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How To Invest ‘Fossil-Free’ With This New ETF?

Pollution and global warming are now blazing issues, raising panic alarms from pole to pole. The louder the moan of panic, the faster the human awareness toward protecting the environment wakes up. The tendency to save the environment and be socially responsive seems to be an order of the day. The financial world also appears to be embracing the theme, which is why a surge in eco-friendly and socially conscious ETFs are now prevalent. One can have a fair understanding of this intention looking at the different areas of the ETF industry. There are clean-energy ETFs, low-carbon ETFs and even environment-oriented ETFs at investors’ disposal. Most recently, the market has received a new environment-pro ETF namely Etho Climate Leadership U.S. ETF (NYSEARCA: ETHO ) from the investment management company Etho Capital in partnership with Factor Advisors. How Does ETHO Work? ETHO follows “an equally weighted all-cap equity index that selects the most carbon-efficient companies across industries. The index is completely divested of fossil fuel companies, as well as those in tobacco, weapons and gambling, and undergoes rigorous screening with expertise from global NGO partners and based on ESG (environmental, social and governances) performance data,” as per the issuer . To accomplish the objective, the index studies total greenhouse gas emissions from over 5,000 equities to choose ‘climate leaders’ in each industry. The index rules out all companies operating in the field of oil, natural gas and coal. Any industry with weak ESG standards does not get an entry to the index followed by ETHO. To add to this, experts’ views related to socially responsible investing are also considered in the stock selection. This results in a 400-stock portfolio having a carbon emissions profile that is 50-70% lower per dollar invested than a conventional broad-based benchmark. No stock accounts for more than 0.56% of the basket. Netflix (NASDAQ: NFLX ), M&T Bank Corp. (NYSE: MTB ) and Energy Recovery Inc. (NASDAQ: ERII ) are top three holdings of the fund, which charges 75 bps in fees. How Could it Fit in a Portfolio? Building a ‘low-carbon’ economy and fighting global warming have become a common theme among the most developed and emerging nations. Recently, China announced that it intends to build a pollution-free environment. And, as part of this mission, the president of China and the U.S. president Barack Obama struck a deal to lessen carbon emissions. The agreement calls for carbon emission reductions by 26% to 28% in the U.S. by 2025. It also includes the first-ever commitment by China to stop emissions from growing by 2030. President Obama has always been active in cleaning up carbon pollution. A proposed Environmental Protection Agency rule seeks to reduce 30% carbon emission from power plants by 2030, compared to the levels in 2005. As per ETHO press release , in September 2015, it was declared that institutions and individuals managing over $2.6 trillion in assets under management are to divest fossil fuel. This figure is likely to go up, as 84% of the millennials support the ESG theme in investing, and close to $41 trillion will move to millennials from baby boomers in the coming 35 years, per the issuer. In short, this ETF can be a great tool to invest in amid the fast-growing awareness of clean energy. In any case, the overall energy sector has been in a lull lately on steeply declining prices, giving investors one more reason to bet on this new ETF. President Obama’s refusal to the planned Keystone XL pipeline and the New York attorney general’s new investigation of Exxon Mobil (NYSE: XOM ) for confusing the public about the impact of climate change also hint at the underlying risks associated with fuel-related investing, per the issuer. By investing in ETHO, investors can also avoid such threats. Competition The competition in this space is negligible with a handful of products sharing the carbon-efficiency theme. There are two low-carbon funds in the market namely The SPDR MSCI ACWI Low Carbon Target ETF (NYSEARCA: LOWC ) and iShares MSCI ACWI Low Carbon Target ETF (NYSEARCA: CRBN ). The nature of these two funds is not exact to ETHO as the duo has global footprint, while the newbie revolves around U.S.-based companies. Since the operating methodology of ETHO is a little different to both low-carbon ETFs, ETHO should not face direct competition from them. However, the duo charges just 20 bps in fees, much lesser than ETHO, which could be a deterrent in amassing investors’ assets for the latter. Original post .

