Tag Archives: economy

Lies, Damned Lies, Corporate ‘Earnings’ And Up Markets

Summary Corporate earnings aren’t always what they seem. The loudest headlines often give the wrong impression. We prefer to stick with oversold value, like those we suggest below…. ” The stock market is never obvious, It is designed to fool most of the people, most of the time.” – Famed market trader Jesse Livermore One thing the market volatility of 2015 has done is decimate some of our best-laid plans, like owning hedges like QID into monster earnings from the QQQ stalwarts like Amazon (NASDAQ: AMZN ), Google (NASDAQ: GOOG ) (NASDAQ: GOOGL ), Facebook (NASDAQ: FB ), Microsoft (NASDAQ: MSFT ) and Apple (NASDAQ: AAPL ). But on the good side it has also opened up some amazing opportunities, punishing brilliantly-run companies with great revenue and earnings potential just because they were in the wrong sector at a time when the markets’ primary participants wanted something other than what they offer. For the year thus far, for instance, that means New Tech / Social Media and Consumer Discretionary. So while Amazon, Google, Apple, Microsoft, Facebook et al have been on a tear, financials, utilities, most health care (particularly the high-tech biotechnology subset,) industrials, materials, consumer staples, utilities and energy are down for the year. That’s six of the original nine S&P sectors of our economy! (S&P just added two new sectors this month.) The V-shaped rally of October lifted health care to a 1.7% gain for the year, but the others are all still in the red. It’s important to recognize this because, in this too-much-data world we live in, people tend to be swayed by the biggest headlines, like the one recently on Marketwatch.com, proclaiming “Stock indexes enjoy best month since 2011” and think, “Wow, the market must really be up this year!” Not exactly. Even after October’s 8.8% rally, the S&P 500 is down 1.7% as of Friday, November 13th. For those who prefer the Blue Chips, alas, you are still down even more. I would rather see it up 2000 but, regrettably, facts are facts. This same “recency versus primacy” bias prevails in looking at individual companies’ shares, abetted by Wall Street’s desire to paint a rosy picture on the most ugly of earnings reports. They do this in two ways; first, by constantly lowering their “estimates” of earnings growth until they are certain that most companies will easily surpass expectations, and second, by ignoring massive losses as long as they are “non-recurring.” As to the first, suffice it to say that, if at the beginning of the quarter, success is measured as a 6-foot high-jump, but that is consistently lowered to a 5, then, a 4, then a 2-foot high jump, it is hardly exceptional to call it a high-jump when it requires only a simple step-over. The less transparent but equally deceptive practice is to say, “After non-recurring items, the company made a profit of x .” If the company, say, sells a money-losing division or abandons a major project, the losses incurred in so doing are considered “non-recurring” and therefore not germane to future earnings flow. Two brief examples: Johnson & Johnson (NYSE: JNJ ) is a longtime favorite of ours (we currently own it via our Tekla Healthcare fund.) The company released earnings for the 3rd quarter that most analysts gushed were a continuation of JNJ’s 4 consecutive quarters of “positive earnings surprises.” I have a problem with considering this the end-point of analyzing JNJ’s numbers. First, they once again showed less revenue this quarter. Earnings can easily be manipulated; revenue not so much. A company is either selling more of its products and services or they are not. One of the more popular ways to manipulate earnings is to buy back shares of your own stock rather than invest in R&D or customer acquisition. JNJ just announced another stock buyback going forward of up to $10 billion. This when its share price is within 10% of the highest it has ever been since the company’s founding in 1886. Second, JNJ only cleared the earnings hurdle after divesting itself of a smaller division at a loss, or as the WSJ put it, “Excluding special items, the company said it earned…” This “”excluding special items” clause also helped us decide to keep only a token amount in our family accounts of our once and future favorite, Royal Dutch Shell (NYSE: RDS.B ), which, every quarter it seems, takes a “one time” non-recurring action like $2.6 billion this past quarter to abandon its Arctic drilling exploration and another $2 billion to abandon its oil sands project in western Canada. The bottom line on these “one time” write-offs that companies take is: who knows how many other skeletons lurk in their closet for the next quarter and the quarter after that? More importantly, does it matter where the loss comes from? A loss is a loss is a loss. It means there is less money available to grow the firm going forward. In the first