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IVE: Why To Get Back Into Value With This ETF

By Jonathan Jones and Tom Lydon The value factor is starting to shake off several years of slack performance to outpace its growth and momentum counterparts as investors yearn for safer destinations in 2016, according to industry analyst ETF Trends . That is proving to be good news for exchange traded funds such as the $9.4 billion iShares S&P 500 Value ETF (NYSEArca: IVE ) . “It’s got a nice 2.5% dividend and when you are stuck in a trading range you want to be in value,” said Brock Moseley, president of Miracle Mile Advisors, of IVE in an interview with TheStreet.com . As the market cools off and moves toward more stable growth, exchange traded funds that track the value style may outperform. “Should economic conditions continue to stabilize, value stocks may be one of the bigger beneficiaries,” according to Russ Koesterich, Global Chief Investment Strategist and Head of the Model Portfolio & Solutions Business at BlackRock . “Value typically outperforms during periods when economic conditions are improving.” Value stocks typically trade at cheaper prices relative to fundamental measures of value, such as earnings and the book value of assets. In contrast, growth stocks tend to run at higher valuations since investors expect rapid growth in those company measures. IVE holds nearly 370 stocks, almost 24% of which are financial services names. Energy stocks account for over 12% of IVE’s weight and healthcare and industrial stocks each command allocations of more than 11%. The S&P 500 Value ETF showed a 14.62 price-to-earnings and a 1.65 price-to-book. In contrast, the S&P 500 Growth ETF has a 19.34 P/E and a 3.99 P/B while the S&P 500 Index ETF was trading at a 16.7 P/E and a 2.34 P/B. Plain vanilla index ETFs that track the value theme has outperformed so far this year, or at least have not done as poorly as broader benchmarks. Nevertheless, potential investors should still look under the hood of these value stock ETFs as no two are created alike and offer varying performances. iShares S&P 500 Value ETF Click to enlarge 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. I have no business relationship with any company whose stock is mentioned in this article.

American States Water: Temporary Factors & Analyst Downgrade Lead To Buying Opportunity

This week, American States Water (NYSE: AWR ) popped up on my radar as an oversold dividend growth stock with a long history of dividend increases. Shares of AWR have fallen nearly 17% since February 24th when the company released earnings that beat on the top and bottom line. The results were better than expected, however, earnings were down year/year and to add to that, the stock was downgraded by Ladenburg Thalmann from neutral to sell on February 26th and the stock fell over 9% just that day and has continued its downward trajectory ever since. I believe the sell-off in AWR is extremely overdone and the reasons why AWR earnings were down year/year are easily explainable and show that they are temporary in nature. Those items include billings, drought and government projects. Billings In the earnings press release for the 4th quarter, the company noted that results for its water business were down because of ” a delay in recognizing $1.4 million of Water Revenue Adjustment Mechanism (WRAM) revenue.” AWR was delayed in recognizing because of water conservation measures taken by the state of California. Simply put the drought had a negative impact on AWR because it was not able to recognize $1.4 million in revenues during the year, however, they will make up for it in 2016 as the statement from the earnings release shows. ” The impact of state-mandated water-conservation targets on customer usage, GSWC recorded large WRAM balances during 2015. Under current CPUC amortization guidelines, surcharges ranging from 12 – 36 months will be implemented in 2016 to recover the recorded WRAM balances, as well as the $1.4 million not recorded.” Drought Last year California had a very bad drought where as noted about there were mandatory water conservation measures put into place, which affected the results for AWR. This year is looking much better in terms of rainfall and snowfall for California. Rainfall data from the California/Nevada River Forecast Center, which is part of NOAA, showed that of the 49 California locations that monitor rainfall, 33 [67%] had increased rainfall totals from October 2015-March 2016 compared to October 2014-March 2015. In addition, as the following comparison of snowfall totals from the California Department of Water Resources shows, 2016 snowfall totals are massively ahead of where they were last year. The left side of the chart shows that snowfall, as a percentage of normal for this time of year in 2015 was 10%, 13% and 13% in the three regions. This year however, the snowfall totals are significantly better with those same regions posting 102%, 95%, and 79% of normal. With the significant increase in rainfall and snowfall totals 2016 should be a much better year for AWR because there should not be the water shortage like there