The NYSE Introduces New Rules That Will Disadvantage Small Investors

Summary NYSE is removing stop loss orders and good-till-canceled orders. The stop loss orders were significantly less useful for casual investors, but did provide some excellent opportunities for buying at discounts in illiquid stocks. The removal of good-till-canceled orders is a terrible change that reduces market liquidity by pushing out retail investors. There is a way to mitigate at least part of the impact by arranging conditional orders to trigger a “good-till-date” after the desired price is reached. Investors should use a great deal of caution when learning about using new order types to get around this problem. For investors who haven’t heard, the NYSE released an update to tell traders and investors that they would be eliminating two types of orders. Bloomberg focused on the “stop loss” orders , but the bigger change may be regarding the “good-till-canceled” order. Chris Demuth Jr. had an article out recently that covered some of the changes. I don’t read much of what comes out on Bloomberg , but I do browse through the works of Mr. Demuth Jr. and I appreciated his take on it. I’d like to share my take on the investing implications of each change. No Stop Loss Orders While I’m not a fan of removing tools from the hands of smaller investors, I can understand the exchange wanting to remove stop loss orders. They are used very infrequently, and may contribute to absurd price movements. I’ve often warned readers that I consider stop loss orders to be a terrible way to design a portfolio for failure in the mREIT space. Some of my most successful ideas have been designed specifically to take advantage of market failures, where a sell-off by one group of investors would trigger prices to drop low enough to trigger the stop loss orders. For instance, I predicted that the major news reporting sites would declare a huge miss on earnings for Orchid Island Capital (NYSE: ORC ), because analysts were forecasting “Core EPS” and the company only reported “GAAP EPS”. The extremely different calculations were going to result in the news stations reporting “a huge miss”, when there was no such miss. That was a great trade opportunity for investors. The stop loss orders were a great source of profits in the mREIT sector, because prices tend to drop significantly on the ex-dividend date. Even if the investor had their order designed to be adjusted for dividends, a little irrationality among other players could trigger the price to fall far enough to trigger those orders. When it comes to protecting traders from themselves, removing stop loss orders may actually be a good thing. On the other hand, the stop loss orders may also be used by traders that were shorting a security and wanted to exit their short position if something happened that suddenly drove prices higher. In this case, removing the stop loss does little to help investors, because any investor involved in shorting should be competent enough to know the risks and design their strategy accordingly. Implications Removing stop loss orders should result in less total volatility for traders and investors. Less volatility means lower risk premiums, and therefore, higher fair values, assuming investors maintained the same risk tolerance as before. This should be good for the market overall, but it remains a sad day for me as an investor, because finding an opportunity where stop loss orders would be triggered by an irrational price movement was a great strategy for finding good investments at bargain prices. No Good-Till-Canceled Orders Neither the update from NYSE nor the one from Bloomberg were thorough in defining which good-till-canceled orders would be removed. Were these orders indefinite, or were they orders that would be good for 30-60 days unless canceled? Personally, I find this change to be absolutely absurd. This hurts retail investors in a bad way, and it helps large investors. Allow me to explain how I can get around this rule. If I’m no longer allowed to place a “good-till-canceled” order, I’m still capable of placing a conditional command to enter a new limit order to buy shares if a certain condition, such as a price, is reached. The old order would’ve looked like this: “I want to buy shares of the Schwab U.S. REIT ETF (NYSEARCA: SCHH ) at any time in the next 60 days if those shares can be purchased for $35.00 or less.” The new order would look like this: ” If shares of the Schwab U.S. REIT ETF fall below $35.00, enter a new order for the day that I would like to buy shares if they can be purchased for $35.00 or less”. The only difference in these orders is the amount of work to create the order, and how frequently I might need to reset the orders. I had never bothered using the new order type, because the old order was so simple. For any investor who might be confused with the second order type, this is known as a “good-till-date” order, and there was no reference to the NYSE removing “good-till-date” orders. Since this new system would only enter the order after the price of $35.00 was seen, it would have a fairly solid opportunity for the order to execute. I Loved Good-Till-Canceled A substantial portion of my investment portfolio (excluding mutual funds in employer sponsored accounts) was purchased using this order type. I will admit that in one scenario, I forgot I had left one of these orders open and got a surprise e-mail indicating that my order had finally been triggered several weeks later. No problem, I keep enough cash on hand to cover such orders, and had 3 days to get the funds into my account to cover my purchase. My Favorite Good-Till-Canceled Order The date I got those “surprise” e-mails telling me I had some orders triggered was August 24th. Many investors may remember the date for the very short-term price fluctuation that triggered the NYSE to introduce these changes. On that day, I picked up shares of SCHH at $37.52 and shares of the Schwab U.S. Dividend Equity ETF (NYSEARCA: SCHD ) at $34.59. I’m up quite nicely on both positions. Implications Removing this order type should have the exact opposite impact of what the NYSE claims to want. Those good-till-canceled orders