Tag Archives: energy

Utility ETFs Slide On Weaker-Than-Expected Q3 Earnings

The utility sector disappointed in its third-quarter results over the last two weeks with earnings and revenue miss from some of the major players in the space, including Duke Energy Corporation (NYSE: DUK ), NextEra Energy (NYSE: NEE ) and Dominion Resources Inc. (NYSE: D ). However, a recovering U.S. economy, warmer-than-normal weather and ultra-low interest rates helped boost the top and bottom lines of most of these companies. The latest concern threatening the utility sector is the possibility of an interest rate hike in December by the Fed following stellar jobs report for October and the Fed Chair Janet Yellen’s affirmative stance on it. This high-yielding, capital intensive sector mostly resorts to external sources of financing to carry out its generation, distribution and transmission projects. Therefore, a rising interest rate environment certainly does not bode well for them. Below we have highlighted the third-quarter results of the aforementioned utility companies in detail. Duke Energy Duke Energy reported adjusted earnings of $1.47 per share for the quarter that fell short of the Zacks Consensus Estimate of $1.52 by 3.3%. However, quarterly earnings rose 5% year over year on the back of warmer weather compared to the previous year. Further, robust growth in its regulated utilities business as well as the North Carolina Eastern Municipal Power Agency acquisition led to the upside. Total revenue was $6,483 million, lagging the Zacks Consensus Estimate of $6,595 million by 1.7%. Nevertheless, revenues increased 1.4% on a year-over-year basis, driven mainly by rise in the company’s regulated electric unit’s revenues. The company tapered its high end of the earlier 2015 earnings guidance range to $4.55-$4.65 per share from $4.55-$4.75 per share. Shares of the company declined 5.5% (as of November 9, 2015) since its earnings release on November 5. NextEra Energy NextEra Energy’s quarterly adjusted earnings of $1.60 per share missed the Zacks Consensus Estimate of $1.64 by 2.4%. Despite this, earnings climbed 3.2% year over year on the back of higher revenues from Florida Power & Light Company. However, operating revenues of $4,954 million surpassed the Zacks Consensus Estimate by 2.7% and increased 6.5% from the year-ago level. NextEra reaffirmed its 2015 earnings guidance of $5.40-$5.70 per share and expects the figure to come in on the upper end of the range. Meanwhile, earnings per share are expected in a range of 5.85-$6.35 for 2016 and $6.60-$7.10 for 2018. Shares of the company went down nearly 5% since its earnings release on October 28. Dominion Resources Dominion Resources’ quarterly operating earnings of $1.03 per share lagged the Zacks Consensus Estimate of $1.06 by 2.8%. However, earnings increased 10.8% from 93 cents per share in the prior-year quarter due to normal weather and earnings from farmout transactions. The company’s operating revenues of $2,976 million also missed the Zacks Consensus Estimate of $3,181 million by 6.4% and declined about 2.4% year over year. Dominion expects to earn 85 cents to 95 cents per share for the fourth-quarter 2015 compared with 84 cents per share in the year-ago period. The company reaffirmed its 2015 earnings guidance of $3.50 to $3.85 per share. Shares of the company fell 5.2% since its earnings release on November 2. ETFs in Focus The sliding stock prices of these utility companies following the dull third-quarter results have adversely impacted the performance of ETFs with significant exposure to them. Below we have highlighted three of these ETFs, which have lost around 5% in the past two weeks. Investors are advised to exercise caution before investing in these ETFs as the looming rate hike is expected to worsen their performance in the coming days ahead. Utilities Select Sector SPDR (NYSEARCA: XLU ) XLU is one of the most popular in the space with nearly $6.3 billion in AUM and average daily volume of roughly 12.5 million shares. The main purpose of this fund is to provide investment results that correspond to the performance of the Utilities Select Sector Index. This