Tag Archives: alternative

Pampa Energía Is A Good Option For Normalization In Argentina

Summary Pampa Energía works in a highly distorted regulatory framework, where frozen tariffs have led to a critical situation for the utility companies. Even in this scenario Pampa Energía has managed to reach a price earning of 5 years. With a new government about to be elected, great improvements could be in the way. Pampa Energía S.A. (NYSE: PAM ) is the largest integrated electricity company in Argentina and through its subsidiaries participates in the generation, transmission and distribution of electricity, as well as natural gas transportation and production. (click to enlarge) Source: Pampa Energía. Pampa Energía owns indirectly: 84% of the generation assets. 26% of the transmission business (TRAN.BA). 52% of the distribution business with Edenor (EDN). 26% of the natural gas transportation business with Transportadora de Gas del Sur (NYSE: TGS )(pending government approval). 50% of the Oil and Gas exploration and production business with Petrolera Pampa (PETR.BA), associated with Yacimientos Petrolíferos Fiscales (YPF). As of August 17th, 2015 the market cap of the above mentioned: (click to enlarge) Source: Yahoo Finance Reminder: Transener and Petrolera Pampa stocks are only listed in the Merval Index, the market cap is expressed in Argentine Pesos -AR$-. Exchange rate as of August 17th: ARS/USD= 9.15. Updated quotes and market cap expressed in USD here . Scenario: Pampa Energía works in a highly distorted regulatory framework where frozen tariffs have led to a critical situation for the utility companies. From 2001 onwards the tariff was converted to AR$ and had practically no adjustments and no longer provides for a reasonable return on capital/assets. Full tariff reviews are pending. High inflation and regulated tariffs that took place since 2006 and 2001 respectively, have led to deep margin erosion for utility stocks. The Argentine utility stocks have underperformed their Latam and EM peers since 2001, these poor returns are explained by significant erosion in real electricity tariffs (frozen since 2001). Gross margin captured by utilities as a percentage of the GDP fall from 0.3% to 0.02%, setting the scope for a possible recovery in profits, if the upcoming political situation leads to a normalization of the current imbalances. For example, the comparison between the residential electricity cost in Argentina and regional peers shows clearly how distorted the public services tariffs are. (click to enlarge) Source: Pampa Energía. Subsidies for electricity and gas purchases cost the government around 4.5% of GDP, and the burden is growing. Some tariffs would need to triple or even be multiplied by seven times to reach market prices. With just a small correction, companies like PAM will perform better. A presidential election is coming in Argentina as of October 25, and the main contenders (Daniel Scioli, Mauricio Macri and Sergio Massa) have expressed its understanding about the need to lift some tariffs caps, in order to reduce the fiscal deficit, which is unsustainable at these levels. As the company’s aren’t capable of fulfilling the investment needs in electricity of the country, and several blackouts occur during the last quarters, the actual government is taking some measures to improve the situation. Two relevant facts take place during 2Q15 for Pampa Energía: 1) “SE Resolution No. 482/15: Increase in the Electricity Generation Remuneration Scheme On June 10, 2015, the Secretariat of Energy issued SE Resolution No. 482/15, in which it updates retroactively the remuneration for electricity generation as of February 2015 commercial transactions.” 2) “Gas Transportation Tariff Increase for Transportadora de Gas del Sur S.A. On June 8, 2015, the National Gas Regulatory Authority -ENARGAS- issued Resolution No. 3,347/15, which grants TGS a tariff increase for gas transportation and operation and maintenance fees of 44.3% and 73.1%, respectively, both retroactive to May 2015.” Source: Pampa Energía 2Q15. This and other measures have improved Pampa´s EBITDA and Profits. In the 2H15 : Consolidated sales revenues of AR$3,457.6 million ($378 million) for the six-month period ended on June 30, 2015, 18.4% higher than the AR$2,921.4 million ($319 million) for the same period of 2014. Adjusted consolidated EBITDA of AR$1,693.3 million ($185 million) for the six-month period ended on June 30, 2015, compared