Tag Archives: alternative

Duke Energy Is A Good Play In This Volatile Market

Duke Energy is an electric power holding company whose stock is a low-risk investment. Despite its poor return on equity, Duke Energy has strengths that will continue to make it a reliable dividend stock. The company has performed poorly during the most recent quarter, but this is expected to improve. Duke Energy Corporation (NYSE: DUK ) is the largest electric power holding company in the United States and it is expected to stand firm in the electric utilities industry. Recently, the company has underperformed the industry average in many respects, causing its stock price to decrease from $89 to $70 within the past half year. However, an improvement in both company performance and market performance is anticipated. Duke Energy’s faults may currently overshadow its strengths, so it is important to dig deeper into the company’s operations and history before making a decision to buy. Insider Monkey shows that Luminus Management held onto about 1.68 million shares of DUK after decreasing its position by 22%. Seminole Capital’s position in DUK was slightly higher with 630,534 shares, while Highbridge Capital added a new position of 350,000 shares in DUK. We follow these funds because as Insider Monkey shows ( read the details here ), they have a penchant for making good long picks, but their short picks usually eat into their overall returns. In total, Insider Monkey showed five funds adding new positions in the shares of DUK and ten exiting their stakes. We think those funds staying long will not regret their decisions. Duke Energy has struggled with a YTD return of -12.19% even though its shares outstanding have decreased by 2.8% in the same time. The company’s gross margin of 42% exceeds the industry average, but its revenue has decreased over the past year, and in turn, DUK’s EPS has hit a recent low of $3.46. These disappointing statistics are troubling to investors, but there is plenty of reason to still consider DUK as a worthy investment. While many have lost faith in Duke Energy as of the most recent quarter, the company remains poised to reaffirm its reputation and generate a steady source of income for its shareholders. As the largest electric holding company in the country, Duke Energy has shown that its strengths will continue to make it an attractive opportunity for investors. With $120 billion or more in operating assets and nearly 8 million customer relationships , the company can ensure consistent operating cash flows and dividends. Its dividend yield is currently 4.49%. Slumping performance metrics are expected to improve in the near future as well. According to TheStreet , the market expects EPS to increase by $1.00 in the next year. With this may come a decrease in P/E ratio all else equal, meaning DUK may be undervalued considering its forecasted EPS. Additionally, NASDAQ shows DUK will realize earnings growth of 2.4% on a year-end basis and 5.28% by the end of 2016. DUK is known for its relatively consistent cash flows, but an improvement in performance may also be around the corner. Perhaps most important to investors, DUK is a low-risk stock, even compared to most other dividend stocks with an ultra-low beta of 0.35 on a 5-year basis. Its generally consistent performance is why the dividend has increased every year and the yield now stands at 4.5%. DUK remains an attractive option for risk-averse investors in that they have generated predictable cash flows through out their 150+ year existence, and its stock’s fortunes are not entirely tied to the market and the company’s fortunes are not entirely tied to the economy. Duke Energy’s two biggest direct competitors, American Electric Power Company (NYSE: AEP ) and CenterPoint Energy (NYSE: CNP ), have underperformed even more so than DUK. According to Yahoo Finance , AEP and CNP trail DUK in quarterly revenue growth, gross margins, operating margins, and EPS. The electric utilities industry in aggregate, however, has outperformed DUK in terms of quarterly revenue growth, perhaps due to the emergence of utility-scale solar developers. Otherwise, DUK seems to be in a far better position than its two largest direct competitors and the electric utilities industry as a whole. Duke Energy is a low-risk stock that may not offer grand price appreciation, but the company can provide shareholders with a steady source of income through dividends. Its position in the electric utilities industry, including its enormous portfolio of operating assets, allows cash flows to remain relatively predictable. Despite the disappointment surrounding recent performance metrics, DUK is still a reliable investment opportunity and can provide some stability in an increasingly volatile market. 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.

