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ALLETE, Inc: Diversified Utility Seeking New Growth Areas

Summary The company just acquired another new wind facility. The company acquired U.S. water earlier in the year which will drive sales growth. 88% of revenue comes from its regulated utility side. It doesn’t get much more boring than ALLETE, Inc (NYSE: ALE ). The diversified utility based in Minnesota is pretty predictable considering 88% of its revenue is from its regulated utilities. It has been seeking new growth areas as of late. It has taken several steps to aid growth that look quite promising. This new diversification, a solid regulated business, and attractive dividend make ALLETE a great long-term pick in the utilities sector. Stepping back and looking at the company as a whole it is easy to see that it is a very diversified utility. Although it generates 88% of its revenue through its regulated business it also has several other segments. Below is the breakdown of the company’s holdings. (Source: ALLETE ) The regulated business has helped the company achieve steady growth over the past couple of years. This is illustrated by the fact that between 2010 and 2014 earnings grew at a compounded annual rate of 6.7%. All the while the company has been diversifying its portfolio. Through the small reoccurring growth in its regulated business and the higher growth possibilities in its other segments the company is forecasting annual EPS growth of 5% for the next couple of years. Along with this it also expresses that it will keep its dividend competitive and growing. Currently the shares sport a 4.3% yield making it very attractive to dividend investors. Specifically there are two areas which should take the company’s growth to the next level. Below I outline what the company is doing in terms of growing its portfolio and diversifying its business. U.S. Water The best example of the company further diversifying its portfolio is when earlier this year it aquired U.S Water. U.S Water is a integrated water management company that provides solutions to many industrial and commercial clients. The company serves clients nationwide and serves many Fortune 500 companies. (Source: ALLETE ) It has increased its customer base from 2,141 in 2011 to over 3,600 in 2014. It also has an excellent track record of retaining these customers with over 90% of customer being retained. In 2014 U.S Water did $120M in sales which the company forecasts will increase between 10-15% annually over the next few years. Considering ALLETE only has revenue of $1.16B in 2014 this is a very significant addition to the business. On top of that growing it at 15% would mean the company expects it to be pulling in nearly $160M by the end of 2016. U.S. Water continues to retain clients and add reoccurring revenue which compliments the regulated part of ALLETE’s business well. ALLETE Clean Energy Renewable energy has become even more popular in recent years as well as more economical. ALLETE has been expanding its clean energy business as it attempts to make its business more diversified and less reliant on fossil fuels. Over the past year it has increasingly built up its presence in this area, particularly in wind generation. This past November the company agreed to actually develop a wind farm for Montana-Dakota Utilities, which is a division of MDU Resources Group (NYSE: MDU ). In the agreement it will end up selling the wind farm to MDU for $200M. While I couldn’t locate the exact amount of capital the company will need to put into the development it did make it clear in the quarter one confrence call that it will have an effect on earnings. It should be noted that the effect of these earnings have not been factored into the earnings guidance the company has given thus far. Other than developing wind farms it has also been acquiring them for its own portfolio. Below are the wind farm aquistions the company has completed over the past couple of months. In December closed a deal to acquire 108 MW facility in Iowa. In January closed a deal to acquire 3 wind farms in 3 different states from AES Corp. (NYSE: AES ). In April closed a deal to acquire 98 MW facility from EDF Renewable. In June closed another deal with AES to acquire 101 MW facility in Pennsylvania. With the latest acquisition the company now has over 500 MW of wind generation in operation. Seeing as it has acquired majority of these this year it should be interesting to see the company grow this business in the next couple of years. In the conference call the company touched upon that it will also see positive effects for the year from these clean energy acquisitions. However, it expects its gains in this area to only offset the losses from the steel industry dynamics that face its Minnesota Power business. Conclusion ALLETE is further diversifying its portfolio to seek new areas of growth. Although it has yet to see positive effects from the newest acquisitions it should start to see them as the year progresses. With these new growth opportunities as well as an extremely strong regulated business to lean on it expects to deliver 5% earnings growth over the next couple of years. This should translate into further dividend growth adding attractiveness to the already high yield of 4.3%. I think as a long-term play ALLETE is making the right moves making itself more diversified and seeking new growth areas. Disclosure: I am/we are long AES. (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: Always do your own research before investing.

