Tag Archives: alternative

Duke Energy And Southern Company Set To Soar In 2016

Unregulated utility companies’ performance likely to stay challenging in 2016 because of weak and volatile power prices. DUK and SO making correct strategic attempts to strengthen regulated operations. Stock valuations for DUK and SO are cheap, as both are trading at discounts to peers and the industry average. 2015 has been a tough year for the U.S. utility sector, mainly because of concerns regarding the Fed interest rate increase; the utility sector ETF (NYSEARCA: XLU ) is down 10% year-to-date. Moving into 2016, given the decline in the power and natural gas prices, U.S. unregulated utility companies’ performance will stay volatile and weak; however, I think U.S. utility companies with significant and growing regulated business operations will stay an attractive investment option for income-hunting investors. Duke Energy (NYSE: DUK ) and Southern Company (NYSE: SO ) are the two U.S. utility companies that have large regulated business operations and are further working to strengthen their regulated business operations, which will provide stability to their revenues and cash flows, and support dividend growths. Moreover, valuations for both the stocks stay compelling. Two Utility Stocks: DUK and SO In recent years, low power and natural gas prices has adversely affected performance of unregulated business operations. As the power and natural gas prices continues to stay weak, I think, 2016 will be another challenging year for the unregulated utility companies. In the volatile unregulated business environment, the U.S. utility companies are working to lower their unregulated business operations, which will positively affect their performance. DUK is among the leading utility companies of the U.S., and has been working to strengthen its regulated business operations by making regulated capital investments; the company is expected to make capital investments of $20 billion in the next four years, which will result in increase in its rate base and support earnings growth. The company is not only upgrading its existing regulated infrastructure, but also diversifying the power generation assets by focusing on renewable energy sources, which will improve its business risk profile and allow it to comply with changing environmental regulations. DUK plans to spend to $3 billion on renewable energy in the next four years. Moreover, in 2016, if the company decides to sell its international unregulated business operations, it will positively affect its stock price and will make its cash flows more stable. Also, once the company successfully closes acquisition of Piedmont Natural Gas (NYSE: PNY ), which is consistent with its efforts to grow regulated earnings, it could opt to undertake more regulated gas business acquisitions to strengthen its gas business. Given the company’s aggressive efforts to strengthen its regulated operations, its cash flows will improve, which will allow it to increase its dividend growth consistently in the coming years. The stock has yield of 4.75% , which is supported by its 14% operating cash flow yield, and makes it an impressive investment option for income investors. Also, investors should keep track of yearly earnings call in February, in which the company will provide update on its 5-year growth expectation, synergies related to PNY acquisition and rate case outlook. Southern Company is another utility stock which stays an attractive investment option for income investors, as it offers a solid yield of 4.7% , which are backed by its operating cash flow yield of 15% . The company generates almost 90% of its earnings from regulated operations, which provides stability to its cash flows. Similar to DUK, SO also is working aggressively to modernize and strengthen its power generation assets. Moreover, once the company’s two construction projects, Kemper and Vogtle Power plants, are completed it will portend well for its long-term earnings. Also, the company has been actively increasing its renewable energy asset base. The company spent more than $2 billion on renewable in 2015, and plans to spend another $1.3 billion in 2016, which is expected to increase its renewable energy portfolio capacity to 2,600 MW. Consistent with its renewable generation assets base growth, the company acquired almost 600 MW of solar assets from First Solar (NASDAQ: FSLR ). And also, completion of SO’s and AGL Resources (NYSE: GAS ) in the later half of 2016 will augur well for the stock price. The company’s efforts to improve its regulated power asset base will support its long-term earnings growth, and its business risk profile will improve, as it will complete pending acquisitions and ongoing construction projects. Also, the company’s cash flows will stay strong to support its dividend growth, which will improve investors’ confidence. Valuation and Summation Unregulated utility companies’ performance is likely to stay challenging in 2016 because of weak and volatile power prices. However, companies like DUK and SO, which are making correct strategic attempts to strengthen their regulated operations, will deliver healthy performances in future years. Both DUK and SO offer solid yields of 4.7% and 4.75%, respectively, which makes them attractive investment prospects for income-hunting investors. Moreover, stock valuations for DUK and SO are cheap, as both are trading at discounts to their peers and the industry average. DUK and SO are trading at forward P/E of 14.8x and 15.7x, respectively, versus the utility sector’s forward P/E of 16.5x .