to AR$27.1 million ($9 million) for the same period of 2014. Consolidated profit of AR$1,365.1 million ($149 million) during the six-month period ended on June 30, 2015, of which a profit of AR$963.0 million ($105 million) is attributable to the owners of the company, compared to an AR$80.4 million loss (-$8.8 million) attributable to the owners of the company in the same period of 2014. With a market cap of $900 million, earnings per ADR in the 1H15 of $1.7, and foreseeable earnings of nearly $180 million a year, the forward P/E looks compelling. Just thinking about the replacement cost of its fixed assets, it´s easy to see how PAM is undervalued, and this is mostly caused by a regulatory environment which could improve soon. As a change in the government is approaching, it could be expected that some distortions will disappear, I´m not talking here about free market prices, as it´s “politically incorrect” to raise tariffs by 200% in a single move, but given the current situation, where PAM is trading at a forward P/E of 5, and making money under this difficult scenario, any improvement will boost earnings and improve the company´s situation. Risks: Currency risks are present since it’s widely expected that the new government will depreciate the local currency, but that depreciation will certainly include better tariffs for the utilities as the energy price is partly dollar linked as well as the importations of energy. Political risks are another factor to bear in mind, but as the current government deficit is unsustainable, some adjustments are needed. To conclude PAM is under the current conditions deeply undervalued, and that could increase if the pending integral tariff revision comes in place. If the Argentinean economy is going to improve, massive capex in the electricity sector would be needed, and PAM is in the better position to profit from that. Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in PAM over 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.

The iShares Exponential Technology ETF Dilutes Exposure With Blue Chips

Summary XT invests in companies developing or using exponential technologies. XT owns many large companies that only have a small exposure to these technologies. Due to blue chip holdings, XT is not as volatile as one might expect from the name, good for conservative investors, but may disappoint those seeking pure plays. The iShares Exponential Technology ETF (NYSEARCA: XT ) seeks to replicate the overall performance, before fees, of the benchmark Morningstar Exponential Technologies Index. This index is comprised of stocks issued by developed and emerging market companies that create and use exponential technologies. Exponential technologies are those which lead to exponential growth, creating entirely new markets where none existed only years before. Most of the companies in this fund use rather than create exponential technologies, which are much rarer. Take a company such as Netflix (NASDAQ: NFLX ), the top holding with 1.22 percent of assets. Netflix uses Internet technology and is riding a wave of technological change, but Netflix didn’t create the technology behind it. Index & Strategy Following the underlying benchmark, XT invests in developed and emerging market companies involved in nine different fields, or themes, which fund managers deem to be “exponential technologies.” These innovative technologies are replacing outdated systems and methodologies. The areas include big data and analytics, bioinformatics, energy and environmental systems, financial services innovation, medicine and neuroscience as well as nanotechnology, networking, robotics and 3-D printing. XT invests at least 80 percent of its assets in securities found in the underlying index. While the fund provides solid exposure to up-and-coming technology companies, such as Illumina (NASDAQ: ILMN ), Splunk (NASDAQ: SPLK ) and Hologic (NASDAQ: HOLX ), it also holds well-established blue chip companies like Airbus (OTCPK: EADSY ), AT&T (NYSE: T ), Boeing (NYSE: BA ), DuPont (NYSE: DD ), Monsanto (NYSE: MON ) and Pfizer (NYSE: PFE ). Those latter firms are unlikely to experience exponential stock price increases because they’re already large blue chip companies. The former firms are more dynamic pure plays on emerging technologies. Illumina develops, manufactures and markets integrated systems that serve the gene expression, sequencing and genotyping industry. Splunk creates software that