quarter of this year, my firm’s biggest and longest-served client died and his children have now effectively frozen the portfolio squabbling in court over who gets what. Did I say, “Oh, well, it was a non-recurring event so our real earnings to pay salaries, pay for research, etc. is untouched?” Of course not! And if you live in an older home in California and don’t have earthquake insurance and The Big One moves the remaining pieces of your home a quarter mile from its foundation, do you tell your family, “Wow! Aren’t we lucky that was a non-recurring loss?” As a result of financial chicanery I have become less trusting of corporate “earnings” over the years. The whole stock buyback house of cards may bolster earnings per share by reducing the shares outstanding – and will also keep the stock price high (a boon to the few executives in the inner circle whose bonuses are tied partly to the price of the shares) but what really matters in securities analysis? If you are looking for growth, to me that means two things: growth in top line revenues and growth in bottom line earnings, unadjusted for “impairments, special items, divestitures, the high price of the US dollar” or any other thing. Just because a company makes less money because the dollar is strong – it still makes less money . This leaves us with a conundrum. Of the companies out there that are growing real revenues and real earnings, AMZN sells for nearly 3 times sales and 894 times what are likely real earnings, GOOG at 6.5 times sales and 40 times earnings, and FB at 19 times sales and 104 times earnings. Fortunately, AAPL and MSFT are still possibilities and we have indeed begun to nibble at AAPL. But at this point, it simply doesn’t make sense to chase the high tech darlings in social media, online sales or cloud computing — with one against the grain exception. We are nibbling at stodgy old IBM, which has reinvented itself so many times over the past century that, especially at these prices, we aren’t going to count it out! If you can maintain a long-term viewpoint and avoid the emotion that inevitably accompanies volatile markets such as this one, I believe you will enjoy remarkable gains from these overlooked gems. We don’t need to chase the few already high-priced tech darlings to find hi-tech. Every sector and industry uses technology to increase its productivity and revenue. It is these innovators that use technology wisely that we are buying today – for profits tomorrow. There is high tech in industrials, materials, energy, health care and every other sector; it is seen in the ways in which productivity is enhanced and costs reduced. If we can buy stellar companies performing well in their business (but not seeing it reflected in their stock prices) at well below our assessment of their fair value, over any reasonable time frame we will do much better than we would by chasing the currently-highest-momentum Wall Street darlings that need just one mis-step to drop 31.8% in a week. [See: Netflix (NASDAQ: NFLX ) chart Aug 17 to 24…] Energy High Tech Last month I advised we were moving out of most of our RDS.B and BP (NYSE: BP ) positions to begin initial positions instead in Chevron (NYSE: CVX ), Range Resources (NYSE: RRC ) and Antero Resources (NYSE: AR ). Chevron is cutting-edge in LNG production and Range and Antero use technologies that didn’t exist a year ago to extract natural gas at lower cost than most of their peers. Yet all are held back by yet another decline in the price paid for their product. The reason? Projections are for a mild early part of winter. Somebody isn’t thinking very far ahead. We bought these 3 because we like their long term growth. Here at Lake Tahoe, we’ve just had our first snow (it’s so beautiful!) but for most of the nation, early winter temps are expected to be pretty mild – see chart below. But then… (click to enlarge) …look out below! Like I said, somebody isn’t thinking very far ahead. While we are early in our projection for the long-term recovery for natural gas, I think prices will rise short term as utilities start getting their contracts in place for January to March. You and I aren’t the only ones studying the meteorological soothsayers’ reports right about now. Buy your straw hats in the fall and, if you are a Southern, Midwest or Northern US utility, get your natural gas lined up while you can. If these projections for winter are accurate and the rig counts and drilling continue to decline, our 3 natural gas favorites will be ideal for both a short-term blip and, better still, long term profits. Materials High Tech As of last week, the Materials sector was down 8.6% for the year. We’re talking iron and steel, aluminum, chemicals, copper, and other basics of manufacturing and industrial processes. With manufacturing moribund of late, we might expect these sorts of firms to be dead in the water. But all things regress to the mean at some point. I think great companies