SCHD: Lower Volatility Than SPY, Lower International Correlations And A New Place In My Account

Summary SCHD offers investors less volatility than broad market ETFs. The holdings themselves are not extremely diversified, but the performance over the last several years shows the ETF maintains a lower correlation with other assets. I see some benefits to including a small position in SCHD while keeping the core in broad market ETFs. Lately I’ve been considering making some modifications to my portfolio strategy. As the market fell in August I had to recognize that I’m light on bonds. Of course, when the equity markets are falling and the bond markets are rallying it is precisely the worst possible time to start buying up the bond ETFs. Rather than focus on adding the bond ETFs right away, I’m working on revising my strategy. I’m looking for a portfolio that is easier to rebalance and shows less volatility with the market. One of the ETFs that I have been admiring for a long time is the Schwab U.S. Dividend Equity ETF (NYSEARCA: SCHD ). After the market started selling off hard in August, I decided it was time to look for a position in SCHD and put in a limit order to start buying SCHD. As I transfer more funds into the accounts, I expect to have SCHD regularly listed as a top contender for getting more buy orders and a higher allocation. Largest Holdings The internal diversification within the portfolio is much weaker than using whole market ETFs or broad market ETFs. However, the portfolio also has a lower level of volatility despite that challenge. The top holdings are shown below: (click to enlarge) The portfolio pays off a decent dividend yield, currently that yield is nearing 3% which seems fairly attractive as long term bonds are rallying. If we head into another recession, I want to be buying high quality stocks at lower prices (and higher yields) when the recession starts, when we are in the middle, and when it ends. One of the reasons I waited this long to get in on SCHD is that I was hoping for better prices and those seem to be coming through. My limit-buy orders are not very far out of the money and may have hit by the time the article is published. Expense Ratio The expense ratio on SCHD is .07%. That is low enough that I am happy to work with SCHD in my portfolio. Building the Portfolio I put together a hypothetical portfolio using only ETF’s that fall under the “free to trade” category for Charles Schwab accounts. My bias towards these ETFs is simple, I have my solo 401k there and recently moved my IRA accounts there as well. When I’m building a list of ETFs to consider I want to focus on things I can trade freely so that I can keep making small transactions to buy more when the market falls. Within the hypothetical portfolio there are no expense ratios higher than .18%. Just like trading costs, I want to be frugal with expense ratios. The portfolio is fairly aggressive. Only 30% of the total is allocated to bonds and I would consider that the weakest area in the portfolio. I’d like to see more bond options (with very low expense ratios) show up on the “One Source” list for free trading. (click to enlarge) A quick rundown of the portfolio The Schwab U.S. Broad Market ETF (NYSEARCA: SCHB ) is a broad market index. The Schwab U.S. Large-Cap ETF (NYSEARCA: SCHX ) is focused on blended large cap exposure. The Schwab International Equity ETF (NYSEARCA: SCHF ) is developed international equity. The Schwab Emerging Markets ETF (NYSEARCA: SCHE ) is emerging market equity. The Schwab International Small-Cap Equity ETF (NYSEARCA: SCHC ) is developed small capitalization equity. The Schwab U.S. REIT ETF (NYSEARCA: SCHH ) is domestic equity REITs. The Schwab U.S. Aggregate Bond ETF (NYSEARCA: SCHZ ) is a remarkably complete bond fund. The SPDR Barclays Long Term Treasury ETF (NYSEARCA: TLO ) is a long term treasury ETF. The PIMCO 25+ Year Zero Coupon U.S. Treasury Index ETF (NYSEARCA: ZROZ ) is an extremely long term treasury ETF. Notice that the 3 international equity ETFs have only been weighted at 5% while the broad market index has been weighted at 25%. I find heavy exposure to international equity to bring more risk than expected returns so I try to keep my international exposure low. I prefer no more than 20% in international equity. Plenty of domestic companies already have enormous international operations so the benefit of international diversification is not as strong as it would be if the markets were isolated from each other. Risk Contribution The risk contribution category demonstrates the amount of the portfolio’s volatility that can be attributed to that position. When TLO and ZROZ post negative risk contribution it is because the negative correlation to most of the equity holdings results in the long term treasury ETFs reducing the total portfolio risk. In my