5 Investing Lessons I Learned In 2015

Summary Every year I like to do a recap of the lessons I learned over the preceding 12 months. A 50/50 diversified portfolio of stocks and bonds is likely sitting near the zero line in 2015. At some point we are going to see a turn in this commodity downtrend that leads to a new bull market cycle. In my opinion, a counter-intuitive mindset is still one of your greatest allies when navigating these markets. Every year I like to do a recap of the lessons I learned over the preceding twelve months. I find this exercise to be cathartic in examining past mistakes as well as reminding myself of successful portfolio management guidelines that will serve us well in the future. Many of these lessons also apply to other areas of my life outside of the financial markets as well. Part of this practice also involves reviewing my prior years’ lessons in order to stay mindful of the journey that has brought us to this point. So let’s dive in to the high-level topics that drove the markets and our portfolios this year … Trendless markets require endless patience. Looked at a chart of the SPDR S&P 500 ETF (NYSEARCA: SPY ) lately? It’s gone virtually nowhere over the last 12 months. However, that doesn’t mean it has been completely asleep. There have been gut-wrenching drops and face ripping rallies that virtually no one could have foreseen ahead of time. To add to this sense of frustration is the fact that returns in bonds and cash are virtually flat as well. A 50/50 diversified portfolio of stocks and bonds is likely sitting near the zero line in 2015. It’s years like this that truly test your patience with sticking to your plan versus trying to go find a better system or advisor that rose to the top. Of course, you have to ask yourself whether any supposed alpha this year was driven by a time-tested process or the result of simply stumbling into the right place at the right time. Be mindful of taking on too much risk by chasing performance in areas of the market that appear stretched or are outside your comfort zone. Just because an investment seems cheap, doesn’t mean it can’t get cheaper. Anyone who has been trying to find a bottom in commodities or energy stocks this year certainly can relate to this axiom. There have been plenty of pundits, pivots, and pirates in this group that have been unable to successfully navigate the deflation trade. At some point, we are going to see a turn in this commodity downtrend that leads to a new bull market cycle. This will likely fuel demand for beaten down areas of the market like junk bonds, MLPs, oil and gas stocks, or the futures contracts themselves. The bottom line: We aren’t there yet. Trying to pick a perfect bottom in this market is more than likely going to cause undue stress rather than simply waiting for a more discernible pattern to develop. My grandfather used to say that a little bit of lost opportunity is better than a lot of lost money. That certainly applies in this instance. A counter-intuitive mindset is still your best ally. Remember that crazy summer correction in the market? The one that caused a panic on Wall Street, a lockup in ETF liquidity, and decrees that the apocalypse has arrived? Yeah it turned out we overcame that pretty fast. It was scary for sure, but taking a measured approach to any portfolio changes versus full-blown panic was the better move. In my opinion, a counter-intuitive mindset is still one of your greatest allies when navigating these markets. There is a great deal of pessimism and fear out there. More tactical investors can capitalize on that by reducing a portion of your exposure as prices rise and adding to new opportunities on dips. Long-term investors should be looking to put new money to work on any pullbacks to maximize their average cost basis. Starting something new can be rejuvenating. We all get stuck in the grind of our daily life. Our normal routines can get boring, dull, and allow complacency to set in. One of the ways we combated that mindset this year is by introducing a new premium newsletter service to our blog. We call this the Flexible Growth and Income Report , which is designed for serious investors with intermediate to long-term time frames. Our primary investment vehicles are diversified, transparent, and liquid exchange-traded funds. It’s also one of the few services that implements closed-end funds to enhance yield or seek greater returns. The introduction of this new service allowed us the opportunity to evaluate new themes, interact with new clientele, and challenge our existing market thesis. All of this may seem like additional work at first, but it can be truly rejuvenating in the sense that we are creating dynamic content that is rabidly consumed and used as actionable material. It’s a humbling and inspirational process that we enjoy producing every week. Shoulda, coulda, woulda are a drain on emotional capital. Ever feel like there was that one trade you almost took and then decided it wasn’t right for you? Then it goes on to be a very profitable investment and you can’t seem to get that “I should have bought XX” feeling out of your mind. It’s even worse if there was a trade that you forced, only to find out that it was a big loser in time or money. This seems to be a reoccurring theme when I talk to individual investors about their portfolios. Even very successful investors are haunted by missed opportunities or trades they wish they could have back. There is nothing wrong with a short period of self-reflection if you feel you made a mistake with your portfolio. Nevertheless, spending too much time worrying about something that has already passed you by is a drain on emotional capital. It also keeps you preoccupied from being in the present and the future opportunities that will be afforded to you. It’s not always easy to live in the here and now when we are constantly bombarded with historical results in this business. Yet, filtering out the noise and letting go of nominal miscues will be a significant game changer in your long-term success. The Bottom Line 2015 was a difficult year in many respects. However, it afforded the chance to learn and grow as well. Make sure you take the time prior to 2016 to set goals for your personal, professional, and investment endeavors. This will enable you to benchmark your performance to ensure you are on the right track to meet your ultimate objectives.

