Tag Archives: alternative

RSX – October Review: First Positive Month After 5 Months Of Declines

Summary RSX grew by 6.4% in October, after 5 consecutive months of losses. The Bank of Russia expects that the inflation rate should decline by half by late 2016. If the prediction of lower inflation is correct, the Bank of Russia will start to cut the interest rates notably. The October Russian share market optimism may evaporate rather quickly if it won’t be supported by a positive oil price development. After five consecutive months of losses, share price of the Market Vectors Russia ETF (NYSEARCA: RSX ) increased in October. During the first half of the month, RSX grew from $15.7 to $17.75. Although it declined to $16.71 during the second half of October, RSX finished the month up by 6.43%. The growth was fueled by slightly higher commodity prices in early October. Although oil and metals prices started to decline again in late October, the share market was supported by an improved economic outlook. The minister of economic development said that Russian GDP should decline by 3.9% in 2015 but it should grow by 0.7% next year. Russia still has trouble with a high level of inflation that stands at 15.7%. But the Bank of Russia expects that the inflation rate will start to decline steeply by early 2016. If this prediction turns out to be right, the Bank of Russia will keep on cutting the interest rates. These expectations helped to support the Ruble exchange rate as well as the Russian share market. Also the situation in Ukraine is calm, there are no major fights anymore. Some significant changes regarding RSX’s composition occurred in October. Sberbank ( OTCPK:SBRCY ) became the biggest holding when the steep growth of the share price lifted the weight of the biggest Russian bank to 8.16%. Also weights of Gazprom ( OTCPK:OGZPY ) and Lukoil ( OTCPK:LUKOY ) increased. Weight of the biggest Russian food retailer, Magnit, declined from 7.31% at the end of September to 6.59% at the end of October. The Top 15 holdings represent 75.34% of RSX’s portfolio. Source: own processing, using data from vaneck.com Russian shares did very well in October. The biggest winner is Yandex (NASDAQ: YNDX ). Shares of the biggest Russian search engine provider rocketed by 50%, as the Q3 results have beaten expectations, the company has increased its 2015 guidance, and it has become the default search engine for Windows 10 in Russia, Ukraine and Turkey. Shares of the two biggest Russian banks, Sberbank and VTB, grew by 24% and 9% respectively. On the other hand, shares of Magnit lost 4.71% of value, as the food retailer announced a decline of net income by 28% y-o-y. Source: own processing, using data from Bloomberg The chart below shows the 10-day moving correlations between RSX and oil prices represented by the United States Oil ETF (NYSEARCA: USO ) and between RSX and the S&P 500. During the first decade of October, RSX grew along with USO; however, after USO began to decline, it didn’t drag RSX down. Similarly, RSX didn’t react to the jump of oil prices in late October. As a result, the correlation between RSX and USO was relatively low during the second half of the month. The correlation between RSX and the S&P 500 was very high and stable from late August to the middle of October, but it has declined rapidly over the last two weeks. It means that as a result, RSX was moving in its own direction over the last decade of October, without taking into account the oil market or the global financial market developments. Source: own processing, using data from Yahoo Finance The volatility of RSX was relatively high during the first half of October, but it declined significantly in the middle of the month and the end of October was relatively calm. On the other hand, as shown by the chart below, the Russian share market is highly volatile and the volatility eruptions are relatively regular. Source: own processing, using data from Yahoo Finance Some of the more interesting news: Yandex reported better than expected Q3 2015 financial results and increased the 2015 guidance. Yandex also announced that it added an online video streaming service to its film and TV recommendation service. An important news came on October 13, when Yandex announced that its search engine will become the default homepage and search engine for Windows 10 in Russia, Ukraine, Turkey, Belarus, Kazakhstan and several other countries in the region. This strategic partnership may help Yandex in its fight with Google (NASDAQ: GOOG ) (NASDAQ: GOOGL ), over market share in Russia. Norilsk Nickel ( OTCPK:NILSY ) announced that since the start of its buyback program, it purchased 1,186,534 ordinary shares for a total amount of approximately $186 million. The company has also announced a successful placement of $1 billion in eurobonds . The 7-year bonds bear an annual interest rate of 6.625%. Norilsk Nickel has also secured a $1.2 billion credit facility from Sberbank. Via an asset swap , Gazprom strengthened its position in the European gas storage and sales segment. It has also expanded its exploration and production activities in the North Sea. Gazprom also started construction of the Ukhta-Torzhok-2 gas pipeline that will feed natural gas to Nord Stream 2. Polyus Gold announced that the Independent Committee of the Board reiterated its opinion that the takeover offer of $2.97 per share offered by Sacturino Limited is too low. Lukoil announced that it discovered a large gas field in the Romanian deep sea offshore. Drilling intersected a 46-meter thick productive interval. The seismic data indicates that the area of the gas field can reach up to 39km 2 and it may contain 30 billion m 3 of natural gas. The voices against the anti-Russian sanctions keep on growing. The President of the European Commission, Jeaun-Claude Juncker declared that Europe must improve its relationship with Russia: We must make efforts towards a practical relationship with Russia. Russia must be treated decently. We can’t let our relationship with Russia be dictated by Washington. Conclusion Some positive macroeconomic news, the stabilized RUB/USD exchange rate and little higher oil prices supported RSX in October. Also the political situation keeps on improving as the situation in Ukraine is calm and some of the EU representatives indicate that the anti-Russian sanctions may end soon. But also stronger oil prices are important for further growth of RSX’s share price. If the oil price keeps on improving, November may be positive for RSX as well. 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.