searches, monitors and analyzes machine-generated big data. Top 10 holding Hologic develops and supplies diagnostic imaging systems related to women’s health. The mix of holdings in XT offers investors the opportunity diversify their portfolios with growth stocks across a wide range of technologies, market caps and geographic locations, but without taking on as much risk as one might expect (and for aggressive investors, want) from a fund with the name “exponential technology.” Index components are scored across individual analysts, sectors and themes. Managers review the scores and collectively select leading candidates for inclusion in the index. Each theme will have one to five leaders. The index is reconstituted annually. At that time, potential candidates for inclusion must have average 3-month trailing daily trading volume in excess of $2 million and a market cap of more than $300 million. Stocks already in the index must have maintained an average 3-month trading volume over $1.5 million and a market cap greater than $200 million. Stocks not meeting these criteria are eliminated from consideration. The remaining qualified candidates are ranked in order of their exposure to exponential technology themes. Managers rank the stocks using specific criteria, such as the number of themes in which the stock is a leader. They also consider the number of themes in which it scores above average and market capitalization with a preference for smaller firms over shares of larger cap names. The 200 highest scoring stocks are included in the index. The ETF’s managers then select and equally weight shares from this index to create the fund’s portfolio. Thus, while XT is technically not an actively managed fund, the selection of components is made by somewhat subjective measures. Portfolio Composition and Holdings XT is a large core growth fund with slightly more than $686 million in assets allocated across 195 individual holdings. The portfolio holds 67 percent of asset in domestic stocks and 31 percent in foreign shares. The fund’s foreign exposure includes Developed and Emerging Europe as well as Developed and Emerging Asia. In addition to the United States, the fund is invested in companies headquartered in the United Kingdom, France, Switzerland and Denmark as well as Canada, Japan, Australia and India. XT holds 27 percent of assets in giant cap stocks along with 40 percent in large caps, 28 percent in mid-cap stocks and 5 percent in small caps. The fund also has a small exposure to micro-cap shares. Compared to the category averages, the ETF is underweight giant caps and overweight large- and mid-cap stocks. XT is heavily weighted towards the technology, health care and telecommunication sectors. The fund’s top 10 holdings comprise 7.9 percent of total assets. These include Netflix , Valeant Pharmaceuticals (NYSE: VRX ), Amazon (NASDAQ: AMZN ), and Seattle Genetics (NASDAQ: SGEN ). While there are many large caps in the portfolio, XT has an average market capitalization of $23.3 billion, which is less than the technology category averages of $40.8 billion. XT shares have a P/E ratio of 20.94 and a price-to-book 2.72. Historical Performance Established in March 2015, XT has generated a 3-month return of 0.26 percent. This compares to the category average of -2.26 percent over the same period. XT has underperformed the Technology Select Sector SPDR ETF (NYSEARCA: XLK ) since inception in March 2015. (click to enlarge) Expenses The fund has a total expense ratio of 0.47 percent, which is less than the category average of 0.57 percent. Dividends Thanks to owning many large blue chips, the fund does pay a dividend. The current 30-day SEC yield is 1.36 percent. Outlook The iShares Exponential Technology Fund provides investors with the opportunity to gain exposure to a niche area of the thriving technology sector. XT is a relatively conservative way to play these companies due to the inclusion of blue chip companies across a range of sectors. Although the fund is equally weighted, its smaller cap components should experience larger gains over the long run. The approach of XT is good for conservative investors if it is successful, but may disappoint aggressive investors looking for pure exposure to innovative, cutting-edge technology companies. 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. 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.

Has Monthly Resetting Helped Or Hurt The ETRACS 2x Leveraged ETNs?