like duPont (NYSE: DD ) and Alcoa (AA,) while some of their products have become commoditized, are always on the cutting edge of new uses for their products. Alcoa has two primary markets: automobiles and aerospace. Lighter cars, using much more aluminum, mean better gas mileage. Defense and commercial air are both in growth mode and both need what Alcoa provides. For its part, duPont is no longer just a chemicals company. Like IBM (NYSE: IBM ), DD has become expert at reinventing itself. It is now a major factor in agriculture, in biosciences and in human and animal nutrition. Not your father’s Oldsmobile, is it? Teflon, Tyvek, Lycra, Kevlar – all advanced-level materials turned into now-familiar products, all invented and/or developed by duPont. Today, while still pursuing R&D in many areas, agriculture takes center stage at DD. With more and more hungry mouths to feed in the world and less and less arable land available, crop yield becomes critical. Providing hybrid seeds that are more pest-resistant or higher-yielding from the same level of water and nutrients will provide outsize profits to those who succeed in this area. Allegheny Technologies (NYSE: ATI ) and Carpenter Technology (NYSE: CRS ) are also in the boring manufacturing and materials sector. ATI is the Big Dog in producing airframes and other components for military and commercial aircraft engines. Their titanium- and nickel-based alloys are the best in the business and offer reduced weight and greater strength for future aerospace products. If you believe, as I do, that commercial aviation and military defense are growth industries, ATI is a great way to play it without worrying about revenue per passenger and all the other “stuff” the airlines deal with. Carpenter sells to the same end customers in aviation and energy production as ATI does, but they specialize in very different components they construct from their high-value alloys and specialty metals. In fact, CRS specializes in products designed to withstand extreme heat, pressure and corrosion. The next time you fly, just imagine the pressure, weight and heat the landing gear of your aircraft must withstand; that is just one product that CRS specializes in. Real Estate High Tech Real estate? What could possibly be high tech about real estate? Glad you asked. We may take for granted that we pull out our mobile phone and are handily connected to family, friends, and business contacts across the street or around the world, but that doesn’t happen because there are mystical forces in the ether that connect our calls. No, that job falls to the nearly 200,000 cell towers that dot the globe’s landscape, without which Verizon (NYSE: VZ ), AT&T (NYSE: T ), T-Mobile (NASDAQ: TMUS ) et al would be dead in the water. You think high tech is merely the latest gee-gaw on a smartphone? I say the stealth play in mobile telephones are the biggest cell tower owners, American Tower (NYSE: AMT ), SBA Comms (NASDAQ: SBAC ) and Crown Castle Intl (NYSE: CCI ) Of these I think CCI stands head and shoulders above the rest. It’s #2 in number of locations but most heavily concentrated in US urban areas, which garner the most traffic. And it pays a 3.7% dividend to go with what I believe is excellent future growth. As long as people continue to use cell phones, the tower operators will profit. Not Forgetting Our Hedges… 2015 has thus far fulfilled our expectation from January that we have entered a more volatile phase in this aging bull market, yet we recently had our head handed to us by owning short ETFs like QID et al. What to do? We have researched a number of long/short mutual funds and ETFs. One is the global version of our highly successful (MUTF: BPRRX ). Boston Partners Global Long/Short (MUTF: BGRSX ) gives us the same quality team in the global area. Burnham Financial Long/Short (MUTF: BURFX ) focuses almost exclusively on financials. This is an area where some companies regularly disappoint and others soar. In short, if the research at BURFX is good, the profits are good. They’ve averaged 9.4% a year for 10 years. We are buying both. Disclaimer: As Registered Investment Advisors, we believe it is essential to advise that we do not know your personal financial situation, so the information contained in this communiqué represents the opinions of the staff of Stanford Wealth Management, and should not be construed as “personalized” investment advice. Past performance is no guarantee of future results, rather an obvious statement but clearly too often unheeded! We encourage you to do your own due diligence on issues we discuss to see if they might be of value in your own investing. We take our responsibility to offer intelligent commentary seriously, but it should not be assumed that investing in any securities we are investing in will always be profitable. We do our best to get it right, and we “eat our own cooking,” but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about.

