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PKW Presents A Compelling Investment Opportunity

Summary Share buybacks can serve as an effective way to drive shareholder value via returning capital in the form of repurchasing stock. PKW presents an opportunistic niche in which to invest and potentially capitalize on companies that engage in aggressive buyback programs. Over the past 5 years, the annual returns of PKW have outpaced both the S&P 500 and Dow Jones by 5.2% and 7.3%, respectively. Over the past 8 years, PKW has provided more than double the return of the S&P 500 and Dow Jones. Introduction: Share buybacks can serve as an effective way to drive shareholder value via returning capital by repurchasing its own stock. Share buybacks are primarily driven by companies that strongly feel their shares are undervalued and do not reflect the appropriate valuation on the open market. Additionally, the company of interest feels a sense of bullishness and confidence on the future and sustainability of their business. Theoretically, repurchasing and retiring shares satisfies many pro-shareholder objectives: Reducing the number of shares tilts the supply and demand curve thereby removing shares will decrease supply and in turn increase demand and drive the share price higher. Earnings per share increase since earnings are now dividend over fewer shares. If share buybacks are coupled with a dividend, the dividend yield will increase since the quarterly payout amount will remain unchanged and as a result the payout will be divided over fewer shares. The PowerShares Buyback Achievers ETF (NYSEARCA: PKW ) focuses on U.S. companies that have reduced their shares outstanding by at least 5% in the previous year and weights these holdings by market capitalization, subject to a 5% cap within the ETF portfolio. PKW presents an opportunistic niche in which to invest and potentially capitalize on companies that engage in aggressive buyback programs. PKW presents a compelling investment opportunity The annual returns of PKW have been impressive when compared to the broader indices (S&P 500 and the Dow Jones). Over the past 8 years, PKW has outperformed both the S&P 500 and Dow Jones by a wide margin. From 2007 through 2014 the S&P 500 and Dow Jones posted cumulative returns of 49% and 46% respectively, while PKW racked up a return of 100% over the same period. This greater than two-fold return is largely attributed to the previous 5-year time period as the divergence in return is largely observed from 2010 through 2014 (Figure 1). Prior to 2010, the two indices and PKW largely moved in lock-step. Since 2007, PKW has boasted annual returns of 12.0% while the S&P 500 and Dow Jones posted annual returns of 10.6% and 10.3%, respectively (Figures 2 and 3). Outpacing the S&P 500 and Dow Jones by an annual clip of 1.4% and 1.7% respectively may not seem significant, however this translates into a 13.2% and 16.7% increase in annual returns. Narrowing this timeframe to the most recent 5-year period accentuates the returns of PKW relative to the S&P 500 and Dow Jones benchmarks. PKW posted an average annual return 26.3% in comparison to 21.1% and 19.0% for the S&P 500 and Dow Jones, respectively (Figures 2 and 3). Over the most recent 5-year time period, annual returns of PKW have outpaced the S&P 500 and Dow Jones indices by 5.2% and 7.3%, respectively (Figures 2 and 3). Figure 1 – Google Finance comparison of cumulative returns over the past 8 years for PKW, Dow Jones and S&P 500 (click to enlarge) Figure 2 – Morningstar comparison of PKW and S&P 500 annual returns (click to enlarge) Figure 3 – Morningstar comparison of PKW and Dow Jones annual returns (click to enlarge) This trend has continued into the start of the new year (through February 18th), albeit 6 weeks, PKW has outperformed both the S&P 500 and Dow Jones significantly as depicted in figure 4. Figure 4 – Google finance comparison of 2015 YTD returns for PKW, Dow Jones and S&P 500 (click to enlarge) These data suggest that returns are significantly greater than the border indices when specifically focused on an aggregate of companies that deploy capital primarily in the form of share buybacks and secondarily in the form of a cash dividend. Driving shareholder value by combining share buybacks with dividends Share buybacks can be an effective alternative to paying dividends however in some cases these programs are combined with dividend payouts. In this case, shareholders are doubly rewarded with capital returned in the form of share buybacks and a quarterly cash dividend distribution. Dividends coupled with share buybacks can serve as an effective synergy in returning value to shareholders; Apple (NASDAQ: AAPL ) and Boeing (NYSE: BA ) are great examples of this dual capital return. PKW holdings consist of numerous companies that offer both share buybacks and dividends for maximum appreciation. PKW holds stable large-cap stocks across all categories in growth, blend and value with strong cash positions for an overall category status of large value. Apple, Home Depot (NYSE: HD ), International Business Machines (NYSE: IBM ), Boeing, Twenty-First Century Fox (NASDAQ: FOX ), Lowe’s (NYSE: LOW ), Time Warner (NYSE: TWX ), Express Scripts (NASDAQ: ESRX ) and Monsanto (NYSE: MON ) make up the top ten holdings and over a third of the entire portfolio by weight. All of these companies pay a divided with the exception of Express Scripts. Many other companies within the portfolio provide the same share buybacks and dividend combination for optimal capital return