Tag Archives: apple

Apple 2016 predictions: Acquisitions, accessories

The crystal ball for Apple in 2016 shows a second-generation Apple Watch and 10th-generation iPhone, possibly new accessories like wireless earbuds and just maybe a major acquisition. But don’t expect the Cupertino, Calif.-based consumer electronics giant to enter any new product categories in 2016. Apple (AAPL) is very selective about the markets it chooses to enter and takes its sweet time debuting new products. So rumored products like an Apple

Low-Risk Tactical Strategies Using Volatility Targeting

Summary In this volatility targeting approach, the allocation between equity and bond assets is varied on a monthly basis based on a specified target volatility level. Low volatility is the goal. Two strategies are presented: 1) a moderate growth version and 2) a capital preservation version. 30 years of backtesting results are presented using mutual funds as proxies for ETFs. For the moderate growth version, backtests show a CAGR of 12.6%, a MaxDD of -7.4% (based on monthly returns), and a return-to-risk (CAGR/MaxDD) of 1.7. For the capital preservation version, CAGR = 10.2%, MaxDD = -4.9%, and return-to-risk (CAGR/MaxDD) = 2.1. In live trading, ETFs can be substituted for the mutual funds. Short-term backtesting results using ETFs are presented. I must admit I am somewhat of a novice at using volatility targeting in a tactical strategy. But recently, the commercially free Portfolio Visualizer [PV] added a new backtest tool to their arsenal, so I started studying volatility targeting and how it works. Volatility targeting as used by PV is a method to adjust monthly allocations of assets within a portfolio based on the volatility of the assets over the previous month(s). In this case, we are only looking at high volatility equities and very low volatility bonds. To maintain a constant level of volatility for the portfolio, when the volatility of the equity asset(s) increases, allocation to the bond asset(s) increases because the bond asset has low volatility. And when the volatility of the equity asset(s) decrease, allocation to the bond asset(s) decreases. In PV, you can specify a target volatility level for the portfolio. Since I wanted an overall low volatility strategy with moderate growth (greater than 12% compounded annualized growth rate), I mainly focused on very low volatility target levels. I ended up using a monthly lookback period on volatility to determine the asset allocations because monthly lookbacks produced the best overall results. I quickly came to realize that high-growth equity assets are desired for the equity holdings, and a low-risk (low volatility) bond asset is preferred for the bond fund. In order to assess the strategy, I used mutual funds that have backtest histories to 1985. This enabled backtesting to Jan 1986. In live trading, ETFs that mimic the funds can be used. I will show results using the mutual funds as well as the ETFs. The equity assets I selected were Vanguard Health Care Fund (MUTF: VGHCX ) and Berkshire Hathaway (NYSE: BRK.A ) stock. Either Vanguard Health Care ETF (NYSEARCA: VHT ) or Guggenheim – Rydex S&P Equal Weight Health Care ETF (NYSEARCA: RYH ) can be substituted for VGHCX in live trading. BRK.A is, of course, a long-standing diversified stock. These two equity assets were selected because of their high performance over the years. Of course, these equities had substantial drawdowns in bear markets, something we want to avoid in our strategy. But in volatility targeting, as I have found out, it is advantageous to use the best-performing equities, not just index-based equities. Of course, it is assumed that these equities will continue to perform well in the future as they have in the past 30 years, and that may or may not be the case. For the