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Cemig Is Worth Considering At These Levels

Summary The financial results for Q3 2015 are out, and it looks like Cemig will end the year with net income and EBITDA in line with 2014. The ttm EPS is $0.68 USD, which implies a ttm P/E ratio of 2.88 at the closing price of $1.96. The stock has been punished by investors, the main causes of concern being the continued depreciation of the brazilian real and the likelyhood of losing the concessions for 3 plants. Companhia Energética de Minas Gerais (NYSE: CIG ), also known as Cemig, is a state-controlled Brazilian power company, headquartered in Belo Horizonte, the capital state of Minas Gerais. The company operates in all three segments of the electricity market (generation, transmission and distribution), but it also has stakes in other businesses, like telecom and natural gas distribution. Year to date, Cemig’s ADRs have lost a bit over 60% in value. Some of this was of course warranted by the depreciation of the real. Aided by a strong US dollar, we’ve seen the BRL/USD pair drop 30% so far this year. CIG data by YCharts Concessions During this summer, the Superior Court of Justice in Brazil has ruled against Cemig on its hydroelectric power plants Jaguara and São Simão, whose concession contracts expired in 2013 and this year respectively. Cemig has appealed the decision at the Federal Supreme Court, which means Cemig will still be operating them until the dispute is settled. The Federal Supreme Court has recently suggested that Cemig and the Ministry of Mines and Energy come to an agreement and not try to drag this out in court: “In view of the complexity and importance of the debate raised by this case, and the need to encourage voluntary settlement within the Judiciary: Parties to state whether they have interest in holding of a conciliation hearing.” Because these assets are still under dispute, they won’t be available for bidding at the auction scheduled for November 25. However, Cemig has stated its interest to participate in this auction, where they could bid for concessions for new power plants: there will be a total of 29 operating concessions auctioned, with a total capacity surpassing 6000MW. Miranda, another power plant that has investors worried has an operation concession to Cemig which expires at the end of 2016. At the end of Q3, Cemig had an operating generating capacity of 7,759MW, and another 2,457MW under construction. This puts the worst case scenario of losing all three concessions at a 32% loss in current operating capacity, or a 24% loss of total capacity, if we include capacity under construction. Financial results In any case, it looks like Cemig will keep operating these plants until the dispute is settled, so let’s look at their current financial metrics. Note that Cemig reports earnings in Brazilian reals, which is the currency in these graphs. (click to enlarge) Although net revenue has been steady in recent years, EBITDA and net income have not, so I’ve included a moving average for the trailing four quarters, to make the results smoother. (click to enlarge) (click to enlarge) A quick glance at these graphs suggests that Cemig will probably end 2015 with about as much in earnings as it did in 2014. Actually, the net income for the first 9 months of 2015 is 2,134 mil $R, which is 5.6% higher than the 2,019 mil $R in the first 9 months of 2014. The ttm EPS is R$2.58, which, at the current exchange rate, is $0.68 USD. This implies a ttm P/E ratio of 2.88 at the closing price of $1.96. Dividend In May of this year, the company has published a notice to shareholders regarding its dividend policy: the payment of dividends specified in the by-laws, of 50% of the Net profit for the business year, would not be compatible with the present financial situation of the Company, due mainly to the low level of water in the electricity reservoirs, which could lead to a significant reduction in the energy available for sale by the Company’s hydroelectric plants in 2015, affecting the Company’s revenues and cash position. You’ll notice management mentions the current drought as one of the culprits for its financial insecurity. I have dismissed this initially, but it turns out Brazil is facing the worst drought in the last 80 years . As the drought reduces hydropower availability, distributors must supply electricity purchased at much higher rates on the spot market or generated by more expensive power plants. This is significant, as more than half of Cemig’s operational costs during the last quarter was the cost of electricity purchased for resale. I believe Cemig’s bottom line could benefit immensely from a change in Brazil’s weather. If management decides to hold on to the policy of paying only 25% of earnings as dividends, and the exchange rate remains steady, we might see another $0.15 dividend being declared next year, a 7.6% yield at current prices. I consider this a good value, even after factoring in a worst-case scenario of a complete loss of all three power plants discussed above, which is why I’ve recently added to my position in Cemig.

