Tag Archives: author

4 REIT ETFs To Buy After The Weak Jobs Report

Real estate investment trusts or REITs certainly have reasons to cheer. The disappointing U.S. jobs data for September has pushed the possibility of a rate hike in the near term further into the dark. Headline job gains for September came in at 142,000 versus estimates of 200,000. Further, average hourly earnings in the month moved south. According to the CME FedWatch Tool , there is now a negligible 6% possibility of a rate hike at the October 28 meeting and a 39% probability at the December 16 meeting, down from 44% before the release of the weak jobs data. This means that REITs will continue to draw leverage from the near zero interest rate in nearly a decade for refinancing their debts. Lower interest rates lead to a lower borrowing cost for the REITs on which they are highly dependent for acquisitions, development and redevelopment activities. Till September this year, REITs raised $49 billion in initial capital, debt and equity capital offerings (IPOs – $1.4 billion, Secondary Common – $20.3 billion, Secondary Preferred – $2.1 billion and Secondary Debt – $25.3 billion). Apart from ultra low interest rates, the capability to generate higher dividend yields makes the investment case for REITs very strong. This is especially true when treasury yields are hovering near its lowest level since April and is down from its peak of 2.5% in June. The U.S. law requires REITs to distribute 90% of their annual taxable income in the form of dividends. This has been one of the biggest enticements for investment in REITs amid global uncertainties, both in the money and commodities markets. In fact, dividend yield of REITs came in better than the market. As of September 30, 2015, the dividend yield of the FTSE NAREIT All REITs Index was 4.44% while the yield of the FTSE NAREIT All Equity REITs Index was 3.97%. With this, REITs outstripped the 2.28% dividend yield offered by the S&P 500 (read: REIT ETFs for Income and Diversification ). ETFs in Focus In the backdrop of weak jobs report, it looks like it’s the right time to bet on the sector through ETFs, so as to reap the benefits in a safer way. We have picked four ETFs that have posted handsome gains in the past five days as well as in the past one month (see all Real Estate ETFs here). iShares U.S. Real Estate ETF (NYSEARCA: IYR ) Launched in 2000, IYR follows the Dow Jones U.S. Real Estate Index that measures the performance of the real estate industry of the U.S. equity market. The fund comprises 119 stocks with Simon Property Group Inc. (NYSE: SPG ), American Tower Corporation (NYSE: AMT ) and Public Storage (NYSE: PSA ) as the top holdings. IYR has garnered more than $4 billion assets and trades in a solid volume of nearly 10 million shares per day. The fund charges 43 bps in fees and has a dividend yield of 3.4%. It has returned 4.2% in the past five days and 5.8% over the last one month (as of October 7, 2015). It has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook. SPDR Dow Jones REIT ETF (NYSEARCA: RWR ) Functioning since 2001, RWR seeks investment results of the Dow Jones U.S. Select REIT Index. The fund consists of 98 stocks that have equity ownership and operate commercial real estate, with the top holdings being Simon Property Group Inc., Public Storage and Equity Residential (NYSE: EQR ). The ETF has amassed nearly $3 billion in assets and trades in a volume of 334,000 shares each day. It charges 25 bps in fees from investors per year and has a dividend yield of 3.3%. RWR gained 4% in the past five days and 7.8% in the past one month. It carries a Zacks ETF Rank #3 with a Medium risk outlook. Schwab U.S. REIT ETF (NYSEARCA: SCHH ) This fund debuted in 2011 and tracks the total return of the Dow Jones U.S. Select REIT Index. The fund consists of 99 stocks that own and operate commercial real estates. The top three holdings are Simon Property Group Inc., Public Storage and Equity Residential. SCHH has gathered $1.6 billion in assets and trades in an average volume of 386,000 shares. It charges a meager 7 bps in fees and has a distribution yield of 2.4%. The fund gained 4.1% in the past five days and 8.2% in the past one month. It holds a Zacks ETF Rank #3 with a Medium risk outlook. PowerShares KBW Premium Yield Equity REIT Portfolio ETF (NYSEARCA: KBWY ) Introduced in 2010, the fund follows the BW Nasdaq Premium Yield Equity REIT Index that measures the performance of 24 to 40 small- and mid-cap equity REITs in the U.S. It consists of 30 stocks with Government Properties Income Trust (NYSE: GOV ), Senior Housing Properties Trust (NYSE: SNH ) and STAG Industrial Inc. (NYSE: STAG ) being the top three holdings. The fund has roughly $107 million in AUM and trades in a volume of 21,000 shares per day. It charges 35 bps in annual fees and offers a robust dividend yield of 5.6%. KBWY returned 4.5% in the last five days and 7.6% in the past one month. It carries a Zacks ETF Rank #3 with a Medium risk outlook. Link to the original post on Zacks.com

