial, industrial and agricultural customers and, to a lesser extent, wholesale distribution to large industrial end users. The fuel oil and refined fuels segment is primarily engaged in the retail distribution of fuel oil, diesel, kerosene and gasoline to residential and commercial customers for use primarily as a source of heat in homes and buildings. The natural gas and electricity segment is engaged in the marketing of natural gas and electricity to residential and commercial customers in the deregulated energy markets of New York and Pennsylvania. SPH is also engaged in other activities, primarily the sale, installation and servicing of a wide variety of home comfort equipment, particularly in the areas of heating and ventilation. SPH’s business is highly seasonal. It typically sells ~ 2/3 of its retail propane volume and ~ 3/4 of its retail fuel oil volume during the peak heating season of October through March. Consequently, the bulk of sales and operating profits are concentrated in the quarters ending December and March (the first and second quarters of the fiscal year). In the quarters ended June and September SPH typically reports losses. Cash flows and DCF coverage ratios are typically highest during the quarters ending March and June; this is when customers pay for product purchased during the winter heating season. SPH’s profitability is largely dependent on volumes generated by its retail propane operations and on the gross margin it achieves on propane sales – the difference between retail sales price and product cost. Table 1 shows volumes and gross margins for the 8 most recent quarters: (click to enlarge) Table 1: Figures in $ Millions, except gallons and percentages. Source: company 10-Q, 10-K, 8-K filings and author estimates. Volumes and earnings for 3QFY15 were adversely affected by unseasonably warm weather during much of 3QFY15 (16% warmer than normal and 6% warmer than 3QFY14 in areas served by SPH). In addition, the timing of the much colder than normal temperatures in March 2015 led to additional deliveries during 2QFY15, obviating the need for further deliveries in 3QFY15 to many customers. Propane prices in 3QFY15 fluctuated between $0.32-$0.57 per gallon and, on average, declined by 55.9% vs. 2QFY15, in line with the dramatic declines in crude oil and natural gas prices as prices. Lower propane prices benefit SPH’s customers and affect SPH by decreasing both its revenues and cost of goods sold. The impact on gross margin may vary; in 3QFY15 gross margin increased to 57% of revenues compared to 46% in 3QFY14 because SPH did not pass on to its customers all the benefits of lower propane costs. However, gross margin declined in absolute dollar terms ($126 million vs. $136 million) due to lower volumes. DCF and adjusted earnings before interest, depreciation & amortization and income tax expenses (“Adjusted EBITDA”) are the primary measures typically used master limited partnerships (“MLPs”) to evaluate their operating results. Making comparisons between MLPs is difficult because of lack of standard definitions these terms (a recent article discusses some examples). It is even more so in the case of SPH because it does not measure its results in terms of DCF and does not provide DCF data. However, SPH does provide Adjusted EBITDA figures: (click to enlarge) Table 2: Figures in $ Millions except per unit amounts, percent change and gallons sold. Source: company 10-Q, 10-K, 8-K filings and author estimates. Net income included expenses of $1.1 million and $4.3 million in 3QFY15 and 3QFY14, respectively, related to integration of the retail propane business acquired from Inergy L.P for ~$1.9 billion in August 2012. For 3QFY14, net income also included an $11.6 million loss on debt extinguishment. Adjusted EBITDA excludes the effects of these charges, as well as the unrealized (non-cash) mark-to-market adjustments on derivative instruments. SPH was able to decrease its investment in working capital in the trailing twelve months (“TTM”) ended 6/30/15, with lower commodity prices significantly reducing both inventories and accounts receivable. This resulted in a sharp increase in net cash from operations, as shown in Table 3: Table 3: Figures in $ Millions. Source: company 10-Q, 10-K, 8-K filings and author estimates. To enable comparison of DCF, investors must generate their own estimates because, as previously noted, SPH does not utilize this metric. Table 4 below provides my estimate of sustainable DCF generated by SPH in the periods under review, as well as my estimate of what SPH’s reported DCF would have been had it adopted a methodology similar to that used by some other MLPs (see article titled ” Distributable Cash Flow” ). Most of the MLPs I follow exclude working capital changes, whether positive or negative, when deriving their reported DCF numbers. This is one of the differences between DCF as is typically reported by MLPs and sustainable DCF. The relevant numbers for SPH are as follows: Table 4: Figures in $ Millions. Source: company 10-Q, 10-K, 8-K filings and author estimates. The two corresponding coverage ratios are as follows: Table 5: Figures in $ Millions except coverage ratio. Source: company 10-Q, 10-K, 8-K filings and author estimates. For the TTM ended 