One Asset Class You Can’t Do Without

Summary The market has been battered by slow global growth and the uncertainty of a looming rate hike by the Federal Reserve. Nonetheless, for years to come, the U.S. is likely to perform well. The Vanguard S&P 500 ETF is the best exchange-traded fund for investing in the U.S. stock market, which is the one asset class you can’t do without. In the search for the right mix of portfolio asset classes, it is tempting to overlook the obvious: the U.S. stock market. Alternative asset classes and exotic emerging markets may look appealing for investors seeking to diversify. But it does not pay to bet against America. So far this year, the U.S. market has been beaten down by fears about slow global growth and the possibility of the Federal Reserve pushing rates higher. For years to come, however, the U.S. is likely to perform well. Keeping a primary, core position in a U.S. stock market exchange-traded index fund is a simple yet profitable investment strategy. The U.S. is still number one China, Russia, Brazil, and India are becoming economic heavyweights on the world stage. The new century brings the possibility that the U.S. will no longer be the largest economy in the world. But this macroeconomic story does not necessarily translate into a good investment idea. Emerging markets, measured by the Vanguard Emerging Markets ETF (NYSEARCA: VWO ), have lagged the U.S. market, measured by the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ), over the past ten years: Source: YCharts Faster economic growth has not resulted in better investment returns. Rather, the U.S. has produced higher returns with less risk than emerging markets. The ten-year standard deviation of the U.S. market is 14.7 compared to 23.7 for emerging markets, according to Morningstar . Emerging markets are plagued by intrusive governments that restrict free market forces and lack the rule of law that Americans take for granted. In addition, the U.S. excels at creativity and innovation. Rule of law, creativity, and free markets give the U.S. market an edge in the world economy that is likely to continue. The U.S. is still the strongest economy and stock market in the world. A basic choice to focus on the domestic U.S. asset class rather than scattering across the globe in search of exotic alternatives helps form a solid foundation for your portfolio. Investing in the U.S. market is the most important asset allocation decision for investors to make. Exchange-traded index funds are a good way to capture broad asset classes, such as the U.S. market. The Efficient Market Hypothesis maintains that the market is so efficient that current prices reflect all relevant information. Therefore, it is very difficult to outperform by picking individual stocks. Buying the index rather than select stocks within the index is the winning strategy for most investors. Index funds run on autopilot, tracking a predetermined basket of stocks. Thus, index funds trade less frequently and are more tax efficient than traditional, actively managed funds operated by a high-cost stock picker. The Vanguard S&P 500 ETF In my opinion, Vanguard offers the best index funds in the marketplace. Vanguard is the market leader in the index fund space, with emphasis on low costs and ethics that put investor interests first. The Vanguard S&P 500 ETF (NYSEARCA: VOO ) is the best choice for investors seeking to establish a core position in domestic U.S. stocks. The S&P 500 Index is one of the most widely used proxies for the U.S. market. As the name suggests, it contains 500 stocks. The S&P 500 is broader than the Dow Jones Industrial Average, which contains only 30 stocks. VOO is the lowest-cost ETF tracking the U.S. market, as far as I know, priced at 0.05% of assets per year. The fund industry average expense ratio is 1.02%, according to Vanguard . Accordingly, VOO is priced 95% lower than the fund industry average. This cost advantage along with the difficulty of picking stocks help make index funds the winning choice. Very few professional fund managers or individual stock pickers – that includes most Seeking Alpha Contributors – can consistently outperform the S&P 500. In 2014, for example, it was reported that 85% of fund managers failed to outperform their benchmark indexes . On the other hand The U.S. economy and stock market are not perfect. The last ten years included an epic housing-market crash, the Great Recession, and a U.S. Government bailout of too big to fail Wall Street banks. Reckless politicians on Capitol Hill seriously contemplated a voluntary default on U.S. debt obligations, making the U.S. seem more like a high-risk emerging market than a developed one. While it is wise to focus your asset allocation on the U.S. market, U.S. stocks should not be the only asset class in your portfolio. Asset-class diversification can help to improve long-term risk-adjusted returns. My point is that attempts to diversify away from U.S. stocks should not be overdone. The Vanguard S&P 500 ETF is likely to outperform the vast majority of those who seek to pick individual stocks. But VOO cannot do better than the S&P 500 Index it seeks to track. The bottom line It pays to invest in America. The U.S. certainly has its fair share of problems. But the U.S. is still number one when it comes to the economy and financial markets. Buying and holding a broadly diversified U.S. stock market index fund such as VOO is a smart decision. The U.S. is the one asset class you can’t do without.