DLN: A Perfectly Adequate Dividend ETF

Summary DLN offers a dividend yield of 2.74%. It’s acceptable, but nothing to write home about. The top several holdings are a mix of established dividend champions, except for the allocation to Apple which is really hanging on the company paying out their cash. The ETF has a moderate expense ratio, but there are so many options I’ve seen lately with ratios that are excellent. I’d really prefer to see consumer staples as an overweight allocation or a higher allocation to utilities. The WisdomTree Largecap Dividend ETF (NYSEARCA: DLN ) looks quite adequate. Ironically, there seems to be no better way to sum up the fund in a single sentence. Expenses The expense ratio is a .28%. When it comes to investing, who wants to throw away their capital on high expenses ratios or trading costs? This is fairly middle of the road for expense ratios in my estimation, but there have been quite a few funds coming up lately with expense rates that are downright excellent. Dividend Yield The dividend yield is currently running 2.74%. That isn’t too bad if the universe of comparable securities is all ETFs, but as far as dividend ETFs go this is running a bit low. Based on current valuations throughout the industry I would expect to see dividend ETFs running closer to 2.9% with some high yield dividend ETFs exceeding 3.5%. Holdings I put grabbed the following chart to demonstrate the weight of the top 10 holdings: (click to enlarge) Apple (NASDAQ: AAPL ) being the top holding makes sense for an ETF that wants to more closely track the market since Apple is such a large part of the market. They certainly have the cash to pay out great dividends but a yield below 2% doesn’t seem like a great fit for the top holding in a dividend ETF. I love seeing Exxon Mobil (NYSE: XOM ) as a top holding. Investors may be concerned about cheap gas being here to stay, but I think money in politics will be around decades (centuries?) longer than cheap gas. Bet against big oil at your own peril. I can say the same about liking Chevron (NYSE: CVX ) as a top holding. These companies offer investors a good way to benefit from high as prices which would generally be a drag on the rest of the economy and on their personal expenditures. Seeing AT&T (NYSE: T ) and Verizon (NYSE: VZ ) with heavy weights is one area where I tend to feel conflicted. The dividend yields are great but the sector is becoming more competitive. On the upside any technology that actually makes them obsolete or at least incapable of growing earnings would be indicative of the investor having a lower cell phone bill, so there is another benefit to aligning the portfolio to match an investor’s individual expenditures. Honestly, is there any better way to pay your phone bill than with a dividend check from the phone company? This is a difficult one to come down on because I love the strategy of covering a cost with dividend income from the company, but I’m also concerned that Sprint (NYSE: S ) is offering a very viable competitive product. Their reception may be terrible in some cities, but they are great in Colorado Springs. Johnson & Johnson (NYSE: JNJ ) is another great dividend company to hold. They have an effective R&D team and a global market presence. Sectors (click to enlarge) The sector composition is fairly balanced. On one hand, a balanced portfolio seems positive. However, I think it comes down to the individual investor. I have more risk tolerance than many investors because I have a fairly long time to recover from negative events, but my portfolio is also missing traditional bond exposure so I tend to prefer the less risky equity allocations. That puts me in a position to favor consumer staples, equity REITs, energy (only in the context of large companies like XOM), and utilities. Occasionally equity REITs are included in the “financials” category, but I’d rather get my REIT exposure through a separate ETF because I want to shove all my REITs into tax advantaged accounts. Therefore, I tend to use large equity REIT allocations in those accounts and would prefer a dividend champion ETF to be underweight on equity REITs. When “financials” simply means banks, then I prefer to see the allocation limited to around 10 to 15% of the portfolio. This allocation is reasonable as a balanced portfolio, but I would really rather see information technology swapping place with utilities and wouldn’t mind seeing financials trade place with either health care or energy. I think those areas offer investors a safer income stream as it relates to the expenses they will face in their life. What to Add Clearly my first area to increase the allocations would be utilities or consumer staples. The utilities offer investors a solid dividend yield while being moderately correlated with interest rates which allows them to serve a purpose that is somewhat similar to bonds in the portfolio while still having the dividend income grow over time. The consumer staples allocation is already almost 15%, but I’d rather see it running closer to 20%. For my risk tolerance, I wouldn’t mind seeing it be even more overweight. Conclusion This is a fairly interesting fund in that it doesn’t stand out from the crowd, but it also doesn’t make have any glaring problems. Overall, I’d have to say that it is perfectly adequate but nothing that really gets me excited. This seems to be a dividend growth fund that just tries to remain reasonable. That makes it an acceptable investment for many investors but it doesn’t stand out as being anything great for my desired allocations.