FDD: Weighing Risk With Return

Top weights ‘best-in-class’ European based global companies. Has traded in a very steady range with steady distributions for over six years. The fund maintains a cyclically sensitive bias, with its heavy weighting on the financial sector. It’s beginning to look as though the “New Normal” will indeed be a new normal for some time to come. With few exceptions, most of the global economy has lost a lot of growth momentum after many years of what seemed like limitless expansion. The most recent Organization for Economic Co-operation and Development (OECD) ‘ Global Economic Outlook ‘ reported that “… A further sharp downturn in emerging market economies and world trade has weakened global growth to around 2.9% this year – well below the long-run average – and is a source of uncertainty for near-term prospects… ” The traditional response to an economic slowdown has always been to increase the amount of cash in the banking system and at the same time lower benchmark interest rates. This in turn lowers consumer and business interest rates. The basic principle behind ‘Quantitative Easing’ is that consumers and businesses would be more inclined to borrow for durable goods, inventory, home buying or home construction and so on, thus creating demand which leads to more hiring. As one might expect, there’s a downside to “QE”. Lowering government benchmark interest rates works its way up the government bond market ladder. So, for example, pension funds will receive lower interest rates when they purchase government bonds which in turn affect their actuarial projections to meet pension payout expectations. Also, when short term savings rates decline, consumers will be less inclined to purchase short term certificates of deposits, hence reducing demand for a popular bank product. Last, but by no means least, is that individual investors will receive smaller distributions from their portfolio’s cornerstone government bond funds. A confluence of events stemming from the credit market collapse in 2008, in addition to the recent economic contraction in the Asia-Pacific region has made most QE programs virtually ineffective. The point of the matter is that the individual investor’s cornerstone fixed income may be safe, but may not contribute meaningfully to the overall portfolio for many years to come. One way to replace the loss of distributions in government bond funds without incurring exceptional risk, is through diversifying among high-quality equity, dividend focused funds. One suggestion would be the First Trust Dow Jones STOXX European Select Dividend 30 Index ETF (NYSEARCA: FDD ) . The underlying index is the STOXX® Europe Select Dividend 30 Index (Zurich: SD3P) which is designed to … track high-dividend-yielding companies, across 18 European countries: Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom… The fund provides relatively good return by any standard: a trailing twelve month yield of 4.45% and an SEC yield of 5.02%. The STOXX index itself has a yield of 5.57%. There is a 0.60% net expense ratio which is much higher than the industry average 0.44%. (click to enlarge) The fund was incepted in August of 2007 closing its first day of trading at $30.75. It had declined considerably since then, tracking the STOXX index down over the years closing November 13, 2015 at $12.42. The Price-Dividend History Chart demonstrates that the fund peaked in October of 2007 at $32.26 per share and declined as housing and credit bubbles deflated, dragging global markets down with them. The fund reached its all-time low of $7.75 a share in March of 2009. It recovered by mid-2009 and has since traded in a steady range from $10.86 to $16.04. The pertinent questions investors should ask is, first, whether the fund is able to continue to produce the steady 4.45% distribution and, second, are the returns worth the risk. The best way to answer these questions is to step through the fund’s holdings sector by sector. First, it’s a good idea to understand the fund’s geographical distribution and then its sector allocation. As the pie chart below demonstrates, the fund is heavily weighted in Europe’s top performing economies, in particular, the United Kingdom, Switzerland France and Germany. Data from First Trust Knowing the geographic allocation, it’s now a good idea to chart-out the fund’s sector distributions. Data from First Trust Clearly, the fund is heavily weighted in Financials. Generally, the financial sector is cyclical, that is, it rises and falls with the economy. On the other hand, the second heaviest weight is in Utilities, a non-cyclical sector; it continues to perform regardless of the economy. Similarly Heath Care is non-cyclical, as well as Consumer Staples. Telecom is considered sensitive