Has The CEFL Rebalancing Train Left The Station?

Summary A previous article attempted to predict CEFL/YYY’s new composition for 2016. Three groups of CEFs are analyzed for their recent price, premium/discount and volume behavior. Frontrunning in the underlying CEFs may have already begun. Introduction In last week’s article ” Are You Ready For CEFL’s Year-End Rebalancing ?”, I discussed the fact that not only was the annual rebalancing of the ETRACS Monthly Pay 2xLeveraged Closed-End Fund ETN (NYSEARCA: CEFL ) nearly upon us, but that the index provider has modified its methodology this year so that changes to the index are no longer made public five days before the actual rebalancing event. Ostensibly, this change was enacted to prevent “front-running” of the index (for more information, refer to ” Frontrunning Yield Shares High Income ETF YYY And ETRACS Monthly Pay 2xLeveraged Closed-End Fund ETN CEFL: Could You Have Profited ?”), which last year caused heavy losses to CEFL holders as well as those of the YieldShares High Income ETF (NYSEARCA: YYY ), an unleveraged version of CEFL. Both CEFL and YYY track the ISE High Income Index [symbol YLDA], an index consisting exclusively of close-ended funds [CEFs], and both pay high, monthly distributions. However, although the index changes are not announced publicly beforehand this year, the index methodology is published and available to all. Therefore, I was quite certain that professional investors would be able to apply the index methodology to accurately determine which CEFs were to be added or removed from the index. Therefore, two days ago I attempted to replicate the index methodology in order to level the playing field for Seeking Alpha readers. As described in ” CEFL: A Year In Review, And A Prediction Of What’s Ahead “, my crude attempt to reproduce the rebalancing algorithm resulted in the identification of the 16 CEFs that could be added to the index, and the 16 CEFs that could be removed. 14 CEFs are predicted to remain in the index. I stressed that my predictions were only an estimate given that I used only an approximate volume ranking and also because I did not know the exact date from which the index provider would harvest the CEF data. However, I did receive some confirmation on my predictions from reader waldschm85 : Thanks for the article SC! I recalculated this morning and 27/30 of our holdings match. I did go ahead and use the volume as a filter so that is likely the difference. There are a few like NHF and TDF that I’m worried won’t meet the threshold based on the 90-day average volume from Yahoo Finance. That being said, I’m feeling good that some of your top holdings with solid volume like KYN, NFJ, BCX, RVT, etc. will be in the index. Another astute reader, Jhinkle, noted : 11 out of 15 to be sold had abnormally high volume on the last trading day. As well most were flat to slightly up compared to decent gains on the ones to be added. 3 in fact were down on price. It would seem the action has already started. Therefore, I wanted to analyze whether or not traders were already bidding up the CEFs to be added to the index, and/or selling the CEFs to be removed. I also discuss some implications and strategies that investors may take advantage of during CEFL’s rebalancing event. Has the CEFL rebalancing train already left the station? (click to enlarge) Credit: Ben Brooksbank ( some rights reserved ) Fund rotations In my previous article, I presented preliminary lists of CEFs that I predicted were to be added, removed or that will remain in the index. Below are reproduced the same lists except that I’ve arranged the CEFs in order of size, from largest to smallest. The Top 10 CEFs in each category are shown in bold. Added CEFs: RVT (NYSE: RVT ), BCX (NYSE: BCX ), NFJ (NYSE: NFJ ), DPG (NYSE: DPG ), NHF (NYSE: NHF ), DSL (NYSE: DSL ), CEM (NYSE: CEM ), CSQ (NASDAQ: CSQ ), KYN (NYSE: KYN ), CHI (NASDAQ: CHI ), TDF (NYSE: TDF ), USA (NYSE: USA ), NTG (NYSE: NTG ), FEI (NYSE: FEI ), UTF (NYSE: UTF ), BOE (NYSE: BOE ), ETJ (NYSE: ETJ ) Removed CEFs: NCZ (NYSE: NCZ ), NCV (NYSE: NCV ), BGY (NYSE: BGY ), HYT (NYSE: HYT ), CHW (NASDAQ: CHW ), DSL , ETY (NYSE: ETY ), FPF (NYSE: FPF ), VTA (NYSE: VTA ), MCR (NYSE: MCR ), MMT (NYSE: MMT ), EDD (NYSE: EDD ), JPC (NYSE: JPC ), ISD (NYSE: ISD ), EAD (NYSEMKT: EAD ), ERC (NYSEMKT: ERC ), ESD (NYSE: ESD ) CEFs that remain from last year: EVV (NYSEMKT: EVV ), GHY (NYSE: GHY ), EXG (NYSE: EXG ), AOD (NYSE: AOD ), PCI (NYSE: PCI ), GLO (NYSEMKT: GLO ), DSL , AWP (NYSE: AWP ), IGD (NYSE: IGD ), GGN (NYSEMKT: GGN ), FAX (NYSEMKT: FAX ), BGB (NYSE: BGB ), BIT (NYSE: BIT ), HIX (NYSE: HIX ) In this article, I analyze these three groups of CEFs in terms of three metrics: [i] price change, [ii] premium/discount change and [iii] volume change, to see if I could spot any differences in behavior