6/30/15 there were no material differences between DCF (excluding the impact of working capital changes and risk management activities, as it is generally reported by MLPs) and what I call sustainable DCF. Coverage of distributions ratio was positive (above 1x). Sustainable DCF shows a marked improvement over the TTM ended 6/30/14, primarily due to $82 million that was required for working capital in that earlier period. Table 6 presents a simplified cash flow statement that nets certain items (e.g., acquisitions against dispositions, debt incurred vs. repaid) and separates cash generation from cash consumption in order to get a clear picture of how distributions have been funded. It provides further insights on changes in coverage ratios. (click to enlarge) Table 6: Figures in $ Millions. Source: company 10-Q, 10-K, 8-K filings and author estimates. Table 6 indicates that net cash from operations, less maintenance capital expenditures, exceeded distributions by $104 million in the TTM ended 6/30/15, but fell short of covering distributions by $63 million in the TTM ended 6/30/14. Cash reserves were used to fund the shortfall. Table 7 provides selected metrics comparing the MLPs I follow based on the latest available TTM results. Of course, investment decisions should be take into consideration other parameters as well as qualitative factors. Though not structured as an MLP, I include KMI as its business and operations make it comparable to midstream energy MLPs. As of 08/26/15: Price Current Yield TTM Adjusted EBITDA EV / TTM Adj. EBITDA IDR- Adjusted EV/Adj. EBITDA Long-term debt (net of cash) to TTM Adj. EBITDA Buckeye Partners (NYSE: BPL ) $69.00 6.74% 844 14.7 14.7 4.2 Boardwalk Pipeline Partners (NYSE: BWP ) $12.89 3.10% 672 10.0 10.1 5.2 Enterprise Products Partners (NYSE: EPD ) $27.29 5.57% 5,239 14.6 14.6 4.1 Energy Transfer Partners (NYSE: ETP ) $46.86 8.83% 5,308 9.0 10.4 5.2 Kinder Morgan Inc. (NYSE: KMI ) $30.80 6.36% 7,373 15.2 15.2 6.0 Magellan Midstream Partners (NYSE: MMP ) $68.29 4.33% 1,102 17.1 17.1 3.0 Targa Resources Partners (NYSE: NGLS ) $27.38 12.05% 1,065 9.5 10.7 4.8 Plains All American Pipeline (NYSE: PAA ) $33.23 8.37% 2,229 10.3 12.8 4.3 Suburban Propane Partners $35.74 9.93% 332 9.8 9.8 3.3 Williams Partners (NYSE: WPZ ) $37.52 9.06% 3,681 10.6 12.3 4.6 Table 7: Enterprise Value (“EV”) and TTM EBITDA figures are in $ Millions. Source: company 10-Q, 10-K, 8-K filings and author estimates. Note that BPL, EPD, KMI, MMP and SPH are not burdened by general partner incentive IDRs that siphon off a significant portion of cash available for distribution to limited partners (typically 48%). Hence multiples of MLPs without IDRs can be expected to be much higher (see Table 4, column 5). In order to make the multiples somewhat more comparable, I added column 6, a second EV/EBITDA column. I derived this column by subtracting IDR payments from EBITDA for the TTM period. Other approaches can also be used to adjust for the IDRs of the relevant MLPs. In prior articles I expressed concerns regarding the susceptibility of SPH to weather conditions, volatile commodity costs, customer migration to natural gas or electricity, difficulties encountered by SPH in passing on higher propane costs to its customers, flat distributions since February 2013 and lack of a clear path to achieving distribution growth. These concerns are still valid, although some are mitigated by lower oil prices. But while the midstream MLP universe has been violently shaken by the decline in the price of oil, SPH has demonstrated less volatility and has performed better than the Alerian MLP Index over the past 12 months (19.5% decrease in unit price vs. a 35.5% decline in the index). Furthermore, the outperformance has been consistent whether measured on a 12-months, year-to-date, 6-months, 3-months or 1-month basis. Although SPH may not offer distribution growth and will probably underperform the index if we see sustained increases in MLP price levels, its ~10% yield appears secure, its valuation multiple is lower and it is less leveraged (3.3x long terms debt, net of cash, over TTM EBITDA). Investors brave enough to broaden their exposure to midstream energy MLPs should consider initiating, or adding to, positions in SPH. Disclosure: I am/we are long EPD, ETP, MMP, NGLS, PAA. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Fidelity Equity Dividend Income: I’d Rather Own A CEF

FEQTX changed managers in 2011 looking to spruce up performance. Although there has been improvement, the results have been middling. If you are looking for income, you might be better off with a CEF. Mutual funds are generally the top-of-mind way for investors to quickly gain access to professional management. However, the Fidelity Equity Dividend Income (MUTF: FEQTX ) shows why you need to be cautious when you go down this route. In the end, if you are looking for dividend income, there are better options out there. Turning to a new leader FEQTX changed managers in late 2011 with the goal of shaking things up at a fund that had been lagging and, generally, not living up to its name. That means that 2011 and part of 2012 were really a transition period as new manager Scott Offen put his mark on the fund. So he’s got about three