Summary The UBS ETRACS line-up of ETNs includes a number of 2x leveraged funds. The use of leverage allows the ETNs to offer higher yields, but may also increase their propensity for decay or slippage during volatile periods. The ETRACS ETNs reset their leverage monthly, has this helped or hurt their performance? Introduction The UBS (NYSE: UBS ) ETRACS line-up of ETNs cover a broad range of investment classes, including traditional equity as well as alternative investment types such as real estate investment trusts [REITs], mortgage REITs [mREITs], master limited partnerships [MLPs], business development companies [BDCs] and closed-end funds [CEFs]. A number of the ETRACS ETNs are 2x leveraged, which means that they seek to return two times the total return of the underlying index, minus fees. This allows the ETNs to offer sometimes mouth-wateringly high headline yields, making them attractive for income investors. Moreover, some of these funds offer monthly (albeit sometimes lumpy) distributions. A recent article provides an overview of the types, yields and expense ratios of these 2x leveraged ETNs. An interesting feature of the 2X leveraged ETNs is that their leverage resets monthly rather than daily, which is the norm for most leveraged funds in the market. It is well known that decay or slippage in leveraged funds will occur when the underlying index is volatile with no net change over a period of time. This “beta-slippage” has been addressed by Seeking Alpha author Fred Picard in an article entitled ” What You Need To Know About The Decay Of Leveraged ETFs “. However, by resetting monthly rather than daily, the decay of the ETRACS ETNs might be somewhat mitigated. Seeking Alpha author Dane Van Domelen has also conducted both theoretical and empirical research into the performance of leveraged funds. His research showed that in most cases, the decay is not as serious as is often initially thought to be. A subsequent article using data from 1980 to 2015 showed that monthly resetting was superior to daily resetting for a 2x leveraged version of S&P 500. This article seeks to directly address the monthly vs. daily resetting issue for a number of the ETRACS 2x leveraged ETNs. Has monthly resetting helped or hurt the ETNs compared to the equivalent daily resetting fund? Methodology The five ETNs chosen for this analysis are shown in the table below, together with their yields, inception date, volume, total expense ratio and corresponding 1x leveraged fund. For details for how the total expense ratio is calculated, please see my previous articles ( I , II ). Fund Ticker Yield Inception Volume TER* 1X Alternative Monthly Pay 2xLeveraged S&P Dividend ETN (NYSEARCA: SDYL ) 5.43% 5/2012 1.8K 1.01% SPDR Dividend ETF (NYSEARCA: SDY ) 2xMonthly Leveraged Long Alerian MLP Infrastructure Index ETN (NYSEARCA: MLPL ) 15.02% 7/2010 103K 1.16% Alerian MLP Infrastructure Index ETN (NYSEARCA: MLPI ) 2xLeveraged Long Wells Fargo Business Development Company Index ETN (NYSEARCA: BDCL ) 20.24% 5/2011 164K 1.16% Wells Fargo Business Development Company ETN (NYSEARCA: BDCS ) Monthly Pay 2xLeveraged Mortgage REIT ETN (NYSEARCA: MORL ) 26.52% 10/2012 289K 1.11% Market Vectors Mortgage REIT Income ETF (NYSEARCA: MORT ) Monthly Pay 2xLeveraged Closed-End Fund ETN (NYSEARCA: CEFL ) 22.04% 12/2013 150K 1.21% YieldShares High Income ETF (NYSEARCA: YYY ) * Includes 3-month LIBOR (currently 0.31%). Those five funds were chosen because they represent some of the more popular ETRACS ETNs, and also because they have existed for sufficient duration to be analyzed. The historical data for both the 2x and 1x leveraged funds were downloaded from Yahoo Finance . Using data for the 1x leveraged fund, I then reconstructed the price history for a hypothetically 2x leveraged fund that resets daily instead of monthly. The normalized price history for the three funds, i.e. the 1x leveraged fund, the (hypothetical) daily-reset 2x leveraged fund and the (actual) monthly-reset 2x leveraged fund are then plotted on the same graph, as shown below. SDYL The first example shown is SDYL, 2x high-dividend equity fund. Since inception in May 2012, the corresponding 1x fund SDY has returned 63.6%, while the 2x SDYL has returned 161.0%, which is over twice that of the 1x fund (the actual number is 2.53 times). This illustrates the powerful compounding of leverage that takes place when the underlying asset moves strongly in one direction with little volatility. Additionally, we observe that the hypothetical daily-resetting SDYL (SDYL-D) has a very similar price history to the actual, monthly-resetting SDYL. SDYL-D ended up with a total return of 157.4%, which is just a few percentage points lower than that of SDYL. MLPL MLPL is a 2x fund of midstream MLP companies. Since inception in Jul. 2010, the 1x fund MLPI has returned 61.0%. The 2x MLPL has returned 141.9%, while the hypothetical MLPL-D returned 125.2%. Studying the price history of these three funds is instructive. We can see that the strong bull market in MLPs from inception to Jul. 2014 provided roaring returns for