3 Sectors To Watch In The Second Half Of 2015

Summary The tepid return in the major averages was generated by weakening in interest rate sensitive areas and continued strength in high growth leadership categories. Healthcare stocks were once considered a defensive area of the market, yet have transitioned to a more growth oriented phase. Conversely, utility stocks have been torched by rising interest rates that have eaten away at their returns. The S&P 500 Index was nearly unchanged in the first half of 2015, yet the divergences in underlying sectors told a very different tale. The tepid return in the major averages was generated by weakening in interest rate sensitive areas and continued strength in high-growth leadership categories. This tug-of-war style market has created a relative valuation chasm between several important sectors that warrants close attention. Leader: Healthcare Healthcare stocks were once considered a defensive area of the market similar to consumer staples and utilities because of their inelastic business models. After all, medical services and drug companies operate with little cyclical burden to their bottom line. Nevertheless, some believe that these stocks have transitioned to a more growth-oriented phase that has been driven by the biotech boom and continued advancements in the medical field. The Health Care Select Sector SDPR ETF (NYSEARCA: XLV ) has been a top performing area of the market over the last three- and five-year time frames and continues to lead as the No. 1 sector so far this year. There’s no doubt that this ETF has shown tremendous momentum and activity has been robust as XLV has gained 9.51% through June 30. While this area of the market has been one of the most resilient, I would be hesitant to chase performance and add near its recent highs. If XLV or a similar healthcare fund has been on your radar, I would be patient with respect to any future entry points and look to pick up shares on at least a modest dip. In addition, this sector should serve as a benchmark of momentum leadership. If we see XLV start to fall out of favor, it may signal that investors are looking to pair back on risk and potentially rotate into a more defensive stance. Healthcare stocks currently make up over 30% of the iShares MSCI USA Momentum Factor ETF (NYSEARCA: MTUM ), which screens its underlying holdings for recent performance characteristics. Laggard: Utilities On the flip side of the coin, utilities have been torched this year as a result of rising interest rates. Coming off a strong performance in 2014 where rising rates acted as a tailwind, the Utility Select Sector SPDR (NYSEARCA: XLU ) is down 10.70% through the first half of 2015. The price of XLU peaked at virtually the same time as interest rates bottomed and has been on a steady course lower ever since. For the moment, it appears that the fate of utility stocks is going to be closely tied to the price action of U.S. Treasury yields. This traditionally defensive sector has been eschewed for more growth-oriented positions in healthcare, consumer discretionary and technology stocks. From a relative value standpoint, I believe that utilities look attractive at these levels given the thesis that interest rates will remain stable or head lower over the next six months. The recent drop in price also has boosted the yield on XLU to a healthy 3.80%, which makes it the highest yielding sector in the S&P 500. Income investors should note that diversified dividend funds such as the iShares Select Dividend ETF (NYSEARCA: DVY ) and First Trust Morningstar Dividend Leaders Index Fund (NYSEARCA: FDL ) have outsized utility sector exposure. This asset allocation acted as a drag on returns in the first half of the year and should be noted as a key driver moving forward as well. Tweener: Financials Financial stocks have long been touted as the cure to beat rising interest rates, yet the Financial Select Sector SPDR (NYSEARCA: XLF ) has been mired in a sideways malaise since the beginning of the year. XLF posted a net return of -0.61% through the first six months of 2015 and has failed to show inspiring price action to back up its reputation. XLF is an interesting fund because of the wide designation of financial-centric companies. This ETF includes large banks, REITs, brokerages and even diversified holding companies such as Berkshire Hathaway Inc (NYSE: BRK.A ) (NYSE: BRK.B ). REITs are currently the third largest industry group within XLF at 14.20% and have dragged on returns since the beginning of the year. The iShares U.S. Real Estate ETF (NYSEARCA: IYR ) has experienced the same interest rate