Tag Archives: etf
Terraform Power: No More Blood On The Streets, Time To Take Profit
Summary I suggested a long position in Terraform Power on November 20th as panic made the valuation very compelling. Recent newsflow has been positive and generated a 50% rally in the stock since my article was published. It is time to reassess the investment thesis and decide whether to keep or sell the position. Less than a month ago I wrote an article on Terraform Power (NASDAQ: TERP ) titled ” Terraform Power : buying when there is blood on the streets?” At the time the stock was trading at $8.4 and it has been on a rollercoaster since then with a lot of news coming in. At the moment of writing this article the stock is at $12.40 and, including the 35c dividend, generated a 52% performance in less than a month. That was quicker than I expected. But such a big move deserves some additional analysis in order to understand if the time has come to close the position. Recent newsflow A few days after my article, the company announced some management changes . This was not good news as the clear message sent to investors was that objective number one was to save the overall Sunedison / Terraform Power / Terraform Global Group. They called it “organizational alignment”; the way I read it was: TERP is in much better shape than Sunedison (NYSE: SUNE ) and needs to provide some help. As expected the stock reacted negatively once the decision was digested and understood: some of the risk is switching back to Terraform from Sunedison as the Group is trying to go back to the initial yieldco drop down strategy, thus putting at risk TERP’s balance sheet. My own reaction was frustration as the investment thesis was certainly weakened by the news. Luckily a few days later (December 1st) reputable hedge fund investor David Tepper of Appaloosa disclosed a very large position in the company and sent a letter to management highlighting his concerns on corporate governance: “Thus, it is obvious that the deterioration in TERP’s security prices and credit profile this month results from (among other things): (1) the transmission of financial stress related to its “Sponsor’s” ambitious growth objectives and over-extended financial commitments; and (2) TERP’s incomplete and selective disclosures”. Market reaction was massive and Tepper’s involvement acted as a confidence booster. What particularly pleased the markets was that such a high profile hedge fund manager built a significant stake (9.5%) and took an activist role (something he rarely does) to push for a change and more protection for TERP shareholders. It really looked like the older brother trying to protect the younger one from bullies. The market appreciated and I recovered all my confidence in the stock and the investment thesis. The third important announcement was the revision of the Vivint acquisition . I am not sure how much weight Tepper’s letter had in the revision but that was clearly another positive. The change in the terms was not massive (the price was reduced 13% or $123 mln) while the reduction in the commitment on future purchases was more significant, with positive elements such as the downward price adjustment to achieve minimum returns. Overall I would say this was a positive but not “massively” positive. Stock reaction The following chart shows the stock performance since my previous article: TERP data by YCharts As you can see there has been a lot of volatility and a dramatic recovery during the month of December. This recovery was exclusively newsflow driven as many stocks in the energy yieldco space suffered significant losses during the same period of time (KMI comes to mind). Change to the investment thesis At the time of my previous post Terraform Power was extremely unloved and panic was pushing investors out. It was trading around book value pre minorities and had a yield of 16.8%. At the moment the stock is trading significantly above book value and on a yield of 11.3%. I believe there is still some value in the stock but it is not such a compelling story anymore. I believe upside from here in the short term is limited, especially if we consider that, while the stock went up 55%, credit markets deteriorated further in December, putting a lot of pressure and scrutiny on highly leveraged balance sheets. As a result I believe it is time to cash out and wait for better opportunities to arise.
Can South Africa ETF Sustain Its Recent Rally?
The South African equity market has been on a roller coaster ride this month recording big, wild moves both ways. The market took a deep plunge after South Africa’s president Jacob Zuma replaced finance minister Nhlanhla Nene, after less than two years of his appointment, with law maker David Van Rooyen (who is relatively unfamiliar and unproven) on December 9. Per reports, Nene’s efforts to cut back spending was not agreed upon in the parliament. This political upheaval dragged down the South African currency to an all-time low and punished the stocks and bonds. Following the removal of Nene, Zuma faced a series of outrages and protests and cries for Zuma’s resignation were widespread. To contain the slide in the market and soothe political uproar, South Africa’s president Jacob Zuma immediately intervened and named well-regarded Pravin Gordhan as the new finance minister who has vowed to restrain the budget deficit and total public debt, Reuters . Market Impact Given the constructive changes in the finance ministry, the South Africa ETF – the iShares MSCI South Africa ETF (NYSEARCA: EZA ) – added about 8.9% on December 14. The ETF lost over 5.8% in the last five days and is off 28.4% in the year-to-date time frame (as of the same date). The ETF also hit a 52-week low on December 11 when shares of EZA were down roughly 42% from their 52-week high price of $73.08/share. Can the Uptrend Last? The fund has been massively beaten down this year by a flurry of issues. The looming Fed lift-off has already soured investors’ mood towards this emerging market. Moreover, South Africa is a commodity-rich nation. Since the greenback is soaring on an impending rate hike, commodity prices are falling fast as most of these are priced in U.S. dollars since one can buy the same quantity of any commodity by a few dollars now. Credit agency Fitch already cut South Africa’s rating on December 4 to barely one mark above the junk status and also added that the firing of Nene “raised more negative than positive questions.” Charts Give Bearish Cues EZA has a Zacks ETF Rank #4 (Sell) with a High risk outlook. For a technical look, the short-term moving average (9-day SMA) for EZA is well below the long-term averages (both 50-Day SMA and 200-Day SMA) signaling further downward movement. Also, EZA is currently trading way below the parabolic SAR indicating a bearish trend for the product. However, the only ray of hope is that the Relative Strength Index (RSI) is around 33.67, suggesting that the ETF is on the verge of entering the oversold territory and is thus due for a trend reversal. Still, for investors who believe that the recent rise in EZA will likely continue for quite some time, we have detailed the ETF below. After all investors should note that much of the Fed-induced blows are currently priced in the present EM valuations. Though emerging market investments will be edgy in 2016, repeated comments made by the Fed on a slow hike trajectory might not hit the EM bloc as badly as is being feared. Also, the fund (EZA) has just 5.3% exposure in materials and 6.7% in the energy sector, and should not be deeply affected by the slumping commodity market. EZA in Focus This ETF looks to track the MSCI South Africa Index. It has a major focus on large and mid-cap equities. The ETF invests about $283.2 million assets in 56 holdings. EZA carries high company-specific concentration risk, with Naspers Limited N Ltd ( OTCPK:NPSNY ) (23.87%), Sasol Ltd (NYSE: SSL ) (6.51%) and MTN Group Ltd ( OTCPK:MTNOY ) (6.28%) taking the top three spots of the basket. From a sector point of view, the fund is tilted towards consumer discretionary (35.7%) and financials (28.9%). The fund charges 62 bps as fees. Original Post