both MLPL and MLPL-D. While the 1x MLPI increased by ca. 100% over this time period, and MLPL and MLPL-D returned over 300%, a quadrupling of value. This further reinforces the notion that leverage works in your favor when an asset is in a rising trend (of course, the opposite is just as true). Moreover, MLPL and MLPL-D tracked each other closely during the MLP bull market, the first four years of this chart. Then why did MLPD-D return some 15% less than MLPL since inception? The answer lies in the fifth and final year of this chart, a period of extremely volatility in oil and oil-related stocks. During this period, we see divergence between the two 2x funds, with the monthly-resetting MLPL falling less than the daily-resetting MLPL-D during this time. This seems to support the conventional wisdom that monthly-resetting is superior to daily-resetting during bouts of heightened volatility. BDCL BDCL is a 2x fund of BDCs. BDCL’s inception took place at an unfortunate time, in the midst of the Eurozone debt crisis. BDCL dropped over 40% from its inception in May 2011 before rebounding. Since inception, the 1x BDCS returned 24.6% and the 2x BDCL returned 45.1%, which is slightly less than twice that of the 1x fund. This illustrates the negative effect that leverage has when the underlying asset moves strongly in one direction, and then reverses. To further highlight this, consider the fact that when BDCS (blue line in chart) breaks even in early 2012, BDCL is still approximately 10% below its inception price. While BDCL fared less well than expected, the daily-resetting BDCL-D did even worse. It returned only 31.3% since inception, significantly underperforming BDCL at 45.1%. This further reinforces the notion that monthly-resetting is advantageous when the underlying asset is volatile. MORL MORL owns a 2x leveraged basket of mREITs. Since inception in Oct. 2012, the 1x MORT has returned 13.0% while the 2x MORL has returned 16.7%, which is far lower than twice of the 1x fund. This indicates that like BDCL, MORL has performed worse than expected. As can be seen from the above chart, this can be attributed to the large price swings experienced by the underlying asset, causing leverage to work against the 2x funds. Very surprisingly, however, the hypothetical daily-reset MORL-D (20.10%) actually outperformed MORL. This contradicts the earlier notion that daily resetting is inferior to monthly resetting during volatile periods. The reason for this result is currently unclear to me. CEFL The final fund to be analyzed is CEFL, a fund-of-CEFs. Since inception in Dec. 2013, the 1x YYY has returned -4.5% while the 2x CEFL has returned approximately twice that, at -9.1%. Interestingly, and unlike MORL, the price swings in CEFL did not appear to adversely affect its total return performance. However, this could also be due to CEFL’s shorter history compared to MORL. The hypothetical daily-reset CEFL-D performed only slightly worse than CEFL, at -9.9%. However, this difference is too small for any meaningful conclusions to be drawn for this fund. Conclusion In his article , Dane Van Domelen wrote: In theory, it’s hard to say whether a 2x daily or 2x monthly leveraged ETF should perform better. During steady index growth or decline, daily is better; during volatile periods for the index with little or no net change, monthly is better. The results of this study partially agree with Dane’s conclusion, but also suggest that the real situation, empirically at least, may be a bit more complicated. Analysis of these five 2x monthly-reset ETNs and their hypothetical daily-reset counterparts revealed that: There was no significant difference in performance between monthly and daily resets when the asset was in a steady upward trend, as was the case for SDYL and the first four years of MLPL. MLPL outperformed the daily-reset MLPL-D during the most recent 1-year period, in which the asset tumbled and with high volatility. For the more volatile ETNs, namely BDCL, MORL, and CEFL, the results were mixed. BDCL significantly outperformed BDCL-D over four years, while MORL underperformed MORL-D over three years. CEFL and CEFL-D had comparable results over two years. Overall, four out of five of the monthly-reset ETNs outperformed their daily-reset counterparts, although the differences were often small: SDYL (161.0% vs. 157.4% for SDYL-D), MLPL (141.9% vs. 125.2%), BDCL (45.1% vs. 31.3%) and CEFL (-9.1% vs. -9.9%). The only underperforming monthly-reset ETN was MORL (16.7% vs. 20.1%). The average differential for the 5 ETNs was +6.3%. In summary, with regards to the question posed in the title, “Has Monthly Resetting Helped Or Hurt The ETRACS 2x Leveraged ETNs?”, I would have to say that the jury is still out. I am slightly leaning towards the “helped” side however. This article used mainly empirical and reconstructed data, so I am also interested to hear if any of the more mathematically-inclined investors would be able to provide a more theoretical framework for the monthly vs. daily resetting issue. 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.