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Riding The Petchem Boom With A Utility

Summary Entergy Corp. is a utility operating in the heart of America’s petrochemical boom. Entergy plans to steadily grow both earnings and dividends through 2018 at least. Shares are undervalued and I believe Entergy is a buy. The ‘shale boom’ just might be turning into the ‘shale bust’ as we speak, but the petrochemical boom is alive, well and durable. That’s because natural gas and natural gas liquids, inputs for the petrochemical industry, are now cheaper in America than anywhere else. This gives the U.S. a major advantage over other countries. The American petrochemical industry is really focused on the eastern Texas-Louisiana Gulf Coast. Not surprisingly, petrochemical plants and LNG export facilities are springing up all over the area. This boom is driven by demand, not supply, and so lower gas prices only help this growth trend. Investing in end-use chemical producers or LNG exporters is one way to participate in this trend, but utilities are also a low-risk way to be involved in this. Entergy Corporation (NYSE: ETR ) is the perfect company for this, in my opinion. Entergy generates power in New England from a handful of nuclear power plants, but the bulk of Entergy’s business is in generation and transmission of power in Mississippi, Arkansas, eastern Texas, and Louisiana. Louisiana is the largest piece of Entergy’s business, and, importantly, Entergy supplies much of the petrochemical industry along the Gulf Coast. Best of all, Entergy now yields over 5%, and has recently begun increasing its dividend as a result of the economic growth in its service areas. Solid growth and reliable income Some of Entergy’s industrial customers use as much power as a small city, and currently there are several plants being built along the Gulf Coast. This includes Cameron LNG in Louisiana, a Sasol cracker/chemical complex, two methanol plants under construction in Texas and Louisiana, and one steel mill under construction in Arkansas. (click to enlarge) Courtesy of Entergy Corp Investor Relations. The key ingredient to the industrial boom in this region is cheap, reliable energy. Louisiana and Arkansas have no renewable energy mandate. Texas does have one, but it’s not very big. Therefore, it’s no surprise that there’s three states have among the lowest electricity costs in the country. Low electricity prices entice these big industrial customers into this region and, as we will see, this in turn brings more residents and more efficient power distribution. It’s a virtuous cycle not often seen in the U.S. anymore. What does that mean for us? Well, it means 2% load growth for residentials and 4% growth for industrials, each year, through 2018 at least. (click to enlarge) Courtesy of Entergy Corp Investor Relations. Currently Entergy’s dividend is 57% of earnings, on a per-share basis. Over the last twelve months, Entergy has generated only $509 in free cash flow, but has paid $617 million in dividends. That, however, is because Entergy is building up its generation capacity with several power plants. Once the first new plant is up, St. Charles power station, Entergy will have much more financial flexibility. I fully expect Entergy to continue raising its dividend by low single digits through 2018, and perhaps even more in the following years. Valuation and conclusion (click to enlarge) Courtesy of Entergy Corp Investor Relations Is Entergy a good value right now? I believe it is. According to FAST Graphs, Entergy trades at 11.3 times earnings, which is quite a bit lower than the stock’s ten-year average valuation of 13.4 times earnings. That’s a 15.6% discount to its full-cycle average valuation, and there’s no reason Entergy shouldn’t achieve at least that average valuation. When you add a 5.1% dividend onto that, there’s a lot to like about this utility. Here’s what you’ll get with Entergy: A steady-growth utility in an economically strong area. As a utility, the barriers to entry in this industry are very high, which puts a lot of safety into this name. For these reasons, I believe Entergy is a buy right here.