encouraged prices to be more efficient, because they allowed buyers who were aware of the risks to effectively leave someone standing in line to buy up any shares that people wanted to sell at a given price. It requires significantly more selling pressure for prices to fall rapidly when numerous investors have left an order that they would be happy to buy at a certain price. Without the good-till-canceled orders to buy up shares of those ETFs, the crash on August 24th could have been substantially worse. The bigger issue here, in my opinion, is that this creates an unfair competitive advantage for the larger players. Many retail investors may not have access to the tools to place the “new order”, but the large traders have had these tools for a long time and have vastly more complicated models to execute them. The gap between the tools available to normal investors and the tools available to large investors will increase, while the liquidity available in the market will decrease. A reduction in liquidity would increase the volatility of price swings and work in precisely the opposite manner of removing the “stop loss” orders. In this case, the increased volatility would encourage lower fair values, assuming the same risk profile for the investor. Clearing Orders One major reason that the good-till-canceled order was so important is the presence of hard selling or buying activity when the market opens. If investors all swap to using conditional orders to create an order to buy a security, then those orders won’t be on the NYSE’s books. Hard selling could result in the opening price being very low, triggering several new “good-till-date” orders to be introduced to buy the security, and the price immediately popping back up. Every investor who was trying to sell at the moment trading opened would have lost out, because many people desiring to buy at those prices would have been excluded from having their order active until the initial price had been recorded. I may need to look into those conditional orders and see if I can create one that simply checks the date, and if it is before a certain date enters a new “good-till-date” limit order. That would be nice for allowing me to have the order in place before the market opens each day. Unfortunately, each investor wanting this option would need to speak with their brokerage and determine if it is available for their account types, and if they would be permitted to use it. Even if their brokerage offers it, investors should be very careful to ensure they know precisely what they are doing before they experiment with new order types.

U.S. Geothermal – Still No Short-Term Catalysts On The Horizon

Summary US Geothermal continues providing decent financial results. This year the company demonstrates some progress in taking two geothermal projects, WGP Geysers and El Ceibillo, closer to their production phase. However, in my opinion, setting COD (“Commercial Operation Date”) at 2Q 2018 (El Ceibillo) and 3Q 2017 (WGP Geysers) is going to be a challenge for the company. I believe that currently US Geothermal’s shares are overvalued against its peers. On November 23, 2015 US Geothermal Inc (NYSEMKT: HTM ) published its 3Q 2015 results. Below I am commenting on these results. I am also covering the last developments at the two most advanced geothermal projects. Year to date financial results The table below summarizes year to date financial results: Source: Simple Digressions and the company’s reports As the table shows, the results reported by the company in the first nine months of 2015 were comparable to those reported last year. However, a 17.5% increase in book value is worth commenting. To remind my readers, I consider book value as one of the best performance measures of any company. Simply put, if a company is able to increase its book value in the long-term, it means that it has built its value. Let me show how HTM was building its value: Source: Simple Digressions and the company’s reports Note: to calculate HTM book value I have excluded two issues, which distort it in the long-term: Accumulated other comprehensive income (AOCI) – it is part of the equity section of the balance sheet, representing accumulated unrealized gains and unrealized losses, such as cash hedges or currency translation adjustments. Every year or quarter this item fluctuates, very often quite much. What is more, AOCI depends on exchange rates, interest rates and other issues, which the company does not control. Therefore I have eliminated AOCI from my calculations of book value. Non-controlling interest – because non-controlling interest represents the stakes other entities hold in the company’s consolidated assets I have excluded this issue from my calculations. Because non-controlling interest is excluded from my calculations, the final figure demonstrates book value attributable to the company’s shareholders. As the chart shows, HTM increased its book value attributable to its shareholders from $0.66 per share at the end of 2012 to $0.80 per share at the end of September 2015 (an increase of 21.2%). In my opinion, it is a big plus – US Geothermal, increasing its book value in the long-term, behaves like a classic utility company. Operating results The table below presents basic operating results: Source: Simple Digressions and the company’s reports As the table shows, year to date US Geothermal reported slightly lower electricity generation and slightly higher operating expenses than in the same period in 2014. After taking a closer look at each operating facility I came to the conclusion that the main factor, standing behind higher operating expenses, was the Raft River’s performance. Raft River, located in Idaho, is the smallest HTM’s power plant, in terms of generation capacity (9.4 MW). Since the beginning this facility has been lagging behind other two plants. However, this year this underperformance is particularly striking: (click to enlarge) Source: Simple Digressions and the company’s reports As the chart shows, this year each megawatt hour, generated by Raft River, delivered only $4.94 in operating income (I call it “Netback”). Other plants, San Emidio and Neal Hot Springs, delivered $61.19 and $75.66, respectively. In its 3Q 2015 report the company explained that there were two reasons standing behind this underperformance: 371 lost hours during two unplanned outages (according to my calculations, these outages were responsible for the lost revenue of $196 thousand) Higher operating costs due to turbine repairs and wage increases – year to date these additional costs were $361.5 thousand (turbine) and $142.3 thousand (wages). I think that technical problems, experienced at geothermal facilities, happen sometimes. However, granting wage increases to the crew when the facility is in trouble is not, in my opinion, the best practice. Projects under development US Geothermal has four projects classified as “Projects under development”: El Ceibillo Phase I, San Emidio Phase II, WGP Geysers and Crescent Valley Phase I. Of these four projects, in 2015 the company was developing mainly two of them: WGP Geysers and El Ceibillo. Below I am commenting on these developments. WGP Geysers In April 2014 the company acquired the so-called “Geysers project”. To remind my readers, this project is located in the Californian broader Geysers geothermal field, the largest producing geothermal field in the world. In June 2015 the company completed a flow test program of the three production wells. These tests confirmed that wells were operational but to achieve a planned long-term capacity of 28.8 MW, two or three additional production wells should be reopened (the company does not need to drill new wells). In other words – before any geothermal company takes a decision on eventual production, flow tests have to be performed to establish resource viability. US Geothermal completed such tests and announced that two or three additional production wells were needed. In my opinion, it is an important message. It seems that the company is approaching a production decision on WGP Geysers – if such is the case it could be a game changer. However I have some doubts. The company estimates that production at Geysers should start in the third quarter of 2017. In my opinion, it will be a challenge to meet this timeline because HTM must, for example, open two or three production wells, connect its property to the grid, sign a power purchase agreement, find financing for its project etc. All these issues need time so the two-year time frame, in my opinion, seems to be very optimistic. El Ceibillo, Guatemala US Geothermal used to postpone a commercial operation date (COD) of El Ceibillo many times. Fortunately, since the fourth quarter of 2014 the company has been confident that this facility should start its operations in the second quarter of 2018. On October 13, 2015 HTM was granted the concession agreement for the El Ceibillo development. To remind my readers, the previous concession expired this year so now the company is once again formally allowed to continue development. Currently the company is in the middle of it. In 2014 it completed a nine hole temperature gradient drilling program (an initial part of any development). This year HTM is performing flow tests – one well (EC-2A) confirmed that there is a commercial resource at El Ceibillo but at least two additional wells are needed to extend the resource area (drilling at the first well, EC-3, started on October 29 ). Summarizing, the company is at its intermediate stage of development at El Ceibillo. In my opinion, setting 2Q 2018 as a COD is going to be, similarly to WGP Geysers, a challenge. Equipment purchase On November 9 the company announced it acquired equipment for the construction of three binary geothermal power plants. This equipment was acquired at a significant discount to its cost. According to the company: “We paid $1.5 million, which is approximately 5% of the equipment’s original cost, a saving of roughly $28 million. This equipment gives us the ability to expand our megawatt output at our existing portfolio of advanced stage development projects at significantly lower cost, and in much shorter construction timeframes” The equipment is supposed to be applied to the Crescent Valley and San Emidio Phase II projects. The initial market reaction was very positive – on November 9, the company’s shares closed 8.9% higher than on the previous day. Well, in my opinion, the equipment acquisition is surely a positive thing in the long-term – the company should save a lot of money and time at the construction of Crescent Valley and San Emidio II. The management did a very good job, indeed. However, in the short-term this message means nothing – the company has just bought some equipment, which will be stored as inventory, waiting a few years to be applied. Additionally, this equipment will be accounted for as inventory and disclosed at cost ($1.5 million). However, the most paradoxical thing is the fact that when both projects start their operations, the company will be allowed to recognize depreciation charges attributable to only $1.5 million. Putting it differently, an excellent managerial success, due to accounting and fiscal rules, will be converted into lower depreciation charges and higher taxes in the future. Valuation To demonstrate US Geothermal’s market valuation I have calculated the Enterprise Value / EBITDA multiples for a few geothermal energy stocks. The chart below, depicting these ratios, was taken from my article on another geothermal company, Polaris Infrastructure. As the chart shows, currently the company’s shares are trading at a multiple of 12.3, which means that they relatively overvalued against its peers: Summary US Geothermal continues to provide descent financial results. However, due to large non-controlling interest component, HTM shares are relatively overvalued against its peers. In this article I have covered two projects, which are approaching production phase – WGP Geysers and El Ceibillo. Year to date some progress towards putting these projects closer to production has been evident. However, in my opinion, to meet time frames set by the company is going to be a challenge. Therefore I am sustaining my previous thesis on US Geothermal – there are still no short-term catalysts to lift the company’s shares. Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.