Tag Archives: alternative

The Forensic Accounting ETF: Where The Bodies Are Buried

Forensic accountant John Del Vecchio likes to joke that he knows “where the bodies are buried” in the financial statements. In his line of work, you have to. John is a professional short seller and the author of What’s Behind the Numbers , an excellent primer on short selling I reviewed two years ago. I call Del Vecchio the Horatio Caine of Wall Street. With single-minded purpose, he looks for the bad guys that are cooking the books and then brings their misdeeds to the light of day. Or more accurately, he looks for companies that are using aggressive accounting techniques to mask poor operating performance and then shorts them. Eventually, management runs out of ways to hide slowing performance, and when they do, the jig is up and the stock takes a tumble. This is where it gets interesting. If Del Vecchio’s sleuthing can effectively catch earnings manipulators in the act, then it only stands to reason that it can also be used to identify good companies with high quality earnings and conservative accounting. And that brings me to the WeatherStorm Forensic Account Long-Short ETF (NYSEARCA: FLAG ) , which has been recently revamped and is now based on a new proprietary index developed by Del Vecchio. “FLAG” is exactly what it sounds like. It’s an ETF that looks for accounting red flags, such as accelerated revenue recognition and manipulation of inventory and receivables numbers. But that’s only part of the story. FLAG’s strategy combines six distinct forensic accounting and valuation factors for scoring and ranking stocks. These factors cover: cash flow quality, revenue recognition, earnings quality, shareholder yield, earnings surprise and valuation. The FLAG ETF runs a 130/30 long/short portfolio, investing 130% of its capital in stocks that rate high for earnings quality based on Del Vecchio’s metrics and maintaining a 30% short position in stocks with low ratings. The net result is that you’re buying the highest-quality companies at reasonable prices… and you’re shorting the expensive junk. While still rare in mutual funds and ETFs designed for regular investors, long/short strategies have long been used by hedge fund managers. So in FLAG, you’re essentially getting a hedge-fund strategy in an ETF wrapper. Let’s take a look at FLAG’s portfolio. As of 9/30/2015, FLAG was long 132 companies and short 41. The average P/E and P/S ratios on the long positions were 15.62 and 0.79, respectively. The averages on the short portfolio were a much higher 27.61 and 1.85. So, FLAG is clearly practicing what it preaches by owning relatively cheap stocks and shorting expensive stocks. Breaking it down by sector, technology stocks make up the largest net long position at 19.0% of the portfolio. 23.7% of the long portfolio is invested in tech and -4.7% of the short portfolio. Financials also make up a large chunk of the portfolio with a net long position of 16.1% (19.1% long and -3.0% short). In looking at individual stocks, we see some household names. AT&T (NYSE: T ) , Molson Coors Brewing (NYSE: TAP ) , Coca-Cola Enterprises (NYSE: CCE ) and Intel (NASDAQ: INTC ) all make the top 10 long holdings. And on the other side, some of the largest short positions include Constellation Brands (NYSE: STZ ) , The Priceline Group (NASDAQ: PCLN ) , Chipotle Mexican Grill (NYSE: CMG ) and Netflix (NASDAQ: NFLX ) . FLAG doesn’t have a long enough trading history to draw firm conclusions about performance. But given its focus on quality and value, I would expect it to significantly outpace the long-only S&P 500 over time. Disclaimer: This article is for informational purposes only and should not be considered specific investment advice or as a solicitation to buy or sell any securities. Sizemore Capital personnel and clients will often have an interest in the securities mentioned. There is risk in any investment in traded securities, and all Sizemore Capital investment strategies have the possibility of loss. Past performance is no guarantee of future results. Link to the original post here .