opinion, this is the best argument for including them in the portfolio. Correlation The chart below shows the correlation of each ETF with each other ETF in the portfolio and with the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ). Blue boxes indicate positive correlations and tan box indicate negative correlations. Generally speaking lower levels of correlation are highly desirable and high levels of correlation substantially reduce the benefits from diversification. (click to enlarge) One quick thing to take away from this is that mixing SCHB and SCHX does not add any material amount of diversification within the portfolio. Investors could simply pick whether they prefer a broad market ETF or a focus on larger capitalization companies. On the other hand, SCHD does some add some diversification to either SCHB or SCHX. The core of my portfolio is currently whole market ETFs and broad market ETFs (including SCHB). I don’t expect that core to change, but I’m seeing SCHD post a correlation of “only” .95 with SCHB and a lower correlation with SCHC and SCHF which helps it provide some diversification. Despite the ETF being heavily focused on providing dividends, SCHD still posts a very negative correlation with bond ETFs. However, the negative correlation is weaker for SCHD than it is for the other equity ETFs. Since I may be using heavy rebalancing and allocating more to bonds over the next few years, I don’t want to go overboard on moving SCHD into the portfolio. I’ll probably limit my holdings to a range of around 5% to 10%. Conclusion SCHD is a very strong ETF for most investors. After admiring it from afar for quite a while I decided to take the plunge and put in an order to buy some shares if they kept getting cheaper. One of those orders activated earlier in the week. I put in another order to buy more if it drops again. The ETF offers lower correlation with some of the other holdings I’m using for international exposure or considering adding to the portfolio soon. Even though the internal diversification is not as great as broad market funds, the volatility has been lower and I’m more comfortable holding SCHD going into a rough macroeconomic environment. Disclosure: I am/we are long SCHB, SCHD, SCHH. (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. Additional disclosure: Information in this article represents the opinion of the analyst. All statements are represented as opinions, rather than facts, and should not be construed as advice to buy or sell a security. Ratings of “outperform” and “underperform” reflect the analyst’s estimation of a divergence between the market value for a security and the price that would be appropriate given the potential for risks and returns relative to other securities. The analyst does not know your particular objectives for returns or constraints upon investing. All investors are encouraged to do their own research before making any investment decision. Information is regularly obtained from Yahoo Finance, Google Finance, and SEC Database. If Yahoo, Google, or the SEC database contained faulty or old information it could be incorporated into my analysis.

Nigeria’s Diversified GDP Offsets Oil Price Risk

Summary Nigeria’s GDP is extremely diversified, offsetting the risks of the current low price of oil, which has attributed to a sharp decline in the Global X MSCI Nigeria ETF. The main strengths of the ETF include the construction and banking industries, while the consumer products industry is characterized by high valuation and low growth. The sharp drop in the fund’s price since late November has created low valuation, and consequently a buy opportunity. I remain optimistic about Nigeria’s economic future, despite the fact that oil has plunged to a 6.5 year low. Citigroup even says that there is a 90% chance that oil will drop closer to $30/barrel soon . The impact of the declining price of oil has resulted in a significant decline of the Global X MSCI Nigeria ETF’s(NYSEARCA: NGE ) stock price, and this trend is certain to continue if the price of oil declines further. As 70% Nigeria’s government revenue and 90% of its export earnings come from oil exports , its struggle in a low price oil environment is inevitable. This can be seen historically in the decline of this ETFs price since late 2014, as well as examining Nigeria’s economic development since 1999 , when oil prices began to increase to an all time high by 2008. Moreover, Boko Haram can be seen as a threat to the fund’s performance, as it has previously also been responsible for a decline in the fund’s price. NGE data by YCharts However, I still take a bullish view on Nigeria on the basis of a newly emerging diversified GDP, that is not completely dependent on oil revenue; oil exports account for only 14% of the country’s GDP. The country’s Annual GDP growth is projected to increase