was in 2015. Click to enlarge [Images from California Department of Water Resources ] Government Projects In the earnings press release for AWR, it was noted that its American States Utility Services subsidiary, which focuses on utility projects for military bases had lower earnings year/year because of a large project that was completed at the end of 2014 and AWR did not have a similar large project completed during the fourth quarter of 2015. This is the most appealing aspect of AWR because they currently operate & maintain water and wastewater systems at nine military bases throughout the United States under 50 year contracts. These long-term contracts give the business current growth as well as long-term stability because of the duration of the contracts. As was noted in an investor presentation in December, “Numerous military bases still to be privatized; active bids are currently in process. Significant water and wastewater contracts to be awarded over the next 5 years.” With its existing portfolio of military bases and the potential for more bases to be served over the coming years, AWR is set up for continued stable growth going forward. Dividend Growth History & Potential AWR has a long history of dividend increases [61 years], with the company classified as a “Dividend King”, that means they have increased their dividend for a minimum of 50 years in a row. With the ability to consistently increase its dividend through any market environment AWR can be a place investors look to for dividend safety in times where there are adverse market conditions. Click to enlarge [AWR December Investor Presentation ] Dividend Growth Potential As you can see in the table below, AWR has a weighted dividend growth rate of 7.15% and I expect the dividend to continue growing over the next 5 years. To determine if that rate of dividend growth is sustainable over the next five years, I conducted an analysis to see if dividends paid as a percentage of net income was less than my self-imposed threshold of 80%. For my calculations, I used the dividend growth rate of 7.15% and I calculated the net income growth excluding discontinued operations over the last five years to be 9.49% and applied that growth for the next five years. The table below shows if AWR continues growing its dividend at its current pace that it will continue to be well below my 80% threshold. Based on my estimates, by 2020, AWR could be paying an annual dividend of $1.24/share or about $0.311/quarter, which is just about 39% above the current quarterly dividend. Estimated Dividend Div Growth Rate Weight Div Rt*Weight 5 Yr 12.28% 20.00% 2.46% 3 Yr 7.24% 30.00% 2.17% 1 Yr 5.05% 50.00% 2.52% Weighted Dividend Growth Rate 7.15% Current Quarterly Dividend 0.224 Shares Outstanding 37.6 Net Income Growth Last 5 years 9.49% Calendar Year Est. Div/Share Shares Divs $ Paid Proj. Net Income Proj. Div as % of Net Inc. 2016 est. 0.94 37.6 35.50 66.24 53.59% 2017 est. 1.01 37.6 38.03 72.53 52.44% 2018 est. 1.08 37.6 40.75 79.41 51.32% 2019 est. 1.16 37.6 43.67 86.94 50.23% 2020 est. 1.24 37.6 46.79 95.19 49.15% ` 2020 Div 1.244 2020 Quarterly 0.311 Current Quarterly 0.224 % Dividend Upside 38.89% Valuation To determine the upside opportunity for AWR, I conducted a discounted cash flow analysis (table below) and found that shares are undervalued at current levels. Because of the nature of its business and the variable nature of free cash flows due to changes in CAPEX, I used cash flows from operations, which are more stable and better reflect the value of cash flows for AWR. Cash flow data is from GuruFocus, long-term growth rate is from Zacks and to determine the discount rate & terminal growth rate, I used the following calculators. I found that shares of AWR are slightly undervalued by just under 10%. While, this may seem low, as I noted in the first section, AWR has potential to increase its cash flows if they were to win the contracts for the military bases that are up for bidding. Discount rate calculator Terminal Growth calculator TTM CF/Share: $2.53 Proj. Long-term growth rate: 3.85% Terminal growth rate: 0.11% Discount rate: 3.47% Fair Value Calculator Assumptions EPS grows for next 5 years. After that, growth levels off to the terminal rate for 15 years. AWR DCF Calculations CF/Share PV Year 1 1 2.63 $2.54 Year 2 2 2.73 $2.55 Year 3 3 2.83 $2.56 Year 4 4 2.94 $2.57 Year 5 5 3.06 $2.58 Year 6 6 3.06 $2.49 Year 7 7 3.06 $2.41 Year 8 8 3.07 $2.33 Year 9 9 3.07 $2.26 Year 10 10 3.07 $2.18 Year 11 11 3.08 $2.11 Year 12 12 3.08 $2.04 Year 13 13 3.08 $1.98 Year 14 14 3.09 $1.91 Year 15 15 3.09 $1.85 Year 16 16 3.09 $1.79 Year 17 17 3.10 $1.73 Year 18 18 3.10 $1.68 Year 19 19 3.10 $1.62 Year 20 20 3.11 $1.57 Fair Value $42.76 Current Price $38.92 Upside/Downside 9.87% Technical Outlook Looking at the technical chart, you can see that AWR has two significant levels of support just below where the stock is currently priced. The upward trending line of support [Red Line] has acted as support for the last four and half years and is currently just below where the stock is currently priced. In addition, if shares of AWR were to breach the upward trend line there