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Will FedEx’s Q4 Spell More Trouble For Transport ETFs?

The transportation sector has given an ugly performance this year in spite of a strengthening economy, better job conditions and cheap fuel. The major culprit is the strong dollar, which is eroding the profitability of big transporters. The rough trading is expected to continue for the sector in the months ahead, especially after a disappointing fourth quarter 2015 earnings report from bellwether FedEx (NYSE: FDX ). The courier company lagged our estimates on revenues and earnings and guided lower, dampening investors’ mood. However, the numbers were better than the year-ago quarters. Q4 FedEx Results in Detail Earnings per share climbed 4.7% year over year to $2.66 but missed the Zacks Consensus Estimate by four cents. Revenues rose 2.5% year over year to $12.1 billion but fell shy of our estimate of $12.39 billion owing to negative currency translation and lower fuel surcharges. FedEx’s ongoing three-year cost cutting measures in the FedEx Express unit, which started in late 2012, are largely paying off and are expected to continue doing so in the coming quarters. This profit-improvement plan will continue to boost revenue and profitability. However, a strong dollar and lower fuel surcharges will likely keep on hurting the company’s profitability in fiscal 2016. As a result, the second largest U.S. package delivery company provided fiscal 2016 earnings per share guidance of $10.60-$11.10, the midpoint of which is below the Zacks Consensus Estimate of $10.90. Investors should note that FedEx is in the process of acquiring the Dutch parcel-delivery company TNT Express ( OTCPK:TNTEY ) for €4.4 billion ($4.8 billion). The buyout is expected to close in the first half of calendar year 2016. The acquisition, pending European regulatory approvals, would bolster its global footprint, particularly in the European markets with many untapped nations like the UK and France. The deal would create the third-largest delivery company in Europe after United Parcel Service (NYSE: UPS ) and Deutsche Post ( OTCPK:DPSGY ). Hence, the transaction will give a big boost to the company’s competitive position and future growth story. That being said, FedEX has a solid Growth Style Score of ‘A’ with some flavor of value as it also has a Value Style Score of ‘B’. Further, the stock has a favorable Zacks Rank #3 (Hold) and a solid industry Rank in the top 43% at the time of writing. Market Impact FDX shares dropped as much as 3.3% in yesterday’s trading session following disappointing results on elevated volumes of nearly 2.5 times than the average. This represents the biggest one-day fall so far this year. Given this, many investors may want to tap the beaten down price of FDX by considering either of the following ETFs: iShares Transportation Average ETF (NYSEARCA: IYT ) The ETF tracks the Dow Jones Transportation Average Index, giving investors exposure to the small basket of 20 securities. Out of these, FedEx occupies the top position in the basket with 13.5% of assets. Within the transportation sector, railroad takes the top spot with 46.8% share in the basket while air freight and logistics (30.1%), and airlines (15.2%) round off the top three. The fund has accumulated nearly $870 million in AUM while it sees good trading volume of around 438,000 shares a day. It charges 43 bps in fees per year from investors and lost 0.3% on the day following the earnings results. The product is down 8.3% in the year-to-date time frame and has a Zacks ETF Rank of 3 or ‘Hold’ rating with a High risk outlook. SPDR S&P Transportation ETF (NYSEARCA: XTN ) This fund follows the S&P Transportation Select Industry Index and uses almost an equal weight methodology for each security. Holding 50 stocks with AUM of $399.2 million, FedEx takes the fourth spot with a 2.7% share in the basket. The product is heavily exposed to trucking which accounts for 36.2% of total assets while airlines make up for another one-fourth share. Airfreight & logistics, and railroads account for 22.7% and 11% share, respectively. The fund charges 35 bps in fees per year from investors and trades in a moderate volume of about 83,000 shares a day. XTN was down 0.6% at the close after FedEx earnings were released and 8.5% so far in the year. The fund has a Zacks ETF Rank of 1 or ‘Strong Buy’ rating with a High risk outlook. Original Post

Fire The CEO, Then Buy The Stock?