fund holds 29 stocks with NextEra Energy, Duke Energy and Dominion Resources holding the top three spots with a combined exposure of nearly 25% in its assets. The fund charges only 15 bps in investor fees per year and currently carries a Zacks ETF Rank #3 (Hold) with a Medium risk outlook. Vanguard Utilities ETF (NYSEARCA: VPU ) This ETF tracks the MSCI US Investable Market Utilities 25/50 Index, measuring the performance of 81 U.S. utilities stocks as classified under the Global Industry Classification Standard. Duke Energy, NextEra Energy and Dominion Resources occupy the top three positions in the fund with a combined exposure of a little more than 20% in the fund’s assets. The fund has amassed $1.6 billion in its asset base and trades in a moderate volume of 144,000 shares per day. It is even cheaper than XLU with 12 bps in annual fees and carries a Zacks ETF Rank #3 with a Medium risk outlook. iShares Dow Jones US Utilities (NYSEARCA: IDU ) The fund follows the Dow Jones U.S. Utilities Sector Index, measuring the performance of 60 utility stocks in the U.S. equity market. Duke Energy, NextEra Energy and Dominion Resources are placed in the top three positions in the fund, together accounting for a share of nearly 21% of the total assets. The fund manages an asset base of around $560 million and exchanges about 182,000 shares per day. It is a bit expensive with 43 bps in annual fees and has a Zacks ETF Rank #3 with a Medium risk outlook. Original Post

Why I Believe Terraform Power Is Still A Good Buy

Summary Despite the stock price decline, fundamentals remain on track. Dividend yield has improved to 6% plus. Strong stable cash flows, geographic diversification and a good mix of generation resources. Solar Energy will continue to grow in high double digits and TERP should benefit as the largest renewable energy yieldco. Yieldcos have been criticized by a lot of industry analysts recently. Given the downturn that the energy stocks are facing currently, yieldcos have failed to deliver the promised results. Having said that, I believe that yieldcos are a safe bet because of their low risk profile and ability to generate stable and predictable cash flows. Even when the entire energy market is going through a severe downturn, they should continue paying their dividends since their cash flows are quite stable. Everything was going well for Terraform Power (NASDAQ: TERP ), the spin off from SunEdison (NYSE: SUNE ), until July this year, when prices started to fall. Though the stock is down 40% since YTD, it has been frequently increasing its dividend and CAFD guidance. The stock has a current dividend yield of more than 6% with a market capitalization of $2.6 billion. Demand for solar energy will continue to increase such that more solar projects will require financing. TERP has a good portfolio of assets increasing dividend payouts in a regular manner. Despite the recent sharp price decline, TERP has maintained its dividend guidance for 2015. While the next year may not be great in terms of growth, TERP should be a good long term holding. Here’s why I think it’s a good buy 1) Renewable Energy Market Is Growing – There is no doubt about the fact that renewable energy is set to boom in the future. It is estimated that renewable energy could account for almost 80% of the world’s energy supply within four decades. As per the recent INDC filings, large countries will have to shift their focus toward solar, wind and other renewable forms of energy for their power needs. New solar projects will get launched in a regular manner and this will help the yieldco business model to flourish. 2) Largest Renewable Energy Yieldco – Terraform Power is well diversified with not only solar assets but also other renewable energy assets, such as wind energy projects. TERP occupies an advantageous position in the industry with a history of good performance. The company is going to slow down and consolidate, as its sponsor SunEdison is curtailing its expansion. 3) Good Liquidity Position to Support Acquisitions – Terraform Power had liquidity of ~$1.3 billion as if Q2 2015 to support further dropdowns and future targets. We currently have $1.3 billion of liquidity which is more than sufficient to support our growth needed for each of 2016 targets. We expect to use this liquidity to fund the Invenergy and Vivint Solar acquisitions, which will provide us with the capital that we need to meet our $1.75 DPS – Carlos Domenech CEO of Terraform. Source: SA Transcripts Source: TERP IR 4) Fundamental Performance Remains Quite Good – As can be seen from the table below, TERP’s performance has improved during the second quarter. The project pipeline also grew by 1 GW to reach 8.1 GW at the quarter end. 146 MW of dropdowns are expected to generate ~$21 million of unlevered CAFD annually over the next 10 years. Q1 ’15 Q2′ 15 Revenue (million $) 75 132 Adj EBITDA (million $) 52 108 CAFD (million $) 39 65 Dropdowns (in MW) 167 146 DPS ($) 0.335 5) High Yield – Terraform Power has been increasing its dividend payments as can be seen below. A yieldco primarily distributes its earnings as dividends to its investors and TERP has already achieved its full-year dividend per share target in the first quarter itself. The projected yield stands at 7.32% and the current yield is 6.32%. Date Amount 08/28/2015 0.335 05/28/2015 0.325 02/26/2015 0.27 11/24/2014 0.2257 Details of Recent dividends from Morningstar Downside Risks a) TERP’s performance is tied to SunEdison’s future performance – Though I was supportive of SunEdison’s acquisition strategy to become the leader in the renewable energy space, I agree that it has become a bit too aggressive. This has been a cause of concern for SUNE investors who have begun doubting the means to fund these acquisitions. One of the biggest risks for a yieldco is the fact that it’s heavily influenced by the actions of its sponsors. SunEdison is a strong renewable energy player today, but it needs to slow down to consolidate its acquisitions. SUNE’s stock price has taken a terrible battering after investors became alarmed over the increase in debt to finance its acquisitions. SUNE has corrected its course by canceling some of its acquisitions in India and Latin America. SunEdison’s stock price has started to stabilize after the management changed its strategy. However, TERP’s future is tied to SUNE’s performance. If it does not improve, then TERP will face a hard time in growing its assets. “We tried to do transactions the market couldn’t absorb. It started over a year ago but we got the brunt of it over the last two months.” – CEO Ahmad Chatila said in an interview. Source: Bloomberg b) Increased competition will result in higher acquisition costs – Even though the market has become slightly tough for yieldcos, there are still new ones in the pipeline. Canadian Solar (NASDAQ: CSIQ ) still plans to list its yieldco by the end of this year or early next year. There are other yieldcos such as 8point3 Energy Partners (NASDAQ: CAFD ) and NRG Yield. New yieldcos will increase competition, raising the acquisition cost for solar projects. Stock Performance and Valuation TERP stock currently trades at $18.3, which is 32% above its 52-week low price. The stock has lost 34% since the last one year and CAFD also is down 30%. The market capitalization stands at $2.6 billion, with a projected yield of 7.32% while CAFD’s stands at 4.37% . The current dividend yield of CADF is very low – a little more than 1%, while TERP’s stands at more than 6.3%. Conclusion Though the stock has been battered due to the general energy market slowdown and the skepticism around SunEdison, the yieldco has been performing quite well. Terraform Power has a lot of potential in the renewable energy space with a solid 27% diversification in wind energy. It has already achieved its full-year dividend per share target in the first quarter itself. SunEdison is a strong player in the energy market and Terraform Power will leverage from its leading position. Though there has been some unrest in the investor community I’m sure it will die soon, since solar energy is the future. Not only does yieldcos offer less volatility but are also more stable in dividend payouts. I support this yieldco platform and see the recent pullback as a good time to build a position.