to the business cycle; however, mobile communications create efficiencies and productivity so Telecom services might not be as sensitive to the business cycle. Similarly, both the Energy and Industrial Sectors are sensitive to the economy, but not nearly as much as Consumer Discretionary or Materials. It seems that overall, the fund is weighted a bit more towards sectors which rise and fall with the economic tide. As to the degree of sensitivity, that would depend on the individual holdings as discussed below. The financial sector includes Europe’s premier banks, insurance and real estate investment. All of these companies are European multinationals and the top weighted funds of this sector have global reach. Three of the 14 holding have payout ratio in excess of 100% of adjusted earning, and those for which no information was available, a percentage of operating cash flow has been substituted. The average yield of the sector is 4.425%. Excluding extreme or absent values, the rough payout ratio average is 70.5%, high but sustainable. Financials 44.92% Symbol Yield Fund Weight Payout Ratio P/E Debt to Equity 5 Year Dividend Growth Rate Primary Business Amlin PLC OTCPK:APLCY 4.14% 5.76% 90.62% 14.37 17.68 6.19% Enterprise insurance and reinsurance Swiss Re OTCPK:SSREY 7.70% 4.28% 71.57% 9.06 33.10 35.92% Reinsurance, property and Casualty Provident Financial OTCPK:FPLPY 2.91% 4.08% 76.59% 26.43 257.46 9.07% Financial services, personal credit and other consumer lending Zurich Insurance OTCQX:ZFSVF 6.46% 3.98% 517% of cash flow 10.30 35.00 4.71% General insurance, consumer and commercial insurance Swiss Prime Site OTC:SWPRF 4.82% 3.31% 89.65% of cash flow 15.05 82.14 1.38% REIT: office and retail Standard Charter OTCPK:SCBFF 1.52% 3.12% 106.85% 14.06 190.27 6.22% International banking, Islamic banking, private and retail services SCOR OTCPK:SCRYY 3.99% 3.09% 26.51% of cash flow 11.39 43.95 6.96% Reinsurance, life, property and casualty, aviation, marine Allianz OTCQX:AZSEY 4.35% 3.02% 46.96% 10.83 53.82 10.81% Holding company for Allianz, insurance and asset management PSP Swiss Property OTC:PSPSY 3.81% 2.64% 88.91% 23.34 47.77 NA Holding company for real estate investment and management Banco Santander SAN 4.68% 2.58% 117.65% 9.19 240.76 0.80% Retail and Private banking; Asset management and insurance Muenchener Rueckversicherung OTCPK:MURGY 4.32% 2.49% 39.18% 9.11 15.73 6.15% Holding company; business and reinsurance, health and asset mgnt Skandinaviska Enskilda Banken OTCPK:SKVKY 5.18% 2.28% 49.68% 11.44 561.00 36.56% Sweden merchant bank; retail, corporate and institutional banking Unibail-Rodamco OTCPK:UNRDY 3.89% 2.26% 42.66% 12.25 87.70 NA French: commercial real estate investment; European shopping centers Baloise Holding OTCPK:BLHEY 4.18% 1.94% NA 9.54 33.03 2.13% Insurance, banking, retirement services Data from Reuters and Yahoo! Finance The Utility sector accounts for four holdings with an average yield of 6.09%. However, the payout ratios indicate that a few of these companies are distributing dividends nearly equal to or in excess of adjusted earnings. Hence it a strange twist, it seems that the financial sector’ dividend distributions are more stable than the utilities. Utilities 14.36% Symbol Yield Fund Weight Payout Ratio P/E Debt to Equity 5 Year Dividend Growth Rate Primary Business SSE Plc OTCPK:SSEZY 5.92% 4.95% 161.35% 27.09 100.33 4.78% UK mainly electric utility; natural gas distribution and storage Snam SpA OTCPK:SNMRF 5.15% 3.82% 19.10% of operating cash flow 13.75 190.00 4.56% Italian natural gas distribution, treatment, management; owns distribution infrastructure United Utilities OTCPK:UUGRY 3.94% 3.62 94.76 24.12 249.98 1.91% UK water and sewage management Fortum OTCPK:FOJCY 9.35% 2.19% 53.88% of operating cash flow 2.60 44.15 5.39% Finland based delivering electricity and heat and related services. Data from Reuters and Yahoo! Finance The Healthcare sector is solid with two world class, well established pharmaceutical companies: Glaxo-Smith-Kline (NYSE: GSK ) and AstraZeneca (NYSE: AZN ) . The holding BB Biotech (OTC: OTC:BBAGF ) is listed by the fund as a ‘materials company’. However, after double checking with several sources, including the company’s home page, it best described as an investment company specializing in Biotech companies. Since the return is a function of the Heath Care sector it seems logical to include this company with the Health Care sector. Health Care 7.36% Symbol Yield Fund Weight Payout Ratio P/E Debt to Equity 5 Year Dividend Growth Rate Primary Business GlaxoSmithKline GSK 5.82% 4.02% 39.40% 6.85 304.36 5.57% R&D pharma, vaccines, consumer health care. A premier global pharmaceutical company; 84 production facilities in 36 countries AstraZeneca AZN 