from its current level of 2.57 to 3.61 by the 2nd quarter of 2016. The key strength of Nigeria is its banking industry, which is the second largest, only outsized by South Africa. Recent financial performance of the holdings in this industry, as well as their extremely low valuation, further edifies the value of this fund. The growth, financial performance, and current valuation of the construction industry can also be seen as a positive driver for this fund, as Nigeria is one of two countries that is projected to have higher construction growth than China. The consumer products industry is a hot topic in Nigeria, as consumption in Nigeria has been on the rise. I am, however, concerned with the future outlook of this industry, due to its relative high valuation and slowed growth in net income. Overall, a low oil price environment has created a buy opportunity for Nigeria, and the new diversified economy is strong enough to continue thriving. However, an increase in the price of oil in the future is necessary for full reconciliation of the fund’s price. Industry Specific Performance Each industry achieved the following level of growth in net income between 2012 and 2014 ; these calculations are based on the average growth of the fund’s top 10 holdings: Consumer Products Industry: 5.3% decline Construction Industry: 65.8% growth Banking Industry: 57% growth As of June this year, the average valuation for the industry was as follows: Consumer Products Industry: P/E=50.5 Construction Industry: P/E=14.9 Banking Industry: P/E=5.8 Therefore it is easy to make the following industry generalizations: The consumer products industry can be characterized as being in a bubble, and having disappointing financial growth. Its high valuation and low growth presents a minor threat to the fund’s performance. The construction industry can be characterized as having attractive valuation and substantial growth. It can be considered one of the positive drivers of the fund. The banking industry had substantial growth and has extremely low valuation. It can be considered the core competency of the fund. If there were Nigerian banking ADRs, then I would recommend solely investing in them rather than investing in this ETF. Consumer Products Industry 2015 Outlook: High Valuation with Moderate Growth Projected 1. During the 2nd quarter of 2015 , Nigerian Breweries PLC’s net revenue grew by 13% YoY and it also had 24% growth in EPS. Consequently, the company is now more attractively valued, as its P/E is now 21.7; its P/E in June was 26.3. 2. Nestle Nigeria’s net revenue declined by 17.6% YoY in March 2015, and the company’s profit decreased by 103% during this time as well. Its current P/E is 39.7 , which is slightly higher than its P/E of 35.9 in June. 3. Guinness Nigeria PLC’s net income declined by 12.2% YoY in March of 2015. Its current P/E is 61.2 , a drastic improvement from its P/E of 89.3 during June. Overall the consumer products industry can be considered a weakness of this fund, with an average P/E of 40.9, and disappointing growth during 2015. (click to enlarge) Source: Trading Economics The appeal of the consumer products industry in Nigeria is very obvious, given the substantial increase in consumer spending since 2012. The consumer products industry does have an overall favorable outlook between now and the 2nd quarter of 2016 : Consumer confidence most recently decreased by 12.4%, but is projected to decrease by 10% YoY during the 2nd quarter of 2016. Consumer spending is projected to increase at a modest rate of 2.3% during the next twelve months. Disposable personal income is projected to increase by 9.5% Overall the consumer products industry holdings are not ideal, but do not offset the appeal of the fund as a whole. Approximately 30% of the fund’s assets invest into this industry, providing the opportunity for the fund to benefit from the relative strengths of other industries. Despite disappointing growth and high valuation of these holdings, they do have a positive outlook throughout 2016. This fact, coupled with the positive industry outlook for the next 12 months, provides a somewhat favorable future outlook for these holdings. Reuters projects that Nestle Nigeria PLC’s EPS will increase by 7.6% between December 2015 and December 2016. Reuters projects that Guinness Nigeria PLC’s EPS will increase by 13.8% between December 2015 and December 2016. Reuters projects that Nigerian Breweries PLC’s EPS will increase by 8.9% between December 2015 and December 2016. Construction Industry 2015 Outlook 1. Lafarge Africa’s net income grew by 22% YoY during the 2nd quarter of 2015, reflecting a continued growth trend, although the growth has been slowed when compared to 2014. Consequently it is more undervalued at the moment, with a P/E of 11.42 ; the company’s P/E was 13.3 in June. 2. During June 