Tag Archives: ideas

Materials ETFs Surge On Dow Chemical, DuPont Chemistry

The latest merger talks between chemical giants Dow Chemical (NYSE: DOW ) and DuPont (NYSE: DD ) might provide a fresh lease of life to the long-ailing material sector. This is especially true as total earnings from the basic material sector were down 18.8% on 214.4% lower revenues as of December 4. The potential merger is rumored to be worth about $130 billion and split the business of the new entity into three new, per sources , namely material sciences, specialty products and agrochemicals. As of December 9, Dow had a market cap of $66.01 billion, while DuPont had a market cap of $65.28 billion. The news was brought to light by The Wall Street Journal . However, there is no assurance of the merger and talks could even disintegrate. If at all the deal is cracked, it would require regulatory clearances in several countries, per Reuters. No comment was made by either of the concerned entities. Both firms are striving to cut their underperforming assets and are gradually shifting to the high-growth areas. In the latest concluded third quarter, Dow Chemical maintained its streak of earnings beat for eight successive quarters. Strong performance by the Plastics segment backed by a lower cost of raw materials like oil and natural gas drove this outperformance. Dow Chemical also raised its quarterly dividend by 10% to 46 cents, which is the highest in the company’s history, reflecting its core strength. However, Dow’s farm chemicals and seeds unit is reeling under pressure for about a year. On the other hand, DuPont beat earnings estimate on cost containment, but its revenues and profits slipped on a strong dollar as the company is heavily exposed to international markets and a soft agriculture business due to soft demand for crop protection products, per Reuters. In such a situation, joining forces would be a win-win case as the duo can cash in on each other’s strength. CNBC estimated a cost synergy of $3 billion from the likely merger. As soon as the news became viral, Dow and DuPont shares climbed about 11.9% each on elevated trading volumes. Plus, Dow Shares advanced about 0.6% after hours of December 9, while DuPont shares returned about 0.1%. Dow shares rose on 4.3 times the regular volume, while DuPont rose on 3.8 times the daily volume. Dow Chemical has a Zacks Rank #2 (Buy) and has a Value score of ‘B’ and a Growth score of ‘A’ despite hailing from a sector which is in the bottom 25% in the Zacks universe. DuPont has a Zacks Rank #3 (Hold). Solid price performance by these two chemical bellwethers led to a rally in material ETFs that are heavily invested in these two stocks. Though these funds have an unfavorable Zacks ETF Rank of 4 or’ Sell’ rating, they gained in the range of 2.1% to 3.3% on December 9 and are on investors’ radar for the weeks ahead. Materials Select Sector SPDR (NYSEARCA: XLB ) The most popular material ETF follows the Materials Select Sector Index. This fund manages about $2.18 billion in its asset base and trades in heavy volume of around 7.5 million. The ETF charges 14 bps in fees per year from investors. In total, the fund holds about 30 securities in its basket with DOW and DD taking the top two spots, with over 11% allocation each. In terms of industrial exposure, chemicals dominates the portfolio with three-fourth share, while ‘metals and mining’ and ‘containers and packaging’ round off the top three positions. XLB is off about 6.4% so far this year (as of December 9, 2015) but rose over 3% post the news. iShares U.S. Basic Materials ETF (NYSEARCA: IYM ) This ETF tracks the Dow Jones U.S. Basic Materials Index and holds 53 stocks in its basket. The fund has AUM of $353 million and charges 43 bps in fees and expenses. Volume is good as it exchanges around 106,000 shares a day. DOW and DD occupy the top two positions in the basket, with over 11% of assets each. The product is heavily skewed toward the chemical segment, as it makes up for more than three-fourths of the portfolio while steel, ‘forestry and paper’, ‘metals and mining’ receive minor allocations to IYM. The fund is down 10.7% year to date (as of December 9, 2015), but jumped over 3.3% in the key trading session. Vanguard Materials ETF (NYSEARCA: VAW ) This fund has amassed about $1.1 billion in its asset base and offers exposure to 120 stocks by tracking the MSCI U.S. Investable Market Materials 25/50 Index. The ETF has 0.12% in expense ratio. Here, DOW and DD are the top two firms accounting for nearly 8% share each. Chemicals make up for nearly 70% of assets, while ‘container and packaging’ and steel also make a nice mix in the portfolio. The fund is down 8.9% in the year-to-date frame (as of December 9, 2015), but added over 2.1% following the merger news. Fidelity MSCI Materials Index ETF (NYSEARCA: FMAT ) This fund provides exposure to more than 120 materials stocks with AUM of $68.8 million. This is done by tracking the MSCI USA IMI Materials Index. Here too, DOW and DD are the top two firms with nearly 8% allocation. Chemicals accounts for 69.7% share, while ‘container and packaging’, and ‘metals and mining’ round off the top three spots with double-digit exposure each. The ETF has 0.12% in expense ratio. The fund was up about 2.3% on December 9 but has lost 8.8% so far this year. Original post .