VTHRX: A Great Mutual Fund For The Investor Nearing Retirement

Summary The Vanguard Target Retirement 2030 Fund has a simple construction and a low expense ratio. Despite being a very simple portfolio, they have covered exposure to most of the important asset classes to reach the efficient frontier. This is quite simply one of the best constructed portfolios I’ve seen for a worker nearing retirement. Lately I have been doing some research on target date retirement funds. Despite the concept of a target date retirement fund being fairly simple, the investment options appear to vary quite dramatically in quality. Some of the funds have dramatically more complex holdings consisting with a high volume of various funds while others use only a few funds and yet achieve excellent diversification. My goal is help investors recognize which funds are the most useful tools for planning for retirement. In this article I’m focusing on the Vanguard Target Retirement 2030 Fund Inv (MUTF: VTHRX ). What do funds like VTHRX do? They establish a portfolio based on a hypothetical start to retirement period. The portfolios are generally going to be designed under Modern Portfolio Theory so the goal is to maximize the expected return relative to the amount of risk the portfolio takes on. As investors are approaching retirement it is assumed that their risk tolerance will be decreasing and thus the holdings of the fund should become more conservative over time. That won’t be the case for every investor, but it is a reasonable starting place for creating a retirement option when each investor cannot be surveyed about their own unique risk tolerances. Therefore, the holdings of VTHRX should be more aggressive now than they would be 3 years from now, but at all points we would expect the fund to be more conservative than a fund designed for investors that are expected to retire 5 years later. What Must Investors Know? The most important things to know about the funds are the expenses and either the individual holdings or the volatility of the portfolio as a whole. Regardless of the planned retirement date, high expense ratios are a problem. Depending on the individual, they may wish to modify their portfolio to be more or less aggressive than the holdings of VTHRX. Expense Ratio The expense ratio of Vanguard Target Retirement 2030 Fund is .17%. That is higher than some of the underlying funds, but overall this is a very reasonable expense ratio for a fund that is creating an exceptionally efficient portfolio for investors and rebalancing it over time to reflect a reduced risk tolerance as investors get closer to retirement. In short, this is a very solid value for investors that don’t want to be constantly actively management their portfolio. This is the kind of portfolio I would want my wife to use if I died prematurely. That is a ringing endorsement of Vanguard’s high quality target date funds. Composition The fund is running almost 75% stocks to about 25% bonds, but over time the portfolio shifts to sell off stocks and hold more bonds as Vanguard assumes that investors nearing retirement will have a reduced risk tolerance. This portfolio strategy is the embodiment of what financial advisors seek to do for clients. Unfortunately Vanguard does not know the unique circumstances of every client, but for a .17% expense ratio they are doing a great job. Holdings / Composition The following chart demonstrates the holdings of the Vanguard Target Retirement 2030 Fund: (click to enlarge) This is a fairly simple portfolio. Only four total funds are included so the fund can gradually be shifted to more conservative allocations by making small decreases in equity weightings and increases in bond weightings. The Vanguard Total Stock Market Index Fund is the largest holding at 45% of the portfolio and it is also available as an ETF. The ETF version is the Vanguard Total Stock Market ETF (NYSEARCA: VTI ). To be fair, Vanguard has a great reputation for running funds but not for coming up with creative names. I have a significant position in VTI because it carries an extremely low expense ratio and offers excellent diversification across the U.S. economy. Volatility An investor may choose to use VTHRX in an employer sponsored account (if their employer has it on the approved list) while creating their own portfolio in separate accounts. Since I can’t predict what investors will choose to combine with the fund, I analyze it as being an entire portfolio. Since the fund includes domestic and international exposure to both equity and bonds, that seems like a fair way to analyze it. (click to enlarge) When we look at the volatility on VTHRX, it is dramatically lower than the volatility on SPY. That shouldn’t be surprising since the portfolio has some very material bond positions. Investors should expect this fund to retain dramatically more value in a bear market and to fall behind in a prolonged bull market. Investors may recognize that the max drawdown for this fund was not that much weaker than the max drawdown for the market overall. That is strongly related to this portfolio being designed for people that will retire in about 15 years from now or 23 years from the crash of 2007. It would be unwise for Vanguard to become too conservative. While the fund has underperformed the S&P 500 by a notable margin, it is worth noting that part of that underperformance has been tied to international markets doing quite poorly relative to the S&P 500 over the last several years. Over the longer horizon I think it would be absurd to expect the domestic markets to continue beating the international markets so thoroughly. When it comes down to it, VTHRX is doing a very solid job of providing risk adjusted returns for the passive investor. Conclusion VTHRX is a great mutual fund for investors looking for a simple “set it and forget it” option for their employer sponsored retirement accounts. It is ideally designed for investors planning to retire around 2030, but can also be used by younger employees with lower risk tolerances or older workers with higher risk tolerances.