4.36% 3.33% 141.51 47.89 63.10 4.01% R&D biopharmaceuticals for cardio-vascular, oncology, autoimmunity and more. Premier global in over 100 countries BB Biotech BBAGF 4.02% 2.96 15.84 3.75 0.00 125.74 (Labeled as Materials) Investment Company specializing in Biotech seeking researching Alzheimer’s, HIV, Hepatitis C, hypertension, hematology, diabetes and cancers Data from Reuters and Yahoo! Finance Telecommunication Service seems ‘ordinary’; however one holding, Orange (NYSE: ORAN ) qualifies as an NYSE-ARCA listing. Telecoms often have high payout ratios and that seems to be the case here. Telecom Services 7.23% Symbol Yield Fund Weight Payout Ratio P/E Debt to Equity 5 Year Dividend Growth Rate Primary Business Proximus OTC:BGAOF 3.64% 2.78% 7.973% of operating cash flow 22.54 68.78 -11.57% Belgium landline and mobile, telephony, internet and television Orange ORAN 3.82% 2.32% 110.24 46.42 114.76 -11.53% French serves France, Spain, Poland, Africa and Middle East Swisscom SCMWY 4.31% 2.08% 298% of operating cash flow 15.45 185.67 1.92% Switzerland and Italy: enterprise and residential, broadband, television, data, mobile and landline Data from Reuters and Yahoo! Finance The energy holdings are Royal Dutch Shell (NYSE: RDS.A ) and Total (NYSE: TOT ) . Again, both are leaders in every area of energy and with a far reaching global presence. Energy 7.17% Symbol Yield Fund Weight Payout Ratio P/E Debt to Equity 5 Year Dividend Growth Rate Primary Business Royal Dutch Shell RDS.A 7.24% 4.01% 187.27% 107.49 31.26 2.28% Well-to-Distilled Product-to-End Product global Oil and Gas energy company operating in over 70 countries Total TOT 5.63% 3.13% 195.03% 33.42 44.59 0.42% Well-to-Distilled Product-to-End Product global Oil and Gas company operating in over 50 countries Data from Reuters and Yahoo! Finance BAE Systems (OTC: OTCPK:BAESY ) is a well-respected aerospace-defense company often involved in state-or-the-art defense projects, joint U.S. defense projects and is considered as the premier weapons developer of the U.K. Carillion (OTC: OTC:CIOIY ) seems to operate a unique niche as a global support and service provider for ‘public-private-projects’ construction in aviation, commercial, rail, roads, utilities, and other areas as well. Industrials 6.66% Symbol Yield Fund Weight Payout Ratio P/E Debt to Equity 5 Year Dividend Growth Rate Primary Business Carillion CIOIY 5.73% 3.79% 64.23% 12.42 65.38 3.98% Support Services for public-private partnerships, construction in the U.K., Middle East and North Africa BAE Systems BAESY 4.69% 2.73% 93.44% 19.93 156.72 5.08% Aerospace, cyber security, electronics, and defense with divisions in the U.S. and U.K. Data from Reuters and Yahoo! Finance The last table contains combined, the one consumer staple and the one consumer discretionary companies. Consumer Staples and Discretionary Symbol Yield Fund Weight Payout Ratio P/E Debt to Equity 5 Year Dividend Growth Rate Primary Business J Sainsbury OTCQX:JSAIY 4.83% 5.75% 47.5% of operating cash flow NA 49.94 -1.45% UK Consumer Staples: supermarkets and convenience stores, online grocery and general retail good. Also in joint ventures for banking and insurance UBM OTCQX:UBMPY 4.16% 3.52% 76.36 20.42 80.43 -2.52 UK Consumer Discretionary: B2B media and marketing, communications, tradeshows, live events Data from Reuters and Yahoo! Finance All in all, a common thread seems to be that whatever European ‘best-in-class’ companies qualify under the fund’s objective, then they are included in the fund. First Trust lists the fund’s P/E as 13.27, price to book at 1.44, to cash flow, 10.33 and to sales, 0.84. The average 30 day trading volume is 80,874 so it shouldn’t present too much of a challenge to acquire a position. Overall, the fund seems to be well grounded with those premier holdings; however, it does stretch out a bit on the risk curve with others. The argument may be made that European banks have survived the worst of all possible situations and that, although it may take more time they will regain strength. If so, the fund is like to experience share price gains. There’s only one caveat: ECB President Mario Draghi has indicated that the European Central Bank might further weaken the Euro to stimulate growth. This might be balanced out by the strong Great British Pound Sterling and the Strong Swiss Franc. Also, the U.S. Federal Reserve Bank has also indicated that it might increase, slightly, its benchmark rate, hence creating a stronger dollar. This all might affect the fund’s yield by currency translation but, again, that greatly depends on the size of the Fed rate hike. All in all, the fund might not replace the safety of a government bond fund, but risk-wise, it seems to be on par with muni funds and then with a better yield.