NiSource – Red Flags All Around

Summary NiSource’s coal operations have gotten it in trouble before; it won’t be the last. Floundering gross margins have handicapped profitability. Net debt/EBITDA over 4x indicates significant leverage. Nearly $500M in annual interest expense. NiSource (NYSE: NI ) is a provider of natural gas and electricity to customers across seven states. The company touts its long-term return potential, citing strong local market growth, geographic diversity, and sizeable upgrade potential on its existing infrastructure, on which it would be entitled to a fair return on its investment. NiSource recently completed a spin-off of its Columbia Pipeline (NYSE: CPGX ) business, which means the new NiSource generates nearly 100% of its revenues from regulated utility operations. This fact, plus management’s guidance of 4-6% annual dividend growth from here on out, has drawn in income investors that have been searching for low-risk, stable income options in a highly volatile market. Is NiSource deserving of this praise, or are there potential bumps in the road for the company in the years ahead? Columbia Pipeline Spin-Off NiSource completed the spin-off of Columbia Pipeline Group in early July. Pitched to shareholders as unlocking value by separating two distinct businesses into independently run, pure-play public companies. Shareholders bought the idea hook, line, and sinker. Columbia Pipeline owns an extensive route of pipelines connecting the Northeast Marcellus/Utica shale plays to important local locations along with hundreds of billions of cubic feet of natural gas storage. Customers are primarily contracted, fee-based giants in the energy/utility business such as Exxon Mobil (NYSE: XOM ) and Dominion Resources (NYSE: D ). The prospect of management-guided 20%+ annual EBITDA growth on a seemingly ever expanding domestic energy market drew in investors chasing big capital gains and solid dividends. Unfortunately for shareholders of this new entity, the market has sold off highly leveraged midstream energy MLPs like Columbia Pipeline (along with peers like Kinder Morgan (NYSE: KMI )) on fears related to the sustainability and growth potential of American energy production. Smaller companies like Columbia Pipeline have been more adversely affected by the sell-off; shares are down 40% in a few short months compared to a flat performance from the S&P 500. This lesson in volatility has likely been a tough pill to swallow for dividend investors who have likely grown used to relatively mild movements in price. While I think midstream MLPs have been oversold and selling here would be a mistake, investors should likely consider paring down exposure to Columbia Pipeline as the share price recovers. Pro-Forma Operating Results Unfortunately for shareholders, NiSource has done a mediocre job regarding transparency of breaking out Columbia Pipeline’s contribution to NiSource’s earnings results on its presentations. This is necessary for investors to properly evaluate how the utility business has been performing over the past few years. After digging around in the SEC filings, I’ve broken out NiSource’s utility operations above given its pro-forma Columbia Pipeline filings given here . Total revenue has grown marvelously, but gross margins have contracted. NiSource has never been known for efficient operations and that trend has continued into recent years. This has always been a concern for investors. Another concern with the company is its electric operations, which generated approximately 30% of total utility revenues in 2014. The vast majority of available power generation (2,540MW of 3,281MW, or roughly 77% of power generation) is fired by coal. Energy mix has been unchanged for years, and given my pessimistic outlook on coal, my opinion here should be obvious. With such a high percentage of ageing coal power plants, it is likely only a matter of time before these plants reach the same fate as the company’s Dean Mitchell Generating Station, which was shut down in a settlement with the Obama Administration. This agreement also led to the company being forced into $600M in infrastructure upgrades on these old coal plants. The company had avoided provisions that required these upgrades for years. Even pro forma to exclude the buildup in the Columbian Pipeline infrastructure over the past few years, NiSource has been a serial burner of cash and a big issuer of debt – the combined company has issued billions in debt over the past few years to cover cash flow shortfalls. After the spin-off, NiSource is being left with a $5.5B long-term debt load. With EBITDA falling in the $1.3B range for 2015, net debt/EBITDA will be a hair over 4x. This is manageable for a utility, but investors should be cautious, especially given likely capital expenditure requirements for NiSource to maintain and update its prior-mentioned aging coal power plants. Conclusion Management here has the opportunity for a fresh start towards operating a functional utility. Improving gross margins, investing in its business smartly, and paying down its debt. Unfortunately, the company is more like a three-legged chair at the moment – the very foundation of the company is wobbly. Coal-fired generation puts a target on the company’s back. Nearly $500M in annual interest expense cuts operating profit off at the knees. With the company trading at nearly 18x 2016 earnings estimates, shares aren’t cheap compared to peers. Fair value is closer to 15x 2016 earnings of $1.03/share, or $15.45/share. In my opinion, investors would be wise to avoid NI’s shares currently.

