Tag Archives: events

Should I Sell My First Energy Stock?

Oddly, this isn’t the first time this thought has popped in to my mind. Last year I wrote a piece titled ” 3 Reasons I Would Sell a Stock .” The listing was created to help me identify holdings that have fallen out of favor in my portfolio or have not performed. After elaborating on the 3 reasons I would sell, I reviewed my portfolio for any stocks that met the criteria. Any takers on guessing which one of the stocks that was discussed in the article? First Energy! Shocker, right? After one heck of a run by the stock that has brought me close to break even, I now find myself asking the question again. Is it finally time to sell my stake in First Energy? First Energy (NYSE: FE ) has been a problem child for me from the beginning. Unfortunately, it sometimes works out like that. Historically, FE has been a stock that pays a high stagnant dividend yield. It is an electric utility after all. Despite the fact that the company’s recent dividend growth rate was non-existent, I was willing to overlook this fact due to the high yield (Which was above 5% at the if I recall). First big mistake right there; I was caught chasing yield and boy did I learn the hard way. Months after I purchased the stock, FE slashed their quarterly dividend from $.55/share to $.36/share. Ugh! That decrease caused a massive sell-off and my position turned red really fast. Isn’t the phrase dividend cut becoming too common on this website? Especially after what happened with KMI and then BBL over the last few months? Finally, after over two long, painful years, my position is at the breakeven point due to dividend re-investment and I have the opportunity to potentially re-coup my initial investment. To determine if I should sell the stock, I want to be able to answer one simple question. If I did not own a stake in the company and had extra capital lying around, would I purchase stock and initiate a position in First Energy? If FE does not pass our stock screener and I would not purchase shares, then why on earth am I holding on to them? Especially considering the fact that I own a small stake in another electric utility that happens to be one of our 5 foundation dividend stocks . Outside of the fact that I am being really stubborn here and don’t want to realize a loss. To answer this question, I decided to run FE through the Dividend Diplomats Dividend Stock Screener to see if FE would pass this daunting test. Let’s see how FE performed. Price to Earnings Ratio Below the S&P 500 – Using FE’s forward EPS per TheStreet.com of $2.84, FE is currently trading at a forward PE multiple of 12.6X, which is well below the PE ratio of the S&P 500. For comparison sake, ED is trading at a multiple of 18.71X. So FE is trading at both a discount to the market and one of the major players in the industry. Payout Ratio below 60% – Using the forward EPS from the line above, FE’s payout ratio is 50% while ED has a payout ratio of 66%. Again, FE passes our metric and shows a better figure than ED. Paying an Increasing Dividend – As I already mentioned earlier, FE cut their dividend to $.36/share per quarter in 2013 and has not increased their dividend since. So this point represents a big negative as my stagnant dividend stream is losing purchasing power each year. For comparison sake, ED is a Dividend Aristocrat and has a 5 year average dividend growth rate of 1.9%. This really isn’t much better; however, at least their dividend is growing at a rate near inflation. Dividend Yield – This isn’t one of the metrics on our stock screener, but it is worth pointing out. FE’s current dividend yield is about 4% while ED has a current yield of about 3.56%. Debt to Equity Ratio – Again, this metric is not a part of our initial stock screener. I began focusing on the impact of debt on a company when my KMI dividend was slashed significantly. However, I really should have begun looking at a company’s debt burden when I purchased stock in First Energy. Per finviz.com, FE has a Debt to Equity Ratio of 1.78X and ED has a Debt to Equity ratio of 1.09X. I understand that debt is not always a necessarily a bad thing, but I am a little “debt averse” after my recent experiences. So much so that I even created a Top 5 list to identify Dividend Aristocrats with low debt to equity ratios. We all have flavors of the month and mine is currently LOW DEBT! Now that I have run some numbers, let’s get back to my original question. Would I purchase shares in First Energy today based on the information above. The answer is…..no. So why am I not logging into Capital One Investing now and selling my stock? Where is my hesitation and why am I struggling to make a decision here? What has me torn is that while the stock may not have passed all metrics in our screener, it didn’t fail all of the screeners. In fact, when compared to another company in its industry, the company appears to be trading at a significant discount while sporting a higher dividend yield. The fact the company is trading at a discount makes perfect sense to me when you consider some of the negative factors I mentioned above. Is the dividend growth rate terrible? Yes. Do they have a lot of debt? Yes. However, their payout ratio is well below our 60% threshold. So the answer isn’t as clear as I was hoping it would be by the time I reached the end of this article. So all of you, I am asking you for your help here. You offered Lanny some great advice about his internet package this week and I have loved reading your responses as they have come in. So I would love to get your take on my dilemma. If you were me, would you sell your stake in First Energy? If so, what other companies would you recommend? I am thinking I would go the ultra safe route and purchase a foundation stock or one of the stocks on my “Always Buy” list with the proceeds. Are there other utilities I should consider as well? Please everyone, help me out here! -Bert