Is This The Worst Time For MLP ETF Investing?

The double whammy of the recent crash in crude oil price below $40 and the Fed’s hawkish stance on interest rate hike are causing mayhem in the master limited partnership (MLPs) business. MLPs are involved in the business of transportation and storage of oil and gas, and they are suffering even more than the oil producers from the downturn in the market. MLPs primarily benefit from an uptick in oil production. However, U.S. oil producers are resorting to a cutback in oil production in response to falling prices. Oil drilling companies have idled over half their rigs from last month. The latest data from Baker Hughes Inc. (NYSE: BHI ) revealed that rigs engaged in the exploration and production of oil and gas totaled 767 for the week ended November 13, 2015, a decline of 4 from the prior week’s count and the lowest level seen since April 2002. The nationwide rig count is still less than half the prior-year level of 1,928. Despite a marginal rise to 574 last week, the oil rig count continues to be on the low end of the five-year range and is significantly below the previous year’s level of 1,578. International Energy Agency (EIA) has also reduced U.S. production outlook for 2016 by 1% to 8.77 million barrels per day. Some might think that the oil price is hitting its bottom but in reality it might head further south. This is because EIA has indicated that the global supply glut could get even worse as global stockpiles have reached the record level of 3 billion barrels owing to abundant supply from the OPEC countries as well as Iraq and Russia. Secondly, a strengthening U.S. dollar supported by the possibility of an interest rate hike weakens the demand scenario for greenback-priced commodities such as crude. A rising interest rate environment would also adversely impact the performance of MLPs for a number of reasons. Firstly, higher interest rates lower the appeal for high-yielding stocks such as MLPs, which have historically offered around 5% in yields and hence attracted investors’ attention due to ultra-low interest rates. Secondly, MLPs heavily depend on external financing to run their operations as they distribute most of their income as dividends. As a result, a rise in interest rates would increase their financing costs, which in turn would diminish their ability to keep distribution payments at the existing level. The adverse developments in the oil and gas sector and the threat of a looming interest rate hike are heavily weighing on MLP stocks and ETFs and indicate the worst may not be over yet. Below we highlight three MLP-based ETFs that have witnessed double-digit fall so far this year and may continue to experience a downspin in the near future as well. Alerian MLP ETF (NYSEARCA: AMLP ) This is the most popular MLP ETF with AUM of $7.3 billion. It tracks the Alerian MLP Infrastructure Index, measuring the performance of 25 energy infrastructure MLPs. The fund’s top three holdings include Enterprise Products Partners LP (NYSE: EPD ), Magellan Midstream Partners LP (NYSE: MMP ) and Energy Transfer Partners LP (NYSE: ETP ), together accounting for 25.4% of assets. The ETF trades in a solid volume of 7.1 million shares per day and is very expensive with 5.43% in expense ratio. It offers a robust dividend yield of 9.3% and has lost around 27% in the year-to-date timeframe (as of November 18, 2015). Credit Suisse X-Links Cushing MLP Infrastructure ETN (NYSEARCA: MLPN ) MLPN follows the Cushing 30 MLP Index, measuring the performance of 30 mid-stream stocks in North America. The note is well distributed with its top 10 holdings comprising around 35% of the assets. It has an AUM of $505 million and exchanges roughly 192,000 shares in hand per day. MLPN charges 85 bps in annual fees and has a dividend yield of 6.8%. The note tumbled nearly 34% so far this year. iPath S&P MLP ETN (NYSEARCA: IMLP ) IMLP tracks the S&P MLP Index measuring the performance of MLP stocks that are classified in the GICS Energy Sector and GICS Gas Utilities Industry. Enterprise Products Partners, Energy Transfer Equity LP (NYSE: ETE ) and Energy Transfer Partners are the top three holdings in the fund with a combined exposure of nearly 35%. The product has amassed around $413 million in assets and trades in a moderate volume of roughly 97,000 shares per day. It charges 80 bps in investor fees and offers a dividend yield of 7%. IMLP shed 31.6% in the year-to-date timeframe. Original post .