5 ETFs To Profit From The Oil Collapse

Oil prices continues their sharp decline Monday as mild weather forecasts added to the commodity’s woes after Organization of the Petroleum Exporting Countries (OPEC) failed to arrive at any agreement to cut production, on Friday. The commodity slumped to its lowest levels in almost seven years, dragging down shares of oil & gas companies and also weighing on the broader market. In the absence of any agreement on production cuts, OPEC as well as non-OPEC members such as Russia, will continue to produce oil in record volume despite weak global demand. In fact, production is going to rise now with Iran set to start exporting oil next year when international sanctions are lifted. Iran was OPEC’s second-largest producer before sanctions and will battle now to regain that position. Further, despite price plunge, US production has not fallen as much as analysts expected earlier. With no end in sight for this supply overhang, the outlook for oil remains negative. Further, even if OPEC somehow agrees to cut production in its next meeting in June, the resulting rally in oil prices would likely bring many smaller producers back into the market and add to supply woes. Now, as the Fed looks all set to raise rates next week and the ECB expected to step up stimulus measures in the coming months, the US dollar may continue to strengthen and pose more headwinds for oil. I believe that oil prices are going to stay “lower for longer”. Looking at the longer-term picture, the rise in climate change awareness would also deter investments in this space. Investors looking for ways to profit from the very challenging outlook for oil should consider investing in the following ETFs. US Global JETS ETF (NYSEARCA: JETS ) Airlines are big beneficiaries of cheap oil and a brightening economy. Fuel accounts for a large portion of airlines’ operating expenses and “lower for longer” oil will further boost airlines’ profitability. This product provides investors access to the global airline industry, including airline operators and manufacturers. It uses a smart beta approach in selecting and weighting its holdings and thus charges a slightly higher fee of 60 bps. JETS is up more than 9% since inception, despite recent headwinds related to worries regarding impact on terrorist attacks on tourism and earlier investigation by the Justice department regarding collusion in pricing practices. First Trust NASDAQ Global Auto ETF (NASDAQ: CARZ ) Ultra-low interest rates and plunging gas prices have been fueling demand for new vehicles in the US. With strong sales for the month of November, auto sales this year appear to be on track to beat the earlier record set in 2000. While higher rates would definitely be negative for the industry, the Fed is likely to move very slowly on rate hikes, and thus the auto industry is expected to continue to do well in the months to come. This product provides investors exposure to automobile manufacturers across the globe. About 80% of assets are invested in stocks of automakers based in the US, Germany and Japan. In view of higher expenses and trading costs, this product is more suitable as shorter-term tactical holding. PowerShares Dynamic Leisure and Entertainment Portfolio (NYSEARCA: PEJ ) While low prices have helped US consumers a lot, they have so far been rather cautious in spending. But now with the labor market firming up, consumers are expected to step up their spending finally, particularly during the holidays. Per Fitch Ratings “U.S. leisure companies will continue to benefit from consumer spending growth in 2016, aided by the trend towards more experiential, rather than material, purchases.” PEJ is a smart beta ETF that uses a variety of investment merit criteria to select the best stocks from airlines, restaurants, movies & entertainment, casino & gambling and other leisure related industries. WisdomTree India Earnings Fund (NYSEARCA: EPI ) India is a huge importer of oil and tumbling energy prices bode well for the country. In addition to narrowing trade, current account and fiscal deficits, lower oil prices have resulted in a drop in inflation. Lower inflation helps the country’s central bank to cut rates, boosting growth. Further, the government has successfully used this opportunity to abolish diesel subsidies and raise taxes on petroleum, which will go a long way in improving the country’s fiscal health. India’s growth is fueled mainly by domestic consumption, largely insulating the economy from global headwinds EPI tracks profitable companies in India using an earnings-weighted methodology. Investors should consider adding this ETF to their portfolio. It is one of the largest, broadest and most liquid India equity ETFs. Market Vectors Oil Refiners ETF (NYSEARCA: CRAK ) Refiners seem to be the only bright spot in the energy space as they are a differentiated segment of the energy sector. Crack spread – the difference between the price of crude oil and its refined products – is an indicator of the profitability of the refining industry and lower oil prices could result in higher margins for refiners. This is the first and the only US-listed ETF to provide pure-play exposure to global oil refiners. However, with more than half of its assets invested in non-US companies, the product has foreign exchange risk and also a higher fee of 59 basis points. Original Post

What You Don’t Own

By Andy Hyer What a year it’s been for Energy. Its rout can be seen in the chart of XLE shown below: Price return only, not inclusive of dividends. Updated through 12/8/15 However, it is not just 2015 where Energy has been weak. Consider the relative strength chart below of the Energy Sector SPDR ETF (NYSEARCA: XLE ) versus the S&P 500 (SPX): (click to enlarge) Price return only, not inclusive of dividends. Updated through 12/8/15 As shown above, Energy has been weaker than the S&P 500 for the majority of the time since June 2008 – although the worst of the relative performance has clearly come in the last year or so. When a sector is weak, a relative strength strategy seeks to underweight that sector. After all, what you don’t own is every bit as important as what you do own . Consider the chart below of the Energy exposure in the Dorsey Wright Technical Leaders Index (used for the PowerShares DWA Momentum Portfolio ETF (NYSEARCA: PDP )): As of 10/1/15 This index is constructed by taking a universe of approximately 1,000 U.S. mid- and large-cap stocks and ranking them by their PnF relative strength characteristics. The top 100 stocks make it into this index. Each quarter, the index is reconstituted to kick out any stocks that have lost sufficient momentum and to replace them with stronger names. One of the unique characteristics of this index is there are no sector constraints. If a sector is weak, it may have little or no exposure in the index. This quarter is now the 4th quarter in a row where PDP has had zero Energy exposure. Much is made of how momentum strategies seek to own the “hottest” stocks. Perhaps, more should be made of momentum strategies seeking to avoid the biggest losers. In the end, that matters every bit as much. The relative strength strategy is NOT a guarantee. There may be times where all investments and strategies are unfavorable and depreciate in value. See www.powershares.com for a prospectus on PDP.