sensitive drag as utility stocks and is down 5.5% in 2015. Conversely, indexes that focus solely on banking stocks such as the SPDR S&P Bank ETF (NYSEARCA: KBE ) have gained 8.87% this year. Clearly these stocks are the true beneficiaries of the rising interest rate theme as it relates to a fundamental driver of industry returns. Ultimately, XLF appears to be experiencing its own internal tug-of-war based on this bifurcation between sub-sectors that has caused it to drift aimlessly for the last six months. The Bottom Line The information presented above can be applicable to both broad-based indices and individual sector investing. Investors that own diversified equity ETFs need to be cognizant of the underlying asset allocation and sector positioning as it relates to future risk and returns. Those who prefer to select more targeted ETFs may choose to shift their positions in order to take advantage of a specific theme or pair back on an overbought area of the market. Making small tactical changes of this nature can have a big impact on your performance and risk profile as we make our way into the second half of the year. I spoke in-depth about these topics and more in our recent mid-year teleseminar: Four Components Of A Successful Income Portfolio . Click here for the presentation . Disclosure: I am/we are long DVY. (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. Additional disclosure: David Fabian, FMD Capital Management, and/or clients may hold positions in the ETFs and mutual funds mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell, or hold securities.

Bearish GLD Trend After Greece Won Its Gamble

Summary The sudden Greek referendum and capital control gave the impression that events would spiral out of control and GLD spike up. U.S. and China intervened to keep the status quo and even the IMF which was defaulted on by Greece considered debt relief. Even the EU backed away from its demands and prepared to spend $35 billion euros to keep Greece within the EU. Still Greek PM wants a ‘No’ vote to increase negotiation leverage for greater concession. In short, Greece called the EU’s bluff and won the gamble. Financial stability concern had subsided but the world would still flock to USD. Bearish trend for GLD is now in place. The value of gold in our current fiat monetary system would be to serve as a hedge against inflation and financial instability. Inflation remains subtle today and major Centrals Banks only expect inflation to return to the 2% target in the next 2-5 years. Hence there is no reason to purchase gold from an inflation perspective. The financial stability argument is now in vogue with the whole Grexit saga that is playing out in real time. This has been expected after the Syriza government seized power back in January 2015 with the conflicting mandate of overthrowing austerity imposed by its European partners and to stay in the Eurozone at the same time. This is doomed for failure because the internal devaluation (cutting of wages and pensions, etc) would still go against the constraint of the strong euro in Greece’s competitiveness. Hence the Greek economy had shrunk year after year which would increase the debt to GDP ratio and make its debt untenable. Greek Referendum Card Therefore the only way forward would be for the Syriza government to play with the only card they have to force debt relief. That is the card of brinkmanship. It is only when Syriza threaten to burn the Eurozone apart with its default and the threat of leaving the European Union, then would the creditor nations be willing to grant them the much needed debt relief. It is important to understand this whole dynamics because it would in Greece’s interest to keep pushing Europe to the brink of collapse but at the same time maintain its membership in the Eurozone as long as the mandate of the Greek sways towards staying in the Eurozone. The Syriza government had to keep pushing the envelope to scare its creditors and it did a big scare on June 27. Greek Prime Minister Alexis Tsipras called for a sudden referendum on July 5 when the deadline for the EU bailout package on June 30. This worked wonders and was broadcasted worldwide for its sudden and irrational nature. At that point in time, shocked EU finance ministers expressed their angry clearly and closed the negotiations with Greece. On the next working day of June 29, Greece installed capital controls and limited the withdrawals of ATM cash to $60 euros per day. Banks were closed as the ECB refused to increase its emergency lending to deal with the bank run. Ratings agency such as Fitch and Standard and Poor downgraded Greeks