years of performance under his belt with a portfolio he created. The fund’s objective is reasonable income and capital appreciation. Reasonable income is defined as a yield above that of the S&P 500 Index. FEQTX’s trailing yield is roughly 2%. For comparison, the SPDR S&P 500 ETF Trust’s (NYSEARCA: SPY ) yield is about 1.9%. So I guess it lives up to its definition of reasonable yield, but that may not be your definition. Searching for stocks, Offen looks for , “…companies that deliver attractive, above-market dividend income and provide exposure to conservative earnings-growth potential with relatively low volatility.” He likes companies with, “…high or improving returns on capital and companies with strong balance sheets, including cash on hand…” As a shareholder, these are the types of things you’d like a manager to look for. The fund tilts toward value stocks, which isn’t surprising since Offen’s last gig was at a value fund. The interesting thing here is that the manager cautions that focusing too much on yield is dangerous. He highlights the banking sector during the 2007 to 2009 recession as a cautionary tale. And while that’s a worthy warning, 2% isn’t a material yield and it certainly isn’t much more than an index is offering, so income investors looking at, or in, this fund have a right to wonder if they are getting their money’s worth. Performance is so-so The problem is that performance relative to the S&P isn’t all that great. Over the trailing three years through July, FEQTX’s annualized return, which includes reinvested distributions, is around 14.7%. The SPY’s annualized return over that span is nearly 17.6%. Both have roughly similar standard deviations and FEQTX’s Beta is nearly 0.95, meaning it moves roughly in line with the S&P. (SPY, as you might expect, moves in lock step with the S&P.) So there’s little yield advantage, no performance advantage, and the same amount of risk. Although the expense ratio of around 0.60% is low for a mutual fund, the extra expense isn’t worth it when you could by SPY, get better performance and a similar yield, and pay just 10 basis points or so in expenses. A better alternative? This is why you shouldn’t get sucked in by a fund name. I’m not suggesting that FEQTX is a bad fund, per se, just that it isn’t compelling enough compared to other options. That said, I don’t believe it lives up to the words “dividend income,” which are found in its name. If you own the fund or are looking at it, you’ll basically be getting something on an index clone at greater cost. Why not shift gears and look at a completely different space? For example, you might consider the Nuveen S&P 500 Buy-Write Income Fund (NYSE: BXMX ). This fund was created through the merger of two older Nuveen closed-end funds late last year and now has the goal of tracking the S&P while writing index options to generate current income. It doesn’t have a long track record, to be sure, but it has put up decent results so far. First off, the distribution is around 7.6%, well above that offered by the index and FEQTX. And year to date through July, BXMX’s return is nearly 6.2% while SPY is about 3.4% and FEQTX is just 1.3%. A big difference, however, is in the expense ratio, which is just under 1%. But based on performance so far under the new investment strategy, you are being rewarded for that. The biggest risk, of course, is that the new strategy is untested. Which is a legitimate concern. That said, writing options should mute downside risk since in a falling market option income will offset capital losses. At least that’s the theory, anyway. Time will be the true test of this, meaning that you’ll need a little faith if you choose to own BXMX. But with a discount of nearly 7%, you are getting a little protection built in by buying below the actual value of the portfolio. Looking at that a little closer at recent performance, since the last few months have been pretty rough, BXMX’s trailing daily return over the last three months through August 26th was a loss of almost 4.2%. The S&P over that same span fell just under 7.3%. Over the trailing month through August 26th, BXMX was down about 5.1% and the index was down nearly 6.5%. So, through the current turmoil anyway, BXMX seems to be holding its own. Note, too, that upside performance should be muted in a roaring bull market because of the use of options. This year’s sideways market is really a good space for option writing. So the strong out of the gate performance really shouldn’t be taken as an indication of future performance. But income should always be notable. Not the only option That said, BXMX is just one option. It seems like a compelling one compared to FEQTX, but there are other closed-end funds with compelling yields and performance histories. That said, the real point here is to make sure you understand what you own. That’s particularly true of mutual funds where a fund may not be living up to its name. If you find you are an income-oriented investor stuck in such a fund, consider shifting to closed-end funds. You might find you are willing to pay a little more for a higher level of income-that’s especially true when the fund you own is simply tracking a broader index. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.