low-risk bond asset class, I used the GNMA bond class. The selection of the GNMA bond class was made after studying performance and risk using other bond classes such as money market, short-term Treasuries, long-term Treasuries, etc. The GNMA class turned out to be the best. I selected Vanguard GNMA Fund (MUTF: VFIIX ) for backtesting, so that the backtests could extend to Jan 1986. There are a number of options for ETFs that can be used in live trading, e.g. iShares Barclays MBS Fixed-Rate Bond ETF (NYSEARCA: MBB ). Moderate Growth Version (CAGR = 12.6%) A moderate growth version is considered first. VGHCX and BRK.A are the equities always held in a 66%/34% split; VFIIX is the bond asset; and the target volatility is 6%. The backtested results from 1986-2015 are shown below compared to a buy and hold strategy of the equities (rebalanced annually). (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) It can be seen that the compounded annualized growth rate [CAGR] is 12.6%, the maximum drawdown [MaxDD] is -7.4% (based on monthly returns), and the return-to-risk [MAR = CAGR/MaxDD] is 1.7. There are three years with essentially zero or very slightly negative returns: 1999, 2002 and 2008. The worst year (2008) had a -1.6% return. The monthly win rate is 74%. The percentage of VFIIX varies between 1% and 93% for any given month. The Vanguard Wellesley 60/40 Equity/Bond Fund (MUTF: VWINX ) is a good benchmark for this strategy. The overall performance and risk of VWINX are shown below. It can be seen that the CAGR is 9.1%, while the MaxDD is -18.9%. These performance and risk numbers are quite good for a buy and hold mutual fund, but the volatility targeting strategy produces higher CAGR and much lower MaxDD. VWINX Benchmark Results: 1986-2015 (click to enlarge) Capital Preservation Version (MAR = 2.1) For this version, the target volatility was set to a very low level of 3.5%. This volatility level produced the lowest MAR. The results using PV are shown below. (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) It can be seen that the CAGR is 10.2%, the MaxDD is -4.9%, and the MAR is 2.1. Every year has a positive return; the worst year has a return of +0.4%. The monthly win rate is 75%. Limited Backtesting Using ETFs To show how this strategy would play out in live trading, I have substituted RYH for VGHCX and MBB for VFIIX. The second equity asset is BRK.A as before. Backtesting is limited to 2008 with these ETFs and the BRK.A stock. The backtest results are shown below. (click to enlarge) (click to enlarge) The ETF results can be compared with the mutual fund results from 2008 to 2015. The mutual fund results are shown below. (click to enlarge) (click to enlarge) It can be seen that the overall performance over these years is lower than seen over the past 30 years. The CAGR is 9.7% from 2008 to 2015 for the mutual funds and 9.3% for the ETFs. Although this performance in recent years is less than earlier performance, it is still deemed acceptable for most retired investors interested in preserving their nest egg while accumulating modest growth. The good quantitative agreement between mutual funds and ETFs between 2008 and 2015 provides some confidence that using ETFs is a viable option for this strategy. Overall Conclusions The tactical volatility targeting strategy I have presented has good potential to mitigate risk and still provides moderate growth in a retirement portfolio. The moderate growth version has a CAGR of 12.6% and a MaxDD of -7.4% in 30 years of backtesting. The capital preservation version has a CAGR of 10.2% and a MaxDD of -4.9% over this same timespan. The return-to-risk MAR using target volatility is much better than passive buy and hold approaches, especially in bear markets when large drawdowns may occur even in diversified portfolios.