There is a widely-held perception that CEOs don’t tend to last very long at big companies – maybe just three or four years on average. The truth, however, is not that bad if you are a CEO (or a person who loves one). The average CEO at a Fortune 500 company actually lasts about 8 to 10 years. Still, because the CEO is the face of the company and critical to its success, CEO turnover can cause volatility in a stock’s price – especially if it is unexpected and especially if the CEO leaves in less-than-voluntary circumstances. The latest example comes from Twitter (NYSE: TWTR ). Dick Costolo, who has announced he will be gone effective July 1, had served as Twitter’s CEO since 2010 and helped take the company public in 2013. The nice thing about being the CEO of a private company is that you have the luxury of time. You can more easily focus on the long term. Once you go public, however, you have a stock price that investors constantly monitor. Your stock is like a voting machine, and your stock price tells you how investors think you’re doing. Investors were telling Dick Costolo that he wasn’t doing well at all. After a brief run-up following the IPO, shares of Twitter, which has never been a profitable company, faded. Today, the stock sells for less than the first trade at the IPO. Investors were telling Costolo loud and clear that it was time to go. He asked the Board of Directors to name a replacement. That’s all well and good, but from my perspective, I don’t really care if Costolo was a good or bad CEO. As far as I’m concerned, the more important question is, does it make sense to buy the stock now that the CEO is gone? That’s what lots of investors thought when Costolo’s departure was announced. Twitter stock rallied almost 7% in after-hours trading right after the company announced that Costolo was stepping down. (That may have been a blow to his ego, although it did boost the value of his own shares and options by millions of dollars – at least temporarily.) However, the euphoria did not last. When the market opened for trading the next morning, half the gains were gone. By the end of that day, the stock was back to pre-resignation levels. And by the end of the following trading day, the stock had tanked 3.2% below where it had been just before the announcement of Costolo’s resignation. Investors apparently came to the conclusion that Twitter’s problems went well beyond Costolo’s personal inability to implement a winning strategy. McDonald’s (NYSE: MCD ) provides a bit of a counter example. When CEO Don Thompson resigned in January, the stock rallied 5.1% by the end of the following day. But in McDonald’s case, the stock kept going higher. In fact, it rallied for more than a month. It has given up some ground since, but it remains higher than it was before Thompson’s resignation. With McDonald’s, investors seem to believe that the problems were more closely associated with the CEO than they were with any fundamental problem with the business. McDonald’s has to make its hamburgers more popular and it has a lot to prove, no doubt. But Twitter, remember, as popular as its service already is, has yet to prove that it even can be a profitable business. So, in general, does it make sense to buy the stock when an unpopular CEO steps down? For the short term, the answer appears to be yes; but only if you can act quickly enough to buy the stock before the run-up. Keep in mind that these kinds of announcements are typically made during non-trading hours. For you to have made money on Twitter, you would have had to be sitting at your trading desk rapidly buying and selling when the market was closed. For the longer run, the answer depends. The more investors believe that the company’s troubles are due to bad management and not to a broken business model, the more the stock will rally – and keep rallying – when the unpopular CEO resigns. But if investors think the company’s problems are so endemic that even a new star CEO can’t fix them, you will be better off taking a pass.

Fight Rising Yield With These High Yield ETFs

A flurry of strong U.S. economic indicators, especially the better-than-expected May job growth number which is one of the key gauges of the Fed policy determination, set the stage for a September timeline for the Fed rate hike. This, along with rising supplies of debt securities pushed the yield on the benchmark 10-year Treasury note to this year’s high of 2.42% on June 9. In such a backdrop, yield-loving investors might be looking for ways to beat the benchmark Treasury yield and yet enjoy decent capital gains. For them, we highlight some ETF choices that provide extra yield and might be in focus once the Fed puts an end to the rock-bottom interest rate environment. Senior Loan ETFs Senior loans are issued by companies with below investment grade credit ratings. In order to make up for this high risk, senior loans normally have higher yields. Since these securities are senior to other forms of debt or equity, senior loans give protection to investors in any event of liquidation. As a result, default risk is low in this type of bonds, even after belonging to the junk bond space. Moreover, senior loans are floating rate instruments and provide protection from rising interest rates. In a nutshell, relatively high-yield opportunity coupled with protection from the looming rise in interest rates post Fed tightening should help the fund to perform better in the second half of 2014. PowerShares Senior Loan ETF (NYSEARCA: BKLN ) The most popular and liquid fund in this space is BKLN with AUM of $5.7 billion. The fund tracks the S&P/LSTA U.S. Leveraged Loan 100 Index and holds 115 securities in its basket. It has weighted average maturity of 4.71 and average days to reset of just over 35. Though senior loans account for a hefty 83.7% of the assets, high yield securities also make up for 9% share in the basket. The product charges an expense ratio of 65 bps a year and pays out an attractive dividend yield of 3.95%. The ETF has added nearly 1% in the year-to-date timeframe (as of June 9, 2015). Preferred Stock ETFs Preferred stocks are hybrid securities having the characteristics of both debt and equity. The preferred stocks pay the holders a fixed dividend, like bonds. These types of shares normally get priority over equity shares both in case of dividend payments as well as at the time of liquidation if the company fails. Preferred stocks are thus relatively stable and usually exhibit a low correlation with other income generating assets. These products are interest rate sensitive – lesser than the bond space though – but a high yield opportunity might present them as potential bets once the Fed hikes rates. iShares S&P U.S. Preferred Stock ETF (NYSEARCA: PFF ) PFF is perhaps the biggest and the most popular name in the preferred stock ETF space. With total assets of $13.3 billion, it is one of the largest funds in this category. The ETF charges 47 basis points in fees. The fund has returned 1.83% so far this year (as of June 9, 2015) and pays out 6.09% per annum as dividends. The ETF holds 302 securities in all and eliminates concentration risk by allocating a mere 15% of its total assets in its top 10 holdings. Business Development ETFs Business Development Companies (BDCs) are firms that give loan to small and mid-sized companies at relatively higher rates and often grab debt or equity stakes in those companies. BDCs dole out high cash payments together with captivating the equity performance of the borrower. The U.S. law obliges BDCs to hand out more than 90% of their annual taxable income to shareholders. Market Vectors BDC Income ETF (NYSEARCA: BIZD ) The ETF looks to invest in a variety of BDCs which are traded in the American market by tracking the Market Vectors U.S. Business Development Companies Index. The ETF has $82.5 million in AUM. In total, BIZD invests in 29 firms with a relatively high level of concentration in the top names. Ares Capital and American Capital account for 14.6% and 9.9% of total assets, respectively. The fund yields 8.29% annually (as of June 9, 2015) and is up about 3% year to date. Originally posted on Zacks.com