Tag Archives: ideas

Bet On European Economic Recovery With This New ETF

Ongoing policy easing and hopes for further stimulus (if need be) have put the spotlight on the Euro zone stocks and related ETFs. Since available funds are tacking on gains and assets on a potential economic recovery, issuers are putting out all the stops in rolling out more and more innovative Europe-based funds. Most recently, WishdomTree launched the WisdomTree Europe Local Recovery Fund (BATS: EZR ) , which better reflects the European growth prospects on corporate profile. Let’s dig a little deeper and find how one can wager on the potential bounce in the European economy by this ETF (read: ETF Strategies for 2H ). EZR in Focus The fund seeks to provide exposure to the European companies susceptible to economic growth prospects in the Euro zone and that generate over 50% of their revenues from Europe. Thus the fund may benefit from the ongoing economic recovery and rising purchasing power in the Euro zone. By tracking the WisdomTree Europe Local Recovery Index, the fund fulfills its objective. This strategy results in the fund holding 212 stocks in its basket, which are quite well diversified across the portfolio. The top 10 names form roughly 15% of total assets, with just 2.22% allocated to the top fund holding – Total SA. (NYSE: TOT ), BASF SE ( OTCQX:BASFY ), Allianz SE ( OTCQX:AZSEY ) and BNP Paribas ( OTCQX:BNPQY ) are some of the other top holdings of the fund. However, there seems to be some sector concentration in the fund as the top three sectors – Financials, Industrials and Consumer Discretionary- alone occupy four-fifth of total fund assets. Energy and Information Technology have the lowest allocations in the fund. Capitalization-wise, the fund has a mixed approach with about 35% of weight invested in small and mid caps each, while the remaining 30% goes to large-cap stocks. While France and Germany have roughly 25% allocation each in the fund, Italy occupies about 16% and Spain has 9.42%. The fund charges 48 basis points as fees making it a relatively middle-of-the-road product in terms of costs in the European ETFs space. How Does It Fit in the Portfolio? The newly launched ETF can be a good choice for investors looking to gain exposure to the pure possibilities of the Euro zone. This is especially true given that these companies are closely tied to the European economy and generate a huge bulk of their revenues from the domestic market and thus remain less susceptible to euro depreciation (read: 3 European ETFs Rebounding Sharply ). Notably, Euro zone is presently undergoing a QE stimulus and the European central bank has recently hinted at the beefing up of the ongoing monetary policy, if growth slackens further. These measures are expected to spur bank lending, boost activities and battle low inflation within the Euro zone. ETF Competition The broad European equities fund space is teeming with a number of ETFs such as the Vanguard FTSE Europe ETF (NYSEARCA: VGK ) , the SPDR Euro Stoxx 50 ETF (NYSEARCA: FEZ ) , the iShares MSCI EMU ETF (NYSEARCA: EZU ) and the iShares Europe ETF (NYSEARCA: IEV ) . However, aforementioned ETFs are mostly large-cap in nature and thus can’t be direct competitors to this newbie ETF EZR. Since large-caps only take about one-third of its portfolio, small-cap Europe ETFs including the SPDR STOXX Small Cap ETF (NYSEARCA: SMEZ ) and the WisdomTree Europe SmallCap Dividend Fund (NYSEARCA: DFE ) are likely to pose as threats. In fact, country and sector specification-wise, EZR and SMEZ share many similarities. The newly launched fund is cheaper than DFE – which charges 58 basis points as fees but it is slightly costlier than SMEZ which charges 45 bps in fees. Also, given the greenback strength in the wake of looming policy tightening and euro depreciation, this un-hedged ETF might see tough times ahead. Otherwise, we expect EZR to be successful among risk-averse investors as capitalization-wise, its spectrum is diversified. So, several risk-fearing investors who seek to gain true exposure to the Euro zone but dread the volatile nature of the smaller-capitalization might find EZR’s midway approach lucrative. Link to the original post on Zacks.com

Will Santa Claus Bring Volatility?