Go For Birchcliff’s Preferred Shares Instead Of The Common Stock

Summary Birchcliff enjoys an ultra-low production cost for its natural gas, thanks in part to processing the majority at its own processing plant. I’m curious to see Birchcliff’s plan for 2016 as, despite the $120M price tag, it would make sense to expand the gas processing plant. The IRR is positive and will be 22% at a 10% higher gas price, so technically and theoretically Birchcliff should be going ahead with the expansion plans. But everything will depend on the company’s plans to achieve production growth, and I think Birchcliff will have to choose between the gas plant and a higher gross production rate. It’s pretty obvious the vast majority of the oil and gas producers are bleeding in the current price environment. That’s particularly true for Birchcliff Energy ( OTCPK:BIREF ) where the majority of the annual production consists of natural gas, which has been hit pretty hard. In fact, the gas price in North America has even dropped to less than $2. BIR data by YCharts Birchcliff is a Canadian company and I think it would be a better idea to trade the shares through the facilities of the Toronto Stock Exchange, where Birchchliff is listed on the main board with BIR as its ticker symbol . The average daily volume is much better in Canada as approximately 660,000 shares are changing hands on a daily basis for a daily dollar volume of $2M. El Nino Is Hurting the Company’s Top and Bottom Lines Let’s start with the good news: Birchcliff Energy was able to keep its production rate stable at a total of 38,400 barrels of oil-equivalent per day. As I said, the vast majority of this comes from natural gas sales and the revenue from natural gas was approximately 3.25 times higher than the revenue generated from selling the attributable oil output. As the average production rate in the same quarter of last year was just over 34,000 boe/day and as the average in the first nine months of the current financial year was approximately 38,400 barrels per day, Birchcliff has done a pretty good job at keeping its production rates pretty consistent despite the worsening climate on the oil and gas front. (click to enlarge) Source: Financial statements. The total revenue in the third quarter of the financial year was almost C$79M ($57M) , which is more than 25% lower compared to the same quarter last year, so the higher output didn’t compensate for the lower oil and gas prices. The operating costs also increased a bit, due to increased marketing and transportation expenses. Nonetheless, Birchcliff was able to write black numbers on its bottom line, and the company generated a net profit of C$4.8M ($3.65M) in the third quarter of 2015. Keep in mind that Birchcliff hasn’t hedged any of its gas and oil production, so “what you see is what you get.” The revenue has not been boosted by one-time events, such as the gain on derivative instruments. Source: Financial statements. The operating cash flow on an adjusted basis was C$44.3M ($32M), which is pretty good considering the circumstances and the shortfall to cover the capital expenditures. The investing part of the working capital position was limited to just C$20M ($14.5M). This could be better, but it could also have been a lot worse. This is where Birchcliff’s low-cost gas production at Montney comes in handy. Will Birchcliff Generate a Sufficient Amount of Cash Flow to Cover Its 2016 Capital Expenditures? My main test for Birchcliff will be in seeing what the company is planning to do next year. The original plan called for another 10%-12% production increase to 42,000-45,000 barrels of oil-equivalent per day, but I can imagine the company is currently developing a revised capital plan that will forego any production expansion while waiting for a higher gas price. This might probably be the smartest decision because even though the production costs at Montney are quite low, it might not be sufficient to cover the additional capital expenditures to indeed break even on the cash flow front. Source: Company presentation. It’s encouraging to see that even in the current gas price environment, the annualized operating cash flow will be roughly C$160M ($116M) and Birchcliff will have to try to keep the capital expenditures limited to approximately this level. Fortunately, the Canadian Dollar continued to weaken. This basically means that the lower natural gas price expressed in USD is partly compensated by the weaker CAD, which is also the currency Birchcliff is reporting its financial statements in. (click to enlarge) Fortunately, Birchcliff Energy still has ample access to liquidity as its bank has confirmed and increased an existing credit facility. Birchcliff can still draw approximately US$120M from this credit facility, and that should be sufficient to cover the capital shortfalls for the next two to three years. The Preferred Shares Could Be a Solution to Raise More Cash No company likes to issue new shares at the bottom of a cycle, but Birchcliff has an attractive Plan B. Birchcliff has two series of preferred shares in the market, and both the A-series and C-series have 2 million outstanding shares. The A-shares have a fixed 8% yield (payable quarterly) and are currently trading at 70% of par (and can be reset in 2017 based on the five-year yield on Canadian government bonds with a mark-up of 6.83%). The C-series have a fixed 7% yield . Both preferred share issues are perpetual, so Birchcliff can decide whether or not it wants to retire these preferred shares in the future. Should Birchcliff double the preferred share issue, it could raise C$70M ($50M) in a heartbeat, further reducing the pressure on its balance sheet. This could cover almost two years of capex funding shortfall. The additional cost of raising this C$70M? Just C$7.5M ($5.5M) per year. That’s not cheap, but it would provide an easy way to fund the ongoing activities. Once Birchcliff’s cash flows increase, the company can easily repurchase the preferred shares. Investment Thesis Birchcliff Energy is definitely hoping for a harsh winter to see a boost in the average gas price. The cash flow situation remains under control, but I think I would prefer the additional layer of safety and purchase the preferred shares. Yes, the upside is a bit more limited, but the series-C preferred share now yields almost 9%. That excludes any potential capital gains if Birchcliff decides to repurchase the preferred shares at par value sometime in the future. It will be very interesting to see what kind of capital investment plan Birchcliff has been preparing for 2016, and what it will do with the PCS gas plant, which was expected to see its throughput increase by 30% by the end of 2016. I think holding off on the expansion is the wisest decision, considering the IRR is just 22% at an AECO gas price of $2.5/GJ (currently at $2.25) and the initial capex is budgeted at US$120M. 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.