A Seasonal Biotech Portfolio Alternative To ‘Sell In May’

Summary The common sense strategy of sell in May fails to beat a buy-and-hold ETF strategy. I tested an alternative seasonal strategy to find it safer, but not better than the buy-and-hold strategy. Modifying the seasonal strategy to allocate capital to biotech instead tech beats the buy and hold strategy in at least two ways. This article is a return to the “sell in May” philosophy, which I previously outlined here . As it is now November, those who subscribe to this philosophy are getting ready to enter the market. If you are one such investor, I implore you to first read the following article, in which I show you how the iShares Nasdaq Biotechnology ETF (NASDAQ: IBB ) can more than double the effectiveness of your strategy. Sell in May The first thing I want to do is set a benchmark to which I will compare the portfolio strategy I plan to introduce here. Let’s take it a step further and use two benchmarks: buy and hold and sell in May. Buy and hold: Buy the SPDR S&P Trust ETF (NYSEARCA: SPY ) and continue holding, never selling Sell in May: Buy the SPY in October and switch to Treasury bills in May As you can see from the figure below, the buy and hold strategy actually beats the sell in May strategy over the past 10 years. This only bolsters my original article that states the sell in May strategy only holds is special occasions and should not be relied upon in the long-term. The upside is that you protect yourself a bit from the drawdowns, but as you’ll see in a bit, an even better strategy exists. So let’s stop with the mystery and great straight to the strategy… after one more portfolio strategy introduction. In this article , a different type of seasonality-based portfolio strategy is introduced. You can skip reading the article, as I’ll explain it in a nutshell in the following section. Kaepple’s seasonality Kaepple states that his extensive research of market seasonality led him to three main conclusions. First is to buy tech stocks during the market rally season, typically November to January (that’s now!). Second is to switch over to energy stocks during the winter. Then, in May, switch to cash (or bonds). In September, get into gold for one month, and then switch back to cash. I wondered how this strategy would do compared to the buy-and-hold and sell in May strategies. So, I ran a backtest. The strategy follows: November to January: Buy the Technology Select Sector SPDR ETF (NYSEARCA: XLK ) February to May: Buy the Energy Select Sector SPDR ETF (NYSEARCA: XLE ) June to August: Stay out of the market September: Buy the SPDR Gold Trust ETF (NYSEARCA: GLD ) November: Stay out of the market Here are the results of this strategy: As you can see, the results of this strategy were better than the buy-and-hold strategy. Not in performance – they both performed equally well. However, this strategy reduced the drawdown and showed a stable upward trend. This portfolio allocation strategy could have protected you from much of the damage that most investors suffered in 2008. In addition, although we were in specific sectors via XLK and XLE, this portfolio was less volatile than simply buying the SPY. That is, this is a safer portfolio allocation strategy with fewer downsides. But couldn’t hedging do the same? After all, this strategy didn’t outperform the buy-and-hold strategy. But what if we focused on an even more specific sector during the market rally period? Choosing an individual stock, of course, would be too risky, as you’d be putting all your eggs in one basket. But what about focusing on a very specific subsector of the tech sector? My thoughts immediately turned to biotech, of which there are several good ETFs. Though I am long on the ALPS Medical Breakthroughs ETF (NYSEARCA: SBIO ), this ETF is relatively new, precluding it from backtesting. Instead, I reached for the next best thing: the iShares Nasdaq Biotechnology ETF . Thus, the new strategy invests in IBB from November to the end of January. The results follow. Now we’re talking! Half the max drawdown of the buy-and-hold strategy with double the cumulative gains! In addition, just like the original sector portfolio strategy with the XLK, this portfolio would have weathered the 2008 storm. Conclusion for Investors The conclusion is basically in the last image – a strategy that switches into different sectors of the market throughout the year is safer than an index fund and brings in double the revenue. (Devil’s Advocate: How does this compare to buying and holding IBB? Answer: Same cumulative returns with 30% lower max and average drawdowns.) As the first backtest shows, buy and hold beats sell in May but an IBB-focused seasonal strategy beats them both with no obvious disadvantages. Anyone using a seasonal strategy such as the “sell in May” strategy should reconsider how they play this game. If you’re looking for something easy, this is your four-trade-a-year investment strategy. And it should be rather cost effective to switch four times a year. No, it’s not a flamboyant investment strategy but it beats most mutual funds. If you’re interested in seeing some tweaks to this strategy, ask me in the comments section or via mail. I’ll be rolling out my premium Seeking Alpha backtesting newsletter soon, in which I backtest your strategies. Before I launch it, I’m willing to run a backtest on your portfolio allocation strategy or trading strategy per gratis. Request a Statistical Study If you would like for me to run a statistical study on a specific aspect of a specific stock, commodity, or market, just request so in the comments section below. Alternatively, send me a message or email.