between the three groups. I focus only on the top 10 CEFs in each group for two reasons. Firstly, as those CEFs have the largest weighting in the index, any changes in their price will have a larger impact on CEFL/YYY compared to funds with smaller weighting in the index. Secondly, the higher the allocation of the fund within the index, the more certain I am that that fund is indeed belongs to the category that I have assigned it to. I again wish to stress that all predictions about the CEFs to be added, removed or that will remain in the index are simply predictions, and the actual changes may be significantly different to what I have predicted. For the sake of brevity, however, from this point onwards I will no longer preface my predictions with the word “predicted”. 1. Price change How have the prices of the CEFs fared recently? To analyze this, I plotted the price change of the CEFs over five trading days, from December 21st to the 25th. Top 10 added CEFs RVT Price data by YCharts The graph above shows that out of the Top 10 added CEFs, KYN has the highest 5-day price return of 24.67%, followed by CEM at 13.30%. The average 5-day price return of the 10 CEFs is 7.26%. Top 10 removed CEFs NCZ Price data by YCharts The chart above shows that out of the Top 10 removed CEFs, BGY has the highest 5-day price return of 2.64%, followed by CHW at 1.83%. The average 5-day price return of the 10 CEFs is 1.12%. Top 10 remaining CEFs EVV Price data by YCharts The chart above shows that out of the Top 10 removed CEFs, GGN has the highest 5-day price return of 5.18%, followed by GHY at 3.30%. The average 5-day price return of the 10 CEFs is 2.08%.(Apologies that the above YChart does not appear to be showing correctly. You’ll have to take my word for the numbers). Summary Let’s take stock of the situation. The Top 10 CEFs that were to be added to the index experienced a 5-day price gain of + 7.75% , while the Top 10 CEFs that were to be removed from the index experienced a 5-day price gain of +1.13% . The Top 10 CEFs that remain in the index experienced a 5-day price gain of +1.83 %. Now, the astute reader may observe that two of the Top 10 CEFs to be added (KYN and CEM) are MLP CEFs, which experienced a tremendous rebound over the course of last week. Indeed, KYN rocketed higher by 24.67% while CEM gained 13.30%. Thus, I also calculated an “ex-MLP” average for the remaining 8 CEFs to be added. The answer came out to be +4.33% , which is still significantly greater than the other two categories of CEFs. The above data would support the notion that the CEFs to be added experienced buying pressure while the CEFs to be removed experienced substantially less buying pressure over the past 5 days. 2. Premium/discount change Perhaps a better way to determine buying and selling pressure on CEFs is to study changes in premium/discount value, because the premium/discount value reflects how much more (or less) investors are willing to pay for a CEF compared to its net asset value [NAV]. The following graphs show the change in premium/discount value for the CEFs over the period of last week, from December 21st to the 28th (source: CEFConnect ). Top 10 added CEFs The graph above shows that KYN experienced the largest increase in premium/discount at +4.54%, followed by TDF at +2.41%. 9 out of 10 CEFs to be added experienced positive gains in premium/discount value, while only NFJ had a slightly negative loss of -0.10%. The average of the 10 CEFs was +1.62%. Top 10 removed CEFs The chart above shows that HYT experienced the largest premium/discount increase at +1.52%, followed by VTA at +0.22%. However, 6 out of 10 CEFs experienced decreases in premium/discount value, with MCR and MMT both declining by -1.51%. The average of the 10 CEFs was -0.46%. Top 10 remaining CEFs Of the 10 remaining CEFs, GLO had the highest premium/discount increase of +1.42%, while DSL had the lowest premium/discount change of -1.90%. The average of the 10 CEFs was -0.02%. Summary The Top 10 CEFs that were to be added to the index experienced a 1-week premium/discount change of +1.62% , while the Top 10 CEFs that were to be removed from the index experienced a 1-week premium/discount change of -0.46% . The Top 10 CEFs that remain in the index experienced a 1-week premium/discount change of – 0.02% . The above data would support the notion that the CEFs to be added experienced buying pressure while the CEFs to be removed experienced slight selling pressure over the past 1 week. 3. Volume changes Volume changes can reveal unusual buying or selling pressure on individual CEFs. The below graphs show the changes in 30-day average daily volume for the CEFs over the past one month. I used the 30-day average daily volume rather volume to reduce the effect of volume spikes and make the data more easy to visually interpret. Top 10 added CEFs RVT 