Summary Historically, the holidays provide a brief period of decreasing volatility. This December is filled with unknowns. These unknowns will determine whether stocks finish naughty or nice this year. Hello everyone, I hope you have been doing well. Volatility has turned its head again and is close to backwardation. The purpose of this article is to examine past volatility events and determine the likeliness of a prolonged period of backwardation here. For the basis of discussion, we will use the iPath S&P 500 VIX Short-term Futures ETN (NYSEARCA: VXX ). During the last spike in volatility, VXX performed well and has still not touched the previous lows set in August, see below: (click to enlarge) Historically, this time of year bodes well for inverse volatility products such as the VelocityShares Daily Inverse VIX Short-Term ETN (NASDAQ: XIV ). However, this year, the Santa Clause rally has a Federal Reserve rate hike to deal with. The last spike in volatility came on the back of a decision by the Federal Reserve not to raise interest rates. This was taken as a weak sign for the U.S. economy and investors seemed happy to sell off shares to mark the first real correction since 2011-2012. This spike in volatility created a long period of backwardation, see below: (click to enlarge) Now it appears that solid jobs data has put the Federal Reserve back on track for a December rate hike. Financials rallied for a couple of sessions but have since given back the bulk of their gains after news of new capital rules. Retailers were hit hard after very weak guidance from Macy’s (NYSE: M ). Oil stocks continue to take a beating due to stubbornly high inventories and a very strong dollar. What does all this spell for volatility? A very interesting holiday season. Remember back to the article where we discussed the two types of volatility events. You have economic events that drag out over longer periods of time and you have political events that tend to be very short lived. Volatility markets are now struggling with economics. Even though the market recovered, volatility has remained elevated from the ultra-low numbers we saw in the first half of 2015. Volatility investors are becoming more fearful that the U.S. economy may go from slow growth to none at all. Judging by the jobs numbers, the U.S. economy is doing better than most have expected it to. It is going to be a very competitive holiday season for retailers and a warning from one company does not spell doom for the entire industry. After Macy’s warned on traffic, most online retailers remained unchanged. Wal-Mart (NYSE: WMT ) has even changed course and opted to offer almost all of its Black Friday deals online. Times change and industries must change as well to remain competitive. What to Watch For I have three things on my volatility radar right now. Retail sales and the Santa Claus rally deserve to be recognized this time of year. Typically, a positive start will result in subdued volatility. Will online retailers more than make up for slow foot traffic? I believe the answer is yes. Score one for Santa. The mid-December possible government shutdown. I absolutely hate gridlock in politics and government shutdowns really aren’t the image we want to portray. But, those events were some of the easiest money ever made on volatility trades. Here’s a look at VXX during the last government shutdown: (click to enlarge) Score one for volatility. All eyes will be on the Federal Reserve’s December meeting. To hike or not to hike. I believe over the next month or so, the market will price in a hike in rates only leaving the possibility of disappointment in not getting the rate hike they were expecting. Score two for volatility. Conclusion My scorecard shows a higher chance of volatility than we typically see this time of year. If volatility begins to enter overbought conditions by the beginning of December, I will be looking for a short-term short position in VXX or a small long position in XIV. Keep your eye on the ball and wait for an event to play out before you jump in too soon or chase after something that is already gone. It is important to analyze the situation as it develops. We saw during the last volatility event how trigger-happy investors are right now and we could see more of the same should conditions worsen. This should be in your volatility game plan. Thank you so much for reading and for more information on timing the VIX, volatility ETFs, and related volatility education, please check out my library of articles here on Seeking Alpha .

Northwestern Corporation: Great Business Fundamentals

Summary Montana has a healthy, stable population that pays its utility bills. Hydroelectric generation acquisition changed the company for the better. The acquisition did increase leverage. Debt is manageable, but free cash flow should go to paying down debt. NorthWestern Corporation (NYSE: NWE ) is an electricity and natural gas provider that serves the energy needs of hundreds of thousands of customers in Montana, South Dakota, and Nebraska. Unlike many utilities that have diversified into non-regulated activities, NorthWestern remains a pure-play regulated utility. Management has been wise, making strong moves to diversify away from coal-fired generation in a bid to lower regulatory risk. In turn, investors have rewarded this move, with shares returning roughly double the return of the broader utility index since the September 2013 announcement of the purchase. Will this long-term outperformance continue? Renewable Energy Diversification Those that have followed my work know that I have been especially critical of utilities that have not begun to meaningfully diversify away from coal, shifting power generation into cleaner plays such as natural gas and hydroelectric generation. Coal will continue to play an important, but shrinking, role for most utilities in providing stable energy generation for some time. We all know that sometimes the wind doesn’t blow or the water doesn’t run. But its days of dominance are numbered and utilities must position themselves for a future where coal is not the primary source of power generation, primarily due to continued pressure from environmental regulation. From what I’ve found, utilities in the Midwest have been especially guilty of ignoring renewables. NorthWestern Corporation, operating right next door to many of these slow-to-adapt utilities, has not been ignoring industry trends. The $900M acquisition of eleven hydroelