Tag Archives: energy

3 Merger Arbitrage Opportunities

Summary The arb universe with highlighted opportunities. An idea on how to best time setting them up. One plug and play way to get these at a discount. What are today’s best merger arb opportunities? What are the arbs saying? 1. The first opportunity is to put together a portfolio by hand. The bolded opportunities are the seven that I see as the best risk-adjusted opportunities. Click on comments for additional deals on the specific opportunities. 2. Wait for the next antitrust suit Last fall’s abandonment of the AbbVie (NYSE: ABBV ) acquisition of Shire (NASDAQ: SHPG ) was an exceedingly well disguised blessing for arbs. While the SHPG price cratered before subsequently recovering fully, the chaos led to the best arb spreads relative to risk in years. Today, it appears as if the US antitrust authorities are probably preparing at least one antitrust enforcement action. If/when they block at least one of the current deals (Rexam PLC ADR ( OTCQX:REXMD )? Office Depot Inc. (NASDAQ: ODP )?), the other spreads will widen price-insensitively, leaving better opportunities, perhaps ones that rival last autumn’s. 3. Leave it to the pros While I am an avowed skeptic of the whole concept of “smart money,” this is admittedly a highly research-intensive and fact-specific investment strategy. So, you may want to seek professional help. Hedge funds such as Rangeley Capital are limited to accredited investors. I try to communicate my most actionable items to Sifting the World members, but sometimes you just want someone else to pull the trigger. What should you do? One candidate is to invest in GDL Fund (NYSE: GDL ). According to the fund’s objective, The Fund is a diversified, closed-end management investment company whose investment objective is to achieve absolute returns in various market conditions without excessive risk of capital. Absolute returns are defined as positive total returns, regardless of the direction of securities markets. To achieve its investment objective, the Fund, under normal market conditions, will invest primarily in securities of companies (both domestic and foreign) involved in publicly announced mergers, takeovers, tender offers and leveraged buyouts and, to a lesser extent, in corporate reorganizations involving stubs, spin-offs, and liquidations. The manager is someone I respect. The expense ratio of over 3% is indefensibly obscene, but less so than any hedge fund. The distribution yield is over 6%. The discount to NAV is over 17%. That discount is greater than the 5-year average and the YTD average. It is diversified across sectors. Top Sectors Consumer Services 16.28% Healthcare 12.21% Technology 12.20% Consumer Goods 8.07% Utilities 7.96% Oil & Gas 5.18% Basic Materials 4.64% Financials 4.57% Industrials 3.69% Telecommunications 2.09% Would I quibble with the specific positions? Sure. But does GDL deserve this deep a discount? I don’t think so. Does Gabelli Equity Trust (NYSE: GAB ) need an activist to come in and demand that they cut executive compensation? No comment. But if Mario Gabelli is available, he might want to take a look at it. Conclusion Today, there are some great merger arbitrage opportunities. Tomorrow, they could get even richer if we see a big antitrust suit against one or more of the current deal crop. If you want to take a dip but don’t want the bother, consider GDL as one way to get exposure at a significant discount. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks. Disclosure: I am/we are long PRGO, ALTR, ISSI, WMB, BHI, DEPO, PNK. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: Chris DeMuth Jr is a portfolio manager at Rangeley Capital. Rangeley invests with a margin of safety by buying securities at deep discounts to their intrinsic value and unlocking that value through corporate events. In order to maximize total returns for our investors, we reserve the right to make investment decisions regarding any security without further notification except where such notification is required by law.