PEY: Great Companies, Great Sector Allocations And Solid Yields

Summary PEY offers a dividend yield of 3.39%. The individual company allocations include some relatively heavy concentrations. The sector allocation looks nice, but the volatility on the ETF has been surprising. I like the underlying allocations, but rather than using an ETF that trades the companies I’d prefer a simple “buy and hold” strategy. The PowerShares High Yield Equity Dividend Achievers Portfolio ETF (NYSEARCA: PEY ) has an excellent yield at 3.39% and the sector allocations look great. A heavy allocation to utilities and consumer staples seems like a solid way to build a defensive portfolio, however the volatility of the fund has been surprising. Expenses The expense ratio is a .54%. This is quite a bit too high for my tastes. Holdings I put grabbed the following chart to demonstrate the weight of the top 10 holdings: The heaviest weighting by a slight margin was given to the Vector Group (NYSE: VGR ). The stock has an incredibly high 6.7% dividend yield and is in the cigarette business. While I’m not thrilled with the actions of tobacco companies, the dividend is very strong, and their product benefits from being highly addictive. For the investor addicted to reliable income, this is an industry that simply makes great financial sense. I thought it was interesting that the Vector Group received such a heavy weighting when I didn’t see Altria Group (NYSE: MO ) near the top. Digging deeper into the holdings I found that Altria Group was included and currently represents almost 2% of the portfolio. You may also notice a few oil companies in the portfolio. ConocoPhillips (NYSE: COP ) and Chevron (NYSE: CVX ) both get respectable weights and offer investors exposure to the oil industry which seems to be entirely out of favor. When it comes to oil allocations, I’m fine with having them in the ETF or doing them individually. In the case of ETFs with higher expense ratios, I would lean towards just buying the oil companies individually since I see the sector as a simple “buy and hold” area. Market Cap and Style The style demonstrates a fairly heavy focus on value companies with a willingness to allow blended allocations. It should be noted that they do have a fairly notable allocation to both the small-cap and mid-cap areas which I would expect to increase volatility. Sectors This was the chart that I thought provided the best selling point for PEY. They offer investors a significant allocation to utilities and consumer staples. These heavy allocations should result in a portfolio that is capable of being significantly more defensive and able to withstand downturns in the economy. I wanted to check and see if things had played out that way, so I ran a quick regression on PEY with the S&P 500 going back to December of 2004. It turns out that PEY got hammered pretty hard. The worst drawdown during the recession was saw the S&P 500 fall by about 55%, but PEY managed to lose over 72% of the funds value. I don’t believe that the fund is currently as volatile as those numbers would suggest, but I would prefer to see more diversification in the portfolio allocations since running allocations greater than 3% to anything other than a company like Exxon Mobil (NYSE: XOM ) is simply introducing additional price risk. Conclusion The yield is solid and the sector allocations give the fund a definite appeal for investors looking for that steady source of income. During 2008 and 2009 the fund took some pretty harsh beatings, but I wouldn’t expect them to see that kind of loss again. One of the challenges that I believe the fund faces is having the objective to track the price and yield performance of the Nasdaq US Dividend Achievers® 50 Index. The lack of diversification within the index makes creates a challenge for building any diversification into the fund. The individual holdings include several great dividend growth champions, but I don’t see a benefit in creating higher levels of concentration or trading the positions frequently. The underlying companies are the kind where an investor might serve their family well by simply taking physical delivery of the shares and stuffing them in a safe with the door closed for the next 50 years. There are some areas where more frequent trading makes sense, but when it comes to these dividend champions, I don’t see a need to have any frequent changes. If the fund dropped the expense ratio to .05% and indicated that there would be almost 0 trades over the next few decades, I’d be very bullish on the fund because the underlying companies offer investors a solid growing stream of income. In essence, I like the allocations more than the strategy that created them.