such as FedEx (NYSE: FDX ), Anthem (NYSE: ANTM ), Northrop Grumman (NYSE: NOC ), Deere and Co. (NYSE: DE ), and Corning (NYSE: GLW ) all of which pay a dividend with varying yields. Collectively, all the companies that comprise PKW translate into a current overall yield of 1.00% at the current price of $49.53. This provides a competitive yield to augment the share buyback component of the ETF. Not all companies that initiate buybacks benefit from an increase in share price: Not all companies that engage in share buyback programs are created equally and some companies have alternative motives in initiating a repurchase program. Some leadership boards may want to increase earnings per share by purchasing and retiring shares to demonstrate an ostensibly growing business or to meet executive benchmarks, artificially. There are also share buyback companies that underperform the broader indices thus it may prove to be difficult in identifying individual stocks in this area. Collective exposure across companies with varying market capitalizations via PKW may prove a compelling alternative. Summary: Over the past 5 years, the annual returns of PKW have outpaced both the S&P 500 and Dow Jones by 5.2% and 7.3%, respectively. PKW currently holds a 5-star rating on Morningstar for both its 3 and 5-year timeframes. PKW has an investment return rating of high and a risk rating of below average for its 5-year performance. PKW offers a healthy rate of return with low to moderate risk exposure across large value companies. While PKW charges a very high expense ratio in comparison to other ETFs, considering the strong fundamentals and past performance with focusing on companies that return capital in the form of share buybacks and dividends, this ETF presents a compelling case to belong in any long portfolio Disclosure: The author currently holds shares of PKW and is long PKW. The author has no business relationship with any companies mentioned in this article. I am not a professional financial advisor or tax professional. I am an individual investor who analyzes investment strategies and disseminates my analyses. I encourage all investors to conduct their own research and due diligence. Please feel free to comment and provide feedback, I value all responses. Disclosure: The author is long PKW. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Got DIA? Got DJIA Stocks? Which Is Better?

Summary Very few Exchange-Traded Funds get analyzed in detail, down at the individual holdings level. The DIA lends itself to that by its few, prominent components. The diverse nature of the 30 stocks in the DJIA Index, by design, raises the question of how to rate a CAT in comparison to a PG or a MSFT. And who’s doing the rating? What’s their bias? How do they define risk, and how is that balanced against reward? We get the Market-Making [MM] community to tell us daily, how far up and down the prices of the 30 stocks, and the DIA ETF, are likely to go next. Not voluntarily. But MM capital is regularly put at risk, protected by hedging transactions, helping big-$ funds adjust their portfolio holdings. The hedges’ cost and structure provide price range forecasts. Market-Makers never saw a profit they didn’t like or a risk they did Their principal customers, big-money institutional investment funds, work hard constantly, trying to stay employed at sweet-salary jobs by getting the capital in their charge to perform competitively. That takes shuffling around a lot of “chips” on their “poker table”. The size of their bets often stretches the capacity of markets’ ordinary way, every-day trading. To try to get their volume trade orders of 10,000 shares or sometimes millions of shares “filled” without chasing the issue’s price away from what they want to get, they often use trusted investment bank block-trade services. The kinds of stocks in the DJIA Index are just the ones most likely to see this sort of activity, which often dominates their price movement. The block trade house “makes the market” some 95% of the time by putting its own capital at risk temporarily, positioning that stub end of the “other side of the trade” that the other players in the Street will not accommodate right now, at the desired price. But the MM’s risk is always hedged by side bets in derivative securities – at a cost. Because of the cost, such protection is rarely overbought, because the fund originating the block order has to absorb the cost in the single price per share for the entire transaction. When the cost is too high, the fund balks, and the trade proposition is killed, along with its juicy (to the MM) transaction spread. So all the motivations are there to keep that game honest since the sellers of the price change protection insurance are often the proprietary trading desks of other MM firms. They are as equally well-informed on the future prospects of the subject as the house handling the block trade. And the competitive nature of the community is reminiscent of the seagull dock scene in the film “Finding Nemo”. Mine! Mine! Our Behavioral Analysis of the intelligent actions of the market professionals produces for each subject a price range MMs consider worth protecting against, either as a buyer or a seller of the protection. The change from current market quote to the upper end of the range is a forecast of possible, even likely, price gain, or reward. The opposite direction is a forecast of the kind of price drawdown risk that could be encountered. That risk may not have to be accepted and recognized as a loss, if in time the price rises. But