Dynegy: A Growth Story About To Begin

Dynegy has mainly expanded inorganically through acquisitions. Substantial free cash flow generation and margin improvement are preparing the way for upside. Be on the lookout for any dips on which to buy Dynegy’s shares. Small cap companies offer investors the benefit of potentially increased returns with the downside of increasing volatility and/or risk in the investor’s overall portfolio. This risk can be mitigated through the inclusion of large cap and mid cap stocks as well as diversification through the purchasing of stocks of many small cap companies. Another way to increase the stability of these small cap investments is to make these investments in industries that are more stable, such as utilities and/or industrial industries. These industries retain their stability through inelastic consumer and/or firm demands as well as diversification across multiple other industries. With the infusion of small cap status into a firm in these industries, investors can benefit from the growth of the small cap in addition to the stability that comes with being in steady industry. Small cap utilities companies are one such combination of capital appreciation and capital preservation. Dynegy Inc. (NYSE: DYN ) is one such company that possesses these two characteristics, and based on investor sentiment, the shares are essentially up for grabs. The company owns a series of power generating facilities across the Midwest, Northeast, and West coast regions on the United States, so the company is mostly specialized in terms of customer concentration. The company diversifies its energy facilities across multiple utilities submarkets, including coal and gas; this adds the benefit of indirect additional diversification to investors in that investors who purchase the company’s shares get that indirect diversification. Some of the company’s major business segments include its Homefield Energy segment and its Dynegy Energy Services business. From looking at the company’ stock chart, investors can see that the company’s shares have gone on a bit of a roller coaster over the past few years. Capital invested at the beginning of calendar year 2013 would have generated essentially a zero percent return on investment throughout 2015. The shares have gone from a low of about $17 all the way to a high of about $36, and the shares have fallen all the way down again, so the shares are a bit volatile. In technical terms, the 50-day moving average has danced around the 200-day moving average, with the former going above and below the latter multiple times throughout the course of the past three years. Most recently, the 50-day moving average has once again dipped below the 200-day moving average, which could indicate near-term downside, as the spread between the two indicators seems to be widening. (click to enlarge) Source: Stockcharts.com From a fundamental perspective, the company is in a solid financial position: liquidity ratios indicate that the company’s financial health is in good order. The current ratio, quick ratio, financial leverage ratio all have hit all-time highs. However, it also appears that the debt to equity ratio has also hit an all-time high as well, with the ratio at about 2.5. The reason for this is because of the way the company grows. The company has expanded mainly through inorganic growth, and it has accomplished this by using a substantial amount of debt to fund its acquisitions. Some of its more recent acquisitions include the acquisition of Duke Midwest for $2.8B , which is extremely large for a company with a market cap of just under $3B. Although this particular method of growth has worked for the company, the fact of the matter is that the company’s capital structure has changed to include about 75% debt, which is certainly a lot. Thus, as the number of financial covenants begins to mount up, the company will become limited in the activities it can conduct, including further acquisitions. The company will have to be careful to ensure that the amount of debt that it takes off will not cripple its operations. Positive aspects of the company is that it has been generating large amounts of free cash flow recently, which the company can either use to reinvest back into the company or distribute it to shareholders in the form of share buybacks or dividends. In fact, the company began a share buyback program for $250M, which the company has already completed half of, so it appears that the company is committed to keeping shareholders happy. The amount of free cash flow that the company has historically generated has been negative, so this is definitely a positive trend for the company. Furthermore, cost reductions have resulted in margins that are beginning to stabilize, which could also boost free cash flow in the mid-term. All-in-all, it appears that the company has an uncertain future. However, the shares have dipped all the way back to their original price in 2013, so now could be a good time to buy. The fact that the company’s margins are getting better and that the company is beginning to generate substantial free cash flow is always a good sign. Be on the lookout for any further share dips to buy on.