2015, Dangote Cement’s net revenue rose by 15.94% YoY, and its operating profit grew by 9.3% YoY. Its current P/E is 15.33 , slightly lower than its P/E of 16.5 in June. Overall, the holdings in the construction industry have become cheaper, and were able to achieve substantial growth during 2015. The construction industry can now be viewed even more so as a positive driver for this fund, with a consistent demonstration of high growth and low valuation. However, these companies only account for around 11% of the fund’s total assets. Banking Industry: A Gem for Value Investors 42.16% of the fund’s assets are invested into the banking industry, which is the strongest segment of this fund, due to exceptional financial performance and incredibly low valuation. It is the strength of this industry in particularly that leads me to strongly justify investment into this ETF, amidst the risks associated with low oil prices and politics. Moreover, it is a strong complement to the relatively slower growth and higher valuation of the consumer products industry. 1. Guaranty Trust Bank PLC increased its net income by 34.1% YoY during the 2nd quarter of 2015, which is a substantial improvement from the growth experienced between 2012 and 2014. This has consequently created even lower valuation, as the company currently has a P/E of 5.45 . 2. Zenith Bank PLC increased its profit after tax by 12.1%, which is significant to note as its net income fell by -0.9% between 2012 and 2014. Its valuation is also substantially more attractive, as its P/E is currently 4.13 . 3. FBN Holding PLC had a 4.9% YoY increase in its profit after tax during the 1st quarter of 2015. Its P/E has now dropped even lower to 2.25 . 4. Stanbic IBTC Holdings PLC did not fare well during 2015, with a 52% YoY decline in Profit after tax during June 2015. Its net income previously grew by 230.3% between 2012 and 2014. This company is no longer listed in the top 10 fund holdings, indicating that less than 4% of the fund’s assets invest in this company. The company’s P/E is currently 7.98. 5. Ecobank Transnational Inc.: During the 1st quarter of 2015 , the company’s profit after tax rose by 65% YoY. The company’s P/E is currently 5.12 . Four out of five of the holdings in the banking industry were able to drastically increase their bottom line, and now consequently have substantially lower valuation; the average P/E for these five holdings is 5. This industry has demonstrated consistent financial performance, and is clearly being unfairly harmed by the low oil price environment. Therefore, it can be said that the low price of oil has created a substantial buy opportunity for the banking industry in Nigeria, and consequently the Global X MSCI Nigeria ETF, which invests 42.16% of its assets in the industry. What if Oil Prices Drops Further? The fund’s price has consistently declined from its 52 week of 15.56, due to the decline of oil prices beginning in late 2014. Consequently, the fund now currently has a P/E of 8.8, a far cry from the valuation of other ETFs. It is clear to see that the financial performance of the companies that the fund invests into has been exceptional, and that Nigeria has developed a new economy that is not entirely oil dependent. While it appears that oil may drop closer to $30/barrel in the future, this should not be viewed as a long term threat. Waiting for a further drop in the fund’s price, when the price of oil declines further, would be a wise endeavor. However, the takeaway is that this fund has massive upside potential once oil prices recover, and that most of the companies have fared well amidst low oil prices. The consequent irrational drop in the fund’s price has created a valuation paradise situation, for investors willing to risk investing in Nigeria. I first published an article stating my bull thesis for Nigeria when the fund was trading at 9.73; its price is lower now, but so is its valuation. Conclusion Nigeria is an excellent long term buy at the moment, with an inevitable rebound once oil prices recover. However, the country’s GDP is now diversified, and company’s in the construction and banking industry particularly have had exceptional financial performance amidst low oil prices. A further drop in the fund’s price due to declining oil prices would create even more attractive valuation. Regardless of the timing or price of the buy, a long term approach to Nigeria would be a wise endeavor for investors. My main concern is the high valuation and low growth of the consumer products industry, but this can not be avoided since the none of the fund’s holdings are listed on US exchanges. The Global X MSCI Nigeria ETF is holistically an excellent pick for investors who are willing to hold it long term, and profit from Nigeria’s economic growth. 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.