the period the investment is “under water” is an emotionally disturbing condition, one that often leads investors to loss-taking to prevent the present from getting worse. Sometimes their fears are justified, and worst-case price drawdowns increase the emotional stress to the breaking point where investors accept what appears to be “inevitable”, but could have been avoided. Knowing what the worst has been and the odds of recovery to a profitable position from there minimizes that mistake. We have an established, Time-Efficient Risk Management Discipline [TERMD] procedure of portfolio management that enables us to evaluate the odds of a subject investment’s recovery from a price drawdown, back to a profitable transaction experience. That procedure, applied to all prior forecasts with upside to downside forecast proportions, usually gives a history from hundreds of actual market experiences. Figure 1 is a reward-to-risk map of the 30 DJIA stocks showing their current hedging-derived upside forecasts (on the green horizontal scale) and their worst-case price drawdowns (on the red vertical scale) following prior forecasts like today’s. Figure 1 (used with permission) The advantage of diversification is apparent in DIA [4], with worst-case price drawdowns no worse than all but one of the 30 stocks – at today’s market quotes and upside forecasts. The cost of that diversification is also apparent in the DIA’s upside prospect now being about +3%, compared to the average of the individual stocks of some +5% higher, around +8%. To get the odds for price recovery and a profitable transaction from today’s market prices, we need to check out column (8) of figure 2, today’s appraisals by MMs for the 30 stocks. Figure 2 (click to enlarge) Whoa! There’s a mess of numbers here. The MMs’ price range forecasts for the 30 stocks are in the first two data columns of Figure 2, followed by their separate forecasts for the SPDR Dow Jones Industrial Average ETF (NYSEARCA: DIA ), and as an additional market average index, the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ). The upside percent price change potential is in (5), and the worst-case prior price drawdowns are in (6). These are the coordinates used in Figure 1. The odds of a price recovery from worst-case price drawdowns are in column (8). For example, down at the bottom of the table are DIA and SPY, which have histories of 111 days and 215 days out of the last 5 years, 1,261 market days, in which 84 or 83 out of every 100 produced a profitable transaction using our standard TERMD portfolio management discipline. That is about 5 out of every 6 trades. The average gain by DIA (column 9) from all 111 such positions was only +1.9%. That compares to Disney (NYSE: DIS ) up near the top of figure 2, with a similar 84/100 odds, but it has an achieved gain of twice that of DIA at +3.8%. Further, it took (column 10) only 29 market days – 6 weeks – to reach its sell targets or 3-month holding time limits while DIA took 35 days, or 7 weeks. For the investor most concerned with safety of principal and averse to investing choices, the difference is trivial, inconsequential. But for the investor attempting to build wealth, the compounding of 3.8% gains more than 8 ½ times a year, compared to 1.9% compounded 7 times makes the difference in investment growth of +38% a year vs. +14% (column 11). We have ranked the 30 stocks held in DIA by their forecast price growth per day held (in prior like forecasts) weighted by their prior odds of profit, net of worst-case losses weighted by their odds of loss, with some other minor adjustments, to get an odds-weighted (reward vs. risk) figure of merit for each of these stocks in (15). It is a useful means of setting preferences between investment alternatives for investors concerned with growing their investment wealth. For those concerned with safety or income, it is far less useful. Comparing (15) data for the top ten such ranked DJIA stocks in the upper blue row so labeled, with the next blue row, averaging all 30, shows that at current market prices the top ten are 9 times (14.8 vs. 1.6) as beneficial to the DIA as the other two-thirds of the holdings. Comparing DIA to SPY finds the broader market average is more than twice as strong by this measure, (6.3 vs. 2.7). That may be a suggestion that the DJIA Index is now higher priced temporarily than the S&P 500. Other comparisons, not shown, lead to the same conclusion. The more interesting comparisons are between the average of nearly 2,500 stocks and ETFs, and the market indexes, DIA and SPY. Upside price change forecasts are twice as large for the population as for SPY and 3+ times as large as for DIA. But history shows them to be far riskier (6) at -9.4% price drawdowns than either ETF. That difference, plus far lower odds of capturing a profit (66 out of 100 in column 8), combine to create a net negative figure of merit in (15). Both ETFs provide the security of positive measures. Conclusion DIA at its current market quote offers investing prospects far less attractive than the principal market-average-tracking alternative SPY. An examination of the DIA holdings individually puts over a third of them in the category of a negative influence on the DJIA Index, and thus on DIA. While the ETFs S&P and DIA do provide safety from large price drawdowns encountered by individual stocks, they may give that reward at a high cost to future wealth growth from selective use of specific index holdings. Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Will The FOMC Bring Back Up GLD?