The Guggenheim S&P 500 Equal Weight Utilities ETF: Utilitarianism

An alternatives to a traditional government bond holding. Utilities offer steady, consistent returns and are largely immune to the business cycle. This equal weight utilities fund is biased towards low dividend risk, yet has a respectable return. The world of investing has changed much over the past five years due to the financial crises of 2008 and its subsequent recession. The realization that investing may never be the same is a growing one, particular when it comes to income. As it stands now, even if central banks are able to normalize policy, it still may be years before government bond yields normalize, and that’s under the assumption that all advanced economies will continue to grow uniformly. Recent economic reversals in newly emerged economies, particularly the “BRICS” along with the collapse in commodity prices and the astonishing overproduction of crude petroleum have all weighed on high quality assets yields. High quality government securities have been pressed to their limits. Furthermore, cross market technology, institutional trading, pension fund demands and ‘carry asset’ strategies have created much higher volatility in the once mundane government bond market. The point of the matter is that the individual investor may be saving for retirement in a completely new world. The strategy of holding long term government bonds as a portfolio cornerstone has become an ‘old world’ concept. Utilities assets may be one replacement solution for government bond holdings. There are several to choose from, and one of the top yielding in the class is the Guggenheim S&P 500 Equal Weight Utilities ETF (NYSEARCA: RYU ) . According to Guggenheim, the fund “… Seeks to replicate as closely as possible, before fees and expenses, the performance of the S&P 500 Equal Weight Index Telecommunication Services & Utilities. ..” A word about the ‘equal weight’ S&P Index: according to S&P, the equal weight S&P 500 index is an alternative version of its renowned S&P 500 market cap weighted index. In the equal weight index each S&P 500 member constitutes 20 basis points of the S&P 500 index with a quarterly rebalancing in order to prevent excessive turnover. The S&P 500 equal weight Telecommunications and Utility Index is merely a subset of the equal weight S&P 500 index. Since the fund is based on ‘equal weightings’, it seems superfluous to analyze the top ten holdings. Instead, since the objective here is dividend risk assessment it would be more useful to analyze the potential risk to regular distributions. This may be achieved by comparing a company’s payout ratio to the dividend. Since a payout ratio is defined to be the proportion of earnings paid out as dividends, the lower the payout ratio the less likely the dividend will be reduced and conversely, the higher the payout ratio, the more likely a dividend may be reduced. The fund has 34 holdings and an average dividend yield of 4.0571%. The average payout ratio is 73.62%. (This is less than the S&P 500 market cap weighted payout ratio of almost 85). Five of the holdings have payout ratios of over 100%; 21 of the 34 holdings are below the average payout ratio; 11 are above; 2 have non applicable payout ratios; 14 of the holdings are above the fund’s average yield, and 20 are below the fund’s average yield. Hence, the fund is biased towards the ability of the holding to continue to pay or increase dividends. The chart below summarizes the payout ratio (in blue) and the yield (in red). (click to enlarge) (Data from Reuters and Guggenheim) The 10 lowest payout ratios average out to 44.39% with an average yield of 3.563%. There are no Telecom Service companies in the fund with a payout ratio low enough to place it in the ten lowest of the fund. (Data from Reuters and Guggenheim) The 10 holdings with the lowest payout ratio are summarized in the table below. Company Type Price/Earnings (TTM) Price/Cash Flow Price/Book Divided Yield Payout Ratio AES Corp (NYSE: AES ) Independent Power and Renewable 9.70 3.24 2.14 3.31% 23.43% Edison International (NYSE: EIX ) Electric Utility 12.60 5.52 1.72 2.80% 33.70% PPL Corp (NYSE: PPL ) Electric Utility 10.84 6.49 2.11 4.81% 38.81% Dominion Resources (NYSE: D ) Multi-Utility 24.29 12.25 3.40 3.65% 41.43% Scana Corp (NYSE: SCG ) Multi-Utility 10.29 6.69 1.44 4.04% 43.98% Nextera Energy (NYSE: NEE ) Electric Utility 15.56 8.11 2.16 3.02% 45.61% Sempra Energy (NYSE: SRE ) Multi-Utility 17.77 9.24 2.07 2.88% 48.80% Public Service Enterprise (NYSE: PEG ) Multi-Utility 11.13 6.56 1.61 3.85% 52.13% Eversource Energy (NYSE: ES ) Electric Utility 16.76 9.80 1.50 3.46% 55.99% Exelon Corp (NYSE: EXC ) Electric Utility 11.59 4.20 1.15 3.95% 56.51% (Data from Reuters and Guggenheim) There are, as one might expect, different types of Utility Companies. Diversified Telecommunications includes entertainment, mobile, internet and voice services; Electric Utilities are, as the name implies, electricity providers although some, Duke Energy for instance, provide natural gas as well; Independent Power and Renewables generate power through renewable resources like wind and solar and also install residential and business solar systems; Multi-Utilities provide natural gas, electricity, storage facilities and pipeline delivery. (Data from Reuters and Guggenheim) For a few detailed examples: AES is global, providing services to Chile, Columbia, Argentina, Brazil, Central America, the Caribbean, Europe and Asia. AES generates renewable power from solar, wind, hydro, bio mass and landfill gas. Scana Corporation, classified by the Guggenheim fund as ‘Multi-Utility’ provides natural gas as well as fiber-optic and telecomm services. Dominion Resources distributes natural gas, electricity, natural gas storage, LNG transportation and risk management services. It also has an equity stake in a joint venture with Caiman Energy called Blue Racer , a Marcellus Shale natural gas processing company; neither are publically owned companies. NiSource Inc (NYSE: NI ) is a holding company providing services through 13 subsidiaries for gas, electric and pipeline as well as a financing service. Many of these companies also hedge or trade derivative contracts. The point being that for utility funds with only a few holdings, it’s worth examining the descriptions or company profiles of the holdings to fully understand the depth of the individual holdings. (click to enlarge) Lastly, the fund has a reasonably long history, incepted in November of 2006. Its expense ratio is reasonable at 0.40%. Its total net assets are over $112,487,000 distributed over 34 holdings with a cash reserve. The average daily volume is 186,066 shares per day and there are 1.6 million outstanding shares. It currently trades at a slight discount, $-0.08 per share to NAV. The fund has paid a total of $17.80 in quarterly dividends since inception. Hence, the fund provides a reasonable yield in today’s low yield environment, low volatility with a beta of 0.87 and reasonable liquidity. Should the global economy contract because of a readjustment in the Chinese economy, and the U.S. economy remains reasonably strong with depressed commodity prices, a utility fund such as the Guggenheim S&P 500 Equal Weight Utilities ETF would do well generating good returns with relative safety for some time to come. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: Additional disclosure: CFDs, spreadbetting and FX can result in losses exceeding your initial deposit. They are not suitable for everyone, so please ensure you understand the risks. Seek independent financial advice if necessary. Nothing in this article should be considered a personal recommendation. It does not account for your personal circumstances or appetite for risk.