30-Day Average Daily Volume data by YCharts The Top 10 CEFs added averaged a +67.73% increase in 30-day average daily volume over the past month. Top 10 removed CEFs NCZ 30-Day Average Daily Volume data by YCharts The Top 10 CEFs removed averaged a +42.00% increase in 30-day average daily volume over the past month. Top 10 remaining CEFs EVV 30-Day Average Daily Volume data by YCharts The Top 10 CEFs remaining averaged a +41.11% increase in 30-day average daily volume over the past month. Summary The Top 10 CEFs that were to be added to the index experienced a 30-day average daily volume increase of +67.73% over the past month, while the Top 10 CEFs that were to be removed from the index experienced a 30-day average daily volume increase of +42.00% . The Top 10 CEFs that remain in the index experienced a 30-day average daily volume increase of +41.11% . The above data would support the notion that the CEFs to be added experienced buying pressure over the past 1 month. However, the volume of the CEFs to be removed was not significantly greater than that for the remaining CEFs (the control set). Discussion of results In this study, I compared the 5-day price change, 1-week premium/discount change and 1-month 30-day average daily volume change for three groups of CEFs. The first group were the Top 10 CEFs by weighting that I predicted were to be added to the index. If frontrunning of the index were to occur, this group would experience buying pressure before the rebalancing date. The second set were the Top 10 CEFs by weighting that I predicted would be removed from the index. If frontrunning were to occur, this group would experience selling pressure before the rebalancing date. The final group were the Top 10 CEFs by weighting that I predicted would remain in the index. While these CEFs may change in weighting depending on whether their relative allocations were to be increased or decreased, I still used this group as a control set because I would expect the increases or decreases to partially offset each other. The characteristics of the three groups are presented below. Top 10 added CEFs: +7.75% ( +4.43% ex-MLP) price change, +1.62% premium/discount change and +67.73% volume change. Top 10 removed CEFs: +1.13% price change, -0.46% premium/discount change and +42.00% volume change. Top 10 remaining CEFs: +1.83% price change, -0.02% premium/discount change and +41.11% volume change. Now, readers may draw their own conclusions from the data, but it is clear to me that the frontrunning may have already begun. Both the price and premium/discount data support this idea across three data sets. The volume data indicates higher buying pressure among the added CEFs, although the volumes of the removed CEFs and the remaining CEFs were similar. What are the implications for investors? If this frontrunning behavior were to continue, there are a number of possible strategies for investors depending on the time frame: Sell CEFL or the CEFs to be removed now. While the CEFs to be added have already shown significant increases in price, the CEFs to be removed have not yet experienced heavy selling. Last year, the top 10 CEFs to be removed declined by -3.38% in the one week before the rebalancing date. If further selling in these CEFs were to occur, CEFL will decline in value. Sell the added CEFs just before rebalancing . A number of the CEFs to be added showed increases in both price and premium/discount values. If these were to revert after rebalancing, then those CEFs will decline in value. The best time to execute this strategy may be just before the rebalancing is to take place. Buy the removed CEFs after the rebalancing. Frontrunning may cause the prices and premium/discount values of the removed CEFs to be artificially depressed in price. This might make these funds good buys after the rebalancing is complete. I close by repeating again that my list of CEFs are simply predictions of the upcoming changes and the actual changes may be materially different to my predictions. A final cautionary note is warranted, as presented by reader cpyles42 : Furthering your cautionary note for all the amateur front runners – if UBS has already front run, they will simply cross their positions at rebalance, book a nice profit for themselves and the buying/selling that everybody is expecting to emerge to get them out of their front run positions at the beginning of the year will be absent. if enough people front-ran you could even see a paradoxical response, this happens all the time in markets because market positioning if often the most important short-Term factor. I have provided the 5-day price changes for all the CEFs in each of the three groups for further consideration by readers, in order of largest to smallest price change. 16 added CEFs (click to enlarge) 16 removed CEFs (click to enlarge) 14 remaining CEFs