VWELX: This 86 Year Old Fund Is Still An Ideal Choice For Retirement

Summary Vanguard Wellington is the first balanced fund in the U.S. having launched in 1929. The fund has ranked in the top 10% of its Morningstar peer group over the past 5-, 10- and 15-year periods. The fund has a beta of 0.65 compared to the S&P 500 while outperforming the index over the long term. Wellington held up remarkably well during the 2000 and 2008 bear markets. In a world where there are literally thousands of funds and ETFs available that cover almost every niche, sector and style available, sometimes it’s the most tried and true investment vehicles that still remain the best choices. In the case of the Vanguard Wellington Fund (MUTF: VWELX ), we’re talking about literally the oldest balanced mutual fund in the country. Launched all the way back in 1929, Wellington looks to maintain a balance of roughly two-thirds of assets in conservative large cap stocks and one-third of assets in a mix of high quality bonds. It’s this type of asset allocation that makes for an ideal core holding in many retirement portfolios. Historically, Wellington has provided exactly what retirement investors should be seeking – above average returns with below average risk. With a current beta of 0.65, you’d expect the fund to return about two-thirds of the SPDR S&P 500 Trust ETF’s (NYSEARCA: SPY ) return but over the past 20+ years that hasn’t been the case. VWELX Total Return Price data by YCharts Looking at the past 2+ decades of history is especially appropriate because it takes into account both bull and bear market environments. The fund has performed about how one would expect – outperforming the S&P 500 in a down market but trailing in an up market. The fund’s risk minimization strategy proved especially effective during the Nasdaq bubble providing a relatively steady market performance given the economic environment. While the chart above doesn’t illustrate Wellington’s performance during the financial crisis particularly well but you can see below how well the fund held up. VWELX Total Return Price data by YCharts While the S&P 500 dropped around 55% from its 2007 peak, Wellington was down about 35%. That’s roughly what you’d expect considering the fund’s 60/40 allocation but the fund’s long term performance has been exceptional. Over the last 10 years, the overall performance of Wellington and the S&P 500 has been almost identical. Using a more apples to apples comparison, Wellington has also outperformed the Vanguard Balanced Index Fund (MUTF: VBINX ) – a fund with a 60/40 stock and bond allocation – during the same 10 year period. Morningstar drops Wellington into the Moderate Target Risk bucket. While the fund has returned 8.2% per year since the fund’s inception, it has consistently ranked at the top of its peer group. Wellington ranks in the top 6% of its peer group over the past 5-year and 10-year periods and ranks in the top 4% in the past 15-year period. It’s this type of risk-managed performance history that retirement investors should be seeking out. Retirement income investors will also appreciate the fund’s 2.43% yield. The fund has a few dividend champions among its equity holdings and the bond holdings are almost entirely high quality corporate and Treasury securities ensuring that the fund’s dividend is secure and reliable. Conclusion I’m a firm believer that in the case of most retirement investors, simpler is better. Sophisticated investors may feel comfortable building a more complex portfolio using stock, sector ETFs, etc. but for those who want an all-in-one long term holding that they can just establish and forget about, it’s hard to imagine someone doing much better than Vanguard Wellington. The combination of strong long term performance, risk minimization and low costs make this an ideal core retirement holding even if it’s not as exciting as some of the newer niche products hitting the market today.