is another level of support at $36 [Blue Line], which is another strong level of support. This is where shares failed to break above at the end of 2014 and after shares of AWR broke above the level in 2015, it acted as a strong level of support, making a double bottom during the middle of 2015. With both these levels of strong support nearby, I think shares of AWR are near a bottom. Click to enlarge [Chart from ThinkorSwim Platform] Closing Thoughts In closing, I believe American States Water is worth considering as an addition to dividend growth portfolios because they have increased their dividend each year for the last 61 years, which shows the strength of their business through any type of market. In addition, American States Water has a stable dividend payout ratio, which will allow them to continue increasing their dividend going forward. With the issues that caused the recent sell-off being temporary in nature, an improvement in billings and weather in 2016, along with the potential for increased revenues from new military base contracts, American States Water is poised for a strong rebound from current levels in my opinion. Disclaimer: See here . Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in AWR over 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.

Secrets Of 2015’s Top 3 New Hedge Funds On Interactive Brokers Hedge Fund Marketplace

A great place to look for the smartest managers: Interactive Brokers (NASDAQ: IBKR ) has long been the trading venue of choice for sophisticated high net worth investors. Chairman and CEO Thomas Peterffy once explained the reason for this: “We believe that the better the prices we get for our customers, the better their performance will be and the more business they will bring to us. On the other hand, our competitors believe that most customers cannot tell the difference between good and bad executions. I think we’re both right. As a result, they end up with the customers who cannot tell the difference, and we end up with those who can. I like the side we are on. ” The point he is making applies equally to new hedge fund managers; the smartest, most client-oriented managers will find their way to the trading platform with the lowest-cost and best execution. Interactive Brokers leads by a mile in this respect due to its highly automated processes. It can be extremely difficult to find smart new hedge fund managers due to marketing restrictions that regulators impose. For that reason I was very excited to learn of the new Hedge Fund Marketplace that Interactive Brokers recently launched. This allows clients who are high net worth/accredited investors to request information on those funds which use Interactive Brokers for trade execution. If investors like what they see, they can invest directly in the funds through the platform. Given that the smartest new managers are likely to migrate to the IBKR platform for its low costs, the Marketplace should represent an excellent source of prospective hedge fund investments. With this in mind I looked up the top 3 new funds in the Marketplace based on 2015 returns. Since performance is generally higher for new hedge funds , I restricted my analysis to those that were founded from 2014 onwards. 1. Summit Premium Plus Fund Limited Partnership Fund manager contact: Malcolm Clissold Investment approach: Mr. Clissold runs a registered investment advisor known as SCC Capital Group . Mr. Clissold’s investment approach is to use technical analysis and a quant-oriented approach to position the fund’s investment portfolio. The technical indicators used to time investments include advance/decline measures, new highs/lows, interest rate measures, price/volume measures, price/volume trends and relative strength indicators. Discussion: From the detail given on technical measures used, these appear to be fairly well-known techniques so the magic of this fund is probably in its quant model. It can be difficult to assess quantitative strategies without knowing the inner workings of the “black box”, which of course managers are hesitant to publish. Prospective investors in this fund should request that detail in a discussion with the manager. Since speaking with the manager is outside the scope of this analysis, I’ll move on to other funds where it’s possible to figure out the source of superior returns from the available written material. 2. Shannonside Capital Fund Fund manager contact : Brian Flynn Investment approach: Shannonside follows a long-term, fundamental value approach in its long/short stock-picking strategy . The manager conducts extensive research calls to industry experts in addition to reading all the company filings, news archives and conference call transcripts to build up a mosaic on prospective investments. They look to invest in situations where the picture that they’ve meticulously assembled on a company is different from what the market (mis)perceives . This is the kind of second-level thinking that Howard Marks describes as critical to generating superior returns and is a solid reason for believing that an investment could be a bargain. It is also a very difficult approach to copy due to its