Valuation Dashboard: Consumer Discretionary – November 2015

Summary 4 key factors are reported across industries in the Consumer Discretionary sector. They give a valuation status of industries relative to their history. They give a reference for picking stocks at a reasonable value. This article is part of a series giving a valuation dashboard by sector of companies in the S&P 500 index (NYSEARCA: SPY ). I follow up a certain number of fundamental factors for every sector, and compare them to historical averages. This article is going down at industry level in the GICS classification. It covers Consumer Discretionary. The choice of the fundamental ratios has been justified here and here . You can find in this article numbers that may be useful in a top-down approach. There is no analysis of individual stocks. A link to a list of individual stocks to consider is provided at the end. Methodology Four industry factors calculated by portfolio123 are extracted from the database: Price/Earnings (P/E), Price to sales (P/S), Price to free cash flow (P/FCF), Return on Equity (ROE). They are compared with their own historical averages “Avg”. The difference is measured in percentage for valuation ratios and in absolute for ROE, and named “D-xxx” if xxx is the factor’s name (for example D-P/E for price/earnings). The industry factors are proprietary data from the platform. The calculation aims at eliminating extreme values and size biases, which is necessary when going out of a large cap universe. These factors are not representative of capital-weighted indices. They are useful as reference values for picking stocks in an industry, not for ETF investors. Industry valuation table on 11/2/2015 The next table reports the 4 industry factors. For each factor, the next “Avg” column gives its average between January 1999 and October 2015, taken as an arbitrary reference of fair valuation. The next “D-xxx” column is the difference as explained above. So there are 3 columns for each ratio. P/E Avg D- P/E P/S Avg D- P/S P/FCF Avg D- P/FCF ROE Avg D-ROE Auto Components 18.17 15.33 -18.53% 0.8 0.62 -29.03% 45.52 21.23 -114.41% 10.44 3.9 6.54 Automobiles 14.35 17.67 18.79% 1.02 1.06 3.77% 16.58 21.97 24.53% 15.1 0.21 14.89 Household Durables 19.24 15.46 -24.45% 0.89 0.59 -50.85% 31.14 16.33 -90.69% 9.04 5.3 3.74 Leisure Equip.&Products 23.65 17.82 -32.72% 1.2 0.84 -42.86% 35.83 22.05 -62.49% 9.54 2.63 6.91 Textile,Apparel,Luxury 17.6 16.34 -7.71% 1.07 0.71 -50.70% 27.43 17.23 -59.20% 12.15 7 5.15 Hotels, Restaurants, Leisure 28.5 21.67 -31.52% 1.43 1.04 -37.50% 30.66 24.18 -26.80% 8.96 4.51 4.45 Div. Consumer Services* 26.05 21.49 -21.22% 1.41 1.4 -0.71% 15.58 18.64 16.42% 1.08 11.35 -10.27 Media 21.57 23.31 7.46% 1.81 1.55 -16.77% 22.28 19.9 -11.96% 3.44 -3.45 6.89 Distributors 19.47 14.32 -35.96% 1.76 0.48 -266.67% 36.08 16.28 -121.62% 10.24 3.18 7.06 Internet&Catalog Retail 30.77 37.37 17.66% 1.35 1.8 25.00% 24.02 32.11 25.19% 4.31 -14.7 19.01 Multiline Retail 20.3 19.41 -4.59% 0.5 0.48 -4.17% 25.27 26.81 5.74% 7.1 10.44 -3.34 Specialty Retail 19.9 17.95 -10.86% 0.6 0.56 -7.14% 25.05 21.87 -14.54% 11.78 9.85 1.93 *Averages since 2005 Valuation The following charts give an idea of the current status of industries relative to their historical average. In all cases, the higher the better. Price/Earnings: Price/Sales: Price/Free Cash Flow: Quality Relative Momentum The next chart compares the price action of the SPDR Select Sector ETF (NYSEARCA: XLY ) with SPY. (click to enlarge) Conclusion The Consumer Discretionary sector has widely outperformed the broad market in the last 6 months. It hit a new all-time high last week. Automobiles (the group of car and motorcycle manufacturers) and Internet & Catalog Retail look the most interesting industries now: they are underpriced relative to historical averages for the 3 valuations factors, and quality is above historical averages. However, there may be quality stocks at a reasonable price in any industry. To check them out, you can compare individual fundamental factors to the industry factors provided in the table. As an example, a list of stocks in Consumer Discretionary beating their industry factors is provided on this page . If you want to stay informed of my updates on this topic and other articles, click the “Follow” tab at the top of this article.