Clean Energy Fuels – Time To Go Long

Summary CLNE is set for another disappointing year as weak natural gas prices have curtailed the company’s growth despite an increase in its volumes, but investors should not lose hope. CLNE achieved positive EBITDA last quarter on the back of its cost-reduction efforts, which is commendable if we consider the challenging end-market situation. The registered number of medium and heavy duty vehicles running on natural gas in the U.S. is expected to increase from 0.25% in 2012 to approximately 3.8% in 2023. As CLNE’s end-market grows, it will see an increase in its addressable market that will lead to growth in gallons delivered and help it post better financial results going forward. Natural gas refueling company Clean Energy Fuels (NASDAQ: CLNE ) had started the year with a lot of hope and was trading at 52-week highs at the beginning of May. But, the second half of 2015 ensured that Clean Energy is set to post another disappointing year as it has lost half its value in the past six months. The weakness in the company’s stock price can be attributed a declining financial performance due to weak natural gas pricing. For instance, in the third quarter, Clean Energy’s revenue was down 11% from last year, while it also posted a loss due to a decline in the value of gallons delivered. But, in my opinion, investors should not ignore the improvements in Clean Energy’s performance as the company seems to be on track for long-term gains. In this article, I’m going to take a look at the various reasons why Clean Energy can come out of its slump. Cost reductions indicate that Clean Energy is moving in right direction Though Clean Energy posted a loss last quarter, the company was able to reduce the quantum of its loss. Clean Energy’s loss was down 21% sequentially and 15% year-over-year in the previous quarter. The decline in its loss can be attributed to Clean Energy’s cost reduction efforts and volume growth. For instance, the company has reduced its SG&A expenses by over 20% in the past five quarters and increased its volumes by more than 24%. These are commendable numbers, especially considering that weak oil prices have created an adverse impact on natural gas vehicle conversions. In fact, Clean Energy improved its volume by 17% to 80.6 million gasoline gallon equivalents in the third quarter. What’s more important is that Clean Energy, for the first time, reported positive EBITDA of $3.1 million last quarter despite the low pricing environment. This represents an improvement of $5.7 million over the second quarter of 2015 and an improvement of $8.7 million over the first quarter of 2015. In fact, for the first nine months of 2015, Clean Energy has improved its EBITDA by a whopping 62%. The following table clearly indicates the improvement in Clean Energy’s EBITDA performance. Source: Press Release Hence, as far as operational improvements are concerned, Clean Energy Fuels is moving in the right direction by reducing costs, which is why it has been able to improve its EBITDA remarkably. But, apart from cost reductions, there is another positive about Clean Energy Fuels, in the form of a booming end-market opportunity, which investors should not ignore Growing end-market opportunity strengthens the bull case Looking ahead, Clean Energy Fuels will benefit from a growing number of natural gas vehicles in the U.S. According to a report published by the Fuels Institute, natural gas vehicles are expected to grow substantially in the coming five years, particularly in the medium and heavy duty market. It is expected that the NGV share of registered M/HD vehicles will grow from 0.25% in 2012 to approximately 3.8% in 2023. The following chart shows the expected increase in natural gas vehicles on U.S. roads going forward in both base and aggressive cases: Source The report states that the majority of vehicles using CNG systems will be found in the class 8 category of heavy duty vehicles. This is because these vehicles will benefit from lower fuel costs, combined with significantly higher fuel consumption annually, which will provide returns on vehicle investment quickly. In fact, Clean Energy has already penned a number of agreements with fleet operators, which is an indicator of the fact that the company is already gaining traction for its business. For instance, last quarter, Clean Energy expanded its relationship with Raven Transport. Raven Transport deployed an additional 40 LNG trucks last quarter, and these trucks will refuel at Clean Energy’s stations on interstate corridors throughout the southeast. All in all, Raven now operates 223 LNG trucks in its fleet. Likewise, Clean Energy is also expected to benefit from its relationship with Saddle Creek Logistics, which recently announced that it will be adding 50 CNG trucks to its existing fleet of 200. These new contracts indicate that Clean Energy will see an increase in its natural gas volumes going forward, and as the overall market expands, the company will see better opportunities to expand its volumes. Conclusion Despite the downturn in the end market, Clean Energy has managed to improve its EBITDA performance this year. At the same time, its volumes have also increased, indicating that the demand for natural gas vehicles is still there despite low diesel prices. In the long run, as the number of NGVs on the roads increases, Clean Energy Fuels will see an increase in its addressable market and will be able to improve its financial performance. So, in my opinion, investors should go long Clean Energy Fuels and take advantage of the drop in its stock price for long-term gains.