Conservative Sector ETF Ideas For September

Over the last 20 Septembers, the S&P has posted an average performance of zero. If history repeats in September 2015, investors will want to take a conservative approach to sector exchange traded funds this month. The Utilities Select Sector SPDR ETF is usually the top performer among the nine sector SPDRs in the month of September. By Todd Shriber, ETF Professor September is here and that is great news for fans of American football, but financial market data indicate equity bulls would do well to curb what enthusiasm they have left after a trying August. For believers in seasonal trends, it must be noted that over the last 20 Septembers, the S&P has posted an average performance of zero. The benchmark U.S. equity index is traditionally flat in September over that period, according to Equity Clock data. That does not mean sector-level opportunities cease to exist in the ninth month. Rather, the opposite is true, but if history repeats in September 2015, investors will want to take a conservative approach to sector exchange traded funds this month. Utilities The Utilities Select Sector SPDR (NYSEARCA: XLU ) is usually the top performer among the nine sector SPDRs in the month of September, averaging a modest gain in the ninth month of the year, according to CXO Advisory . XLU is in the midst of what is supposed to be a seasonally strong period for the largest utilities ETF as the fund is usually the second-best of the nine SPDRs in August. Indeed, XLU lived up to that track record, but underscoring just how poorly stocks performed last month, XLU lost 4 percent. Only the Energy Select Sector SPDR ETF (NYSEARCA: XLE ) was better among the nine SPDRs. Consumer Staples According to CXO data, the Consumer Staples Select Sector SPDR ETF (NYSEARCA: XLP ) is usually the second-best of the nine SPDRs this month, though like the S&P 500, is usually about flat this month, reminding investors that sometimes less bad is good. However, before backing up the bus on XLP, investors should note that the largest staples ETF was usually the best of the sector SPDRs in August, but that historical data did not mean much as XLP tumbled 6.1 percent last month. Materials & Tech In terms of the worst of the nine SPDRs in September, that dubious honor goes to the Materials Select Sector SPDR ETF (NYSEARCA: XLB ) followed by the Technology Select Sector SPDR ETF (NYSEARCA: XLK ). This is where things get interesting and those things are a reminder that seasonal trading often requires the user to be nimble. Historical data, courtesy of CXO, indicate XLU is usually the best SPDR this month, but that is before it turns into October’s worst. Conversely, XLK is historically the second-worst SPDR in September before it becomes the best of the nine in October. Disclaimer: Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.