Stock Picking Or Index Investing: Comparing Average And Median Price To Cash Flow Ratios Globally

Summary When looking at country level stock market valuation ratios, it is always useful to look both at median and average statistics. Wide valuation dispersion allows stock pickers to find relative value plays within a country index. Narrow valuation dispersion tends to top-line calls on the overall country index. When looking at country level stock market valuation ratios, it is always useful to look both at median and average statistics. If you only look at average statistics, the resulting valuation ratios can sometimes be very skewed . When several companies are dramatically re-rated lower it drags down the average ratio statistics and can make an entire countries stock market look a lot cheaper than it actually is. A good example of this can been seen when looking at MSCI Brazil. The average price to cash flow ratio for MSCI Brazil is just 4.6x. If an investor just looks at this than one might think that market looks as cheap as it has at any point since 2009. However, the median price to cash flow ratio is still 8.6x which is right in the range that valuation ratios have been since mid-2012. Therefore, there most be a wide dispersion of valuations among individual stocks for investors to choose from. On the other hand, you have a situation like MSCI Hong Kong where the spread between average and median valuations is just 14 basis points. With average and median valuations so close, most likely there isn’t a lot of variation among valuation levels among individual stocks within the country index. In the charts below, we are going to group various country indexes into two baskets: large valuation spreads and small valuation spreads. (click to enlarge) (click to enlarge) Large Spreads – Potential For Individual Security Analysis (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) Small Spreads – Index Investing May Make More Sense (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) Its tough to make an investment decision purely on valuation spreads. However, there are a couple of investment conclusions that I think we can make. First, when the spread between average and median valuations is large this means most likely that there is a wide dispersion of valuation levels among individual stocks within a country index. This would seem like an environment for stock pickers to be able to find opportunities to apply individual security analysis to unearth stock ideas. Second, when the spread between average and median valuation is small than it would seem that it would be tougher to find very many individual security ideas, at least from a relative valuation stand point, and investors would be better off buying or selling the entire country index (or ETF). Relevant Tickers: MCHI , EDEN , EWG , EWQ , EWH , EWJ , EWW , EWM , EPHE , EWS , ERUS , EWP , EZA , EWD , TUR , ICOL , EWA , EWC The original posting of this article can be found here . All data was created by the author and sourced from Gavekal Capital, MSCI and FactSet.