banks and sovereign debt respectively. For a while, it would appear that things are rapidly spiraling out of control. I was shocked too and I wrote an article about the irrational nature of the Greek government as seen here . As the SPDR Gold Trust ETF (NYSEARCA: GLD ) chart below would show, gold prices actually spiked up that day as the threat of unconstrained disaster of Grexit appears imminent. The risk was that it would move out of Europe to the wider global economy. USD weakened as it was exchanged for gold. However this extreme extrapolation was a result of shock rather than a comprehensive assessment of the global economy. Foreign Intervention It turned out that the global will to keep the status quo was underestimated. Global leaders such as U.S. President Barack Obama, China’s Premier Li Keqiang and even IMF Christine Lagarde were not willing to rock the boat too hard. On June 30, the New York Times reported that President Obama intervened in the talks to urge creditors to soften their stance and come to a resolution. Obama was concerned over the financial stability concerns as the situation unfolded as described above. The U.S. President had grounds to believe that the unraveling of Europe could easily cause the contagion to spread not only in weaker European countries like Spain and Italy but also to the global economy including the U.S. In addition to the economic damage, there would also be geopolitical damage as Greece is part of NATO which is used to actively counteract the influence of Russia in Europe. This is especially after Russia annexed part of Ukraine in 2014 and this is still an existing concern. Obama was concerned enough for him to dispatch a senior Treasury officer to Europe to follow the status of the talks. For China , they had substantial investments in Greece and want Greece to stay within the EU framework for the safety of their investment. When the new government came into power, they tried to tear apart signed infrastructure contracts which unnerved Beijing. Things would only worsen if Greece were to leave the EU under desperate circumstances. Lastly we have the IMF which was at the losing end of Greece’s struggle with the EU. Greece failed to pay the $1.6 billion euros due on June 30 as the bailout negotiations failed. However the IMF had not taken action against Greece. Instead IMF Managing Director Christine Lagarde is entertaining the option of debt relief in exchange for reforms. Calling The EU Bluff Meanwhile the EU President Jean-Claude Juncker urged the Greeks to vote yes on the July 5 referendum and to stay within the Eurozone. This indicated that the EU would bend over backwards to accommodate the Greeks. In fact, the EU had already backed away from its proposal to rise the Value Added Tax from 13% to 23% and was prepared to give away another $35 billion in bailout. This is despite their doubts over the ability of the current Greek government to implement any reforms as demanded for the creditors. In fact even with these concessions on the table, the Greek PM is still urging his people to vote ‘no’ so that they can have more leverage on the EU for even more concession. The creditors are losing ground step by step with the negotiations with the current Greek government. The recent referendum, flawed as it is, is not used to primarily as a means for the Greek people to express their opinion. It is used as negotiation tool. In short, Tsipras had called the EU’s bluff. Even if the EU was willing to let go of Greece and go against its strong political will to unite the European nations on the frustrations of the creditor nations, international pressure would not allow it to happen so soon after a major recession and with the ongoing Russian aggression. In short, Tsipras took a gamble politically and he won. We can now expect to see more debt relief for Greece even if its record for implementation of reforms are doubted. Tsipras had won and Greece can stay within the Eurozone and not pay its debt. Conclusion The GLD chart below shows the recent impact of the Grexit drama. It spiked on June 29 as pointed out in the chart but it softened shortly after. It is clear that the financial stability concerns had faded and what is left is the rush to safety which would benefit the USD. (click to enlarge) Hence we should continue to sell GLD on any spikes in prices but we should not push it too far as there will be residual demand for gold in case events escalate beyond control suddenly. In other words, there will be a gradual weakening of GLD with periodic strength which should be sold. 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.