time-intensive nature. The fund holds a concentrated portfolio with large positions taken in its top ideas. Discussion: Shannonside can go the extra mile with its research because it first filters the investment universe down to a smaller pool of interesting stocks using proprietary screens. These guys are willing to hold a concentrated portfolio in their best ideas. Hence they can focus their research on a small number of promising opportunities. Other managers that can’t handle volatility must be much more diversified (the norm is to hold over 200 stocks). Diversified managers can’t focus on their top ideas because they have to spread research efforts among many more stocks. Diversification (deworsification?) is the norm in the fund management industry because most managers are afraid of losing their jobs if they under-perform in the short run. My point is that Shannonside’s process is difficult for other managers to copy. As such it may generate superior returns for many years to come. Negatives: As a European-domiciled fund, Shannonside Capital Fund is not currently available to U.S. investors. It is a concentrated fund with big positions in its top ideas so it is only suitable for investors that can ride out temporary volatility along the way to building long-term wealth. For those who can, Shannonside may present the opportunity for excellent returns of the kind the fund earned in 2015. 3. Phoenix Capital Fund, LP (Note – I’m only analyzing new funds here so some older funds that had higher returns than Phoenix in 2015 are not discussed) Fund manager contacts : Erik Trofatter, Jordan Causer Investment approach : Short option premium selling. Phoenix’s managers sell short high probability, out-of-the-money option premium on liquid and efficient underlying securities. Furthermore, the fund times its trades in an attempt to sell short option premium on underlying securities that are trading at the high range of their implied volatility. Discussion: Out-of-the money call options with strike prices far above the current market security price are like lottery tickets – there is a low probability that they pay off big if the security moves up by a lot but most people who buy these will lose the amount they paid for their “ticket”. By going short a portfolio of out-of-the-money call options, Phoenix is like a lottery operator – selling overpriced “tickets” to all the punters who dream of hitting it big. On the other side of the spectrum, nervous investors are also willing to pay a steep price for insurance against extreme downside events. By going short a portfolio of out-of-the money put options, Phoenix is like an insurance company that sells insurance for 100-year storms to buyers whose area only gets hit by a storm once in a thousand years. By timing trades, Phoenix is like an insurer that tries to only sell insurance when insurance premiums are expensive. In other words, it seeks to sell when volatility is high with the hope that vol will revert to the lower norms of the past. In selling lottery tickets and tail-risk insurance, the fund appears to be designed to take advantage of the human tendency to pay too much for these products. Peoples’ willingness to pay above the odds is a result of a bias to overweight low-probability events. This ingrained tendency was studied by Daniel Kahneman (author of “Thinking Fast and Slow”) and Amos Tversky when they developed prospect theory . The result of this bias is that positive long-term rewards are possible for firms that sell lottery tickets and insurance to the “suckers” that pay too much. If this is what Phoenix is doing, they could certainly generate excess returns for years to come. Negatives: The main downside to this type of strategy is that it could be like picking up pennies in front of a steamroller. The fund could appear to be consistently profitable by earning premiums from selling out-of-the-money options, and then a flash crash or 1987-style rout hits and suddenly all the out-of-the money put options jump to become in-the-money. In such a market, losses from selling puts could result in a big hit to the portfolio. I think the best way to get comfortable with this risk is to appropriately size any prospective investment in the fund. Conclusions: Hedge fund managers generally have their best years when they are young, hungry and driven but due to marketing restrictions this is also when they are hardest to find. Interactive Brokers Hedge Fund Marketplace is an exciting new place to discover managers at this early stage. This service should accelerate IBKR’s growth because it will attract new hedge fund clients to its brokerage platform. It is great for clients because they can find rising hedge fund stars and it is great for the funds because new clients can invest through the platform. As discussed above, I think I’ve found funds that could generate superior returns for investors for years to come. I’m excited to look further because I’ve only scratched the surface of what is available. Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in SHANNONSIDE OR PHOENIX over the next 72 hours. 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.