Pakistan: The Growth Story Continues

In this article, I will apprise investors about the recent developments in Pakistan having a material impact on the price on the Pakistan ETF (NYSEARCA: PAK ). I recommend readers to read this article in tandem with my previous articles: Pakistan: An Undiscovered Land of Opportunities and Pakistan: Impending Growth Story. Pakistan is an oil importing country that is immensely benefiting from the recent plunge in oil prices. It has been a blessing for its economy in the following ways: CPI (Consumer price index), which is being calculated monthly by Pakistan Bureau of Statistics , has been on the downward trajectory, increasing the purchasing power of ordinary Pakistanis. In addition to that, in line with the decline in inflation number (which is one of the primary indicator SBP considers), State Bank of Pakistan (SBP) slashed the interest rate to a historical low of 6.5%. However, due to lower base effect the CPI numbers have started going up but within the range of moderate inflation. I believe interest rates would remain constant in the upcoming MPS (Monetary Policy Statement). Nonetheless, I foresee 50bps increase in the fourth quarter of the current year. Click to enlarge Prices of petroleum products in Pakistan have not gone down in sync with international crude oil price. This is because the oil and gas sector is heavily regulated by the government of Pakistan, which has levied high indirect tax in order to increase its indirect sources of revenue, bridging a gap of fiscal deficit. Narrowing fiscal deficit is one of the prime conditions of IMF as Pakistan is in IMF program since 2008 due to its incessant and growing current account deficits. Now the situation has improved as Pakistan’s current account deficit has narrowed by 23% , with shrinking fiscal deficit cloaking in at 1.7% of GDP as compared to 2.4% in the same period last year signaling improvement in the chronic structural problem of Pakistan’s economy. Other developments include: a) Approval of the much-awaited five-year Auto policy . This policy would bode well primarily due to phased reduction in duties by 5%-2% for existing players in the market coupled with tax incentives for new investments by existing and new brands in the market. Automobile companies constitute ~3.2% of the PAK ETF. b) Cement sector is rallying with bullish sentiments propelled by strong local demand and margin accretion due to increased construction activity and lower input prices respectively. Moreover, although the FIPI (Foreign Indirect portfolio investment) is negative year to date but cements are attracting foreign indirect portfolio investments with a positive contribution of USD 18.3 mn month to date. Cement companies constitute 14% of the PAK ETF. The following graph depicts sector-wise foreign portfolio investment of the month of February 2016. c) Recent rally in oil prices has reinvigorated the interests of investors in the Oil and Gas sector; this week oil and gas index outperformed the benchmark index. In recent weeks, the OGTI index surged by 2.5% against 1.26% increase in KSE-100. In conclusion, I would again reiterate that PAK is an investment opportunity that is high risk and high return but better for the diversification of your portfolio along with other regional ETFs. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

Factor-Based ETFs Provide Increased Stability, Returns

During a volatile market climate where ETFs are especially getting hit hard, an increased utilization of factor-based investing has the opportunity to provide more stable and higher returns. Factor-based investing allows investors to increase exposure to certain factors, including size, value, quality and momentum. Last year, MSCI introduced a variety of multi-factor indexes that offer investors a better strategy that could be just right for this market environment. These indices cover US, World, Emerging Markets, and more. Click to enlarge The 1 year return of the MSCI US Momentum Index (NYSEARCA: MTUM ) distinctly outperformed iShares Russell 1000 Value ETF: Click to enlarge (Source: Bloomberg) A Focus on Momentum Momentum-based investing has proven to be a successful strategy in a volatile market climate, as seen with AQR’s posted returns in their liquid alternative funds. Such a strategy can provide returns in a downed market as well because the strategy works both ways. A hedge fund can short a portfolio of negative momentum securities and vice versa. For MSCI with their new diversified multi-factor indices, it’s all about choosing the right exposure to multiple factors, not just momentum. They’re targeting four main factors (listed above), including momentum. The MSCI USA Momentum Index didn’t perform well in the past year (-8.04%), but the MSCI diversified multi-factor indices have seen much better returns. MSCI is able to increase or decrease their exposure to certain factors that they see as favorable or unfavorable. Such optimization is extremely strategic as risk level of the underlying index is maintained. These multi-factor indices aren’t brand new strategies, either. The MSCI World Diversified Index returned an annualized 9.8% over a 16-year period during backtests, which is double the return of the regular MSCI World Index. The main methodology is to increase factor exposures to achieve higher historical returns. Which Factor is the Best? With the recent sell-off and market environment that is arguably a mess, what is the right factor to increase exposure to? With the MSCI World DMF index, which has one tilt towards value, there was a positive exposure to earnings yield even in this market. There is no one best factor, which is the point of these indices. A combination of multiple positive exposures with tilts towards different factors (momentum, size, value, quality, leverage, etc.) is what has made these MSCI products produce better returns than the run-of-the-mill ETFs. For example, the MSCI World DMF Index had positive exposure to stocks of lightly levered companies, lower residual volatility and smaller size: (SOURCE: MSCI ) The above described strategies for ETFs is something investors should make note of as clearly alternative strategies are needed in this market situation. Consistent optimization of diversified multi-factor products, like those of MSCI’s, are not completely immune to risk, but have now proven to have broken away from the poor performance of regular ETFs in the past year. Factor-based investing is very optimal for this market is a very forward-thinking investing strategy. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.