Summary The minutes of the last FOMC meeting were released. The minutes could indicate that the FOMC members have concerns that could postpone the next rate, which could bring back up GLD. The uncertainty in Europe around the Greek debt problem could play in favor of GLD. Since the beginning of the month, shares of the SPDR Gold Trust ETF (NYSEARCA: GLD ) fell by 5.8%. But the recent release of the minutes of the last FOMC meeting and the latest developments in Europe could provide some backwind for the gold ETF. The FOMC minutes revealed that its members wanted to reiterate the importance of remaining patient towards the next rate hike: “Many participants regarded dropping the “patient” language in the statement, whenever that might occur, as risking a shift in market expectations for the beginning of policy firming toward an unduly narrow range of dates. As a result, some expressed the concern that financial markets might overreact, resulting in undesirably tight financial conditions.” This is another indication that even though many of the FOMC members may consider raising rates in the coming months, they still don’t want to commit to a time frame and wish to trend very lightly when it comes to changing their policy. The reaction of GLD, however, was subtle, as prices slightly came up yesterday. Source of data taken from FOMC’s website and Google Finance The minutes also revealed that the FOMC members consider the global economic developments as one of the factors that could determine the Fed’s next move: “The Committee further decided that the postmeeting statement should explicitly acknowledge the role of international developments as one of the factors influencing the Committee’s assessment of progress toward its objectives of maximum employment and 2 percent inflation.” Perhaps the latest problems in Europe and the economic slowdown in other leading countries are starting to shift FOMC members’ opinion towards keeping rates low for a bit longer. Next week, Fed Chair Yellen is expected to testify before Congress; this testimony could provide additional input into what’s next for the Fed and whether there is a chance of a delay in the expected rate hike this summer. The ongoing problems in Europe, mainly the debt problems of Greece, could play in favor for precious metals investments such as GLD. The recent news is that Greece is still scrambling towards reducing some of the austerity measures that were agreed in the past, including reducing the budget surplus from 4.5% to 1.5% of its GDP. Some estimate that Greece could run out of cash by March. Moreover, Greek banks have been losing €2 billion in deposits per week, which will only put more pressure on the recently-elected Syriza government to reach an agreement with the EU. These developments are also likely to pressure down the euro against the U.S. dollar. Stronger dollar The recovery in the U.S. dollar has slowed down in the past few weeks, but the U.S. dollar could see additional gains in the coming months, especially if global economic slowdown persists. Further, as other central banks cut down rates (Bank of Canada and RBA) and implement QE programs (ECB and BOJ); these changes are likely to keep the U.S. dollar stronger. FOMC members voiced their concern over a stronger U.S. dollar: “…the increase in the foreign exchange value of the dollar was expected to be a persistent source of restraint on U.S. net exports, and a few participants pointed to the risk that the dollar could appreciate further.” (click to enlarge) Source of data taken from FRED Even though the recovery of the U.S. dollar at the beginning of the year coincided with the rise of GLD, the linear correlation between the two data sets was still strong and negative at the beginning of the year. Source of data taken from FRED This is only an indication that if the U.S. dollar were to resume its rally, this could have an adverse impact on the price of GLD. For now, the problems in Europe and the economic slowdown in China, which is another concern FOMC members reiterated in the last minutes, could still bring down the U.S. treasury yields. U.S. treasury yields, as I pointed out in the past, tend to have a negative relation with the price of GLD. Nonetheless, yields have gone up in the past several weeks, as the market increased the odds of the FOMC raising its cash rate in the coming months. Therefore, we still have sort of a stalemate when it comes to GLD: Higher uncertainty in Europe, weaker growth in China, and falling prices, which are likely to reduce the odds of the rate hike this summer, are keeping the demand for GLD up. Conversely, the ongoing rise in U.S. treasury yields, stronger U.S. dollar, and the slow recovery in the U.S. economy, partly due to low oil prices, are pressuring down GLD prices. Who will eventually win this stalemate? It’s hard to say at this point. So far, GLD hasn’t done much in the past year, and until the FOMC makes its next move, GLD isn’t likely to budge a whole lot from its current level. We could see some short-term gains, especially as the uncertainty around Greece further unfolds, and if the FOMC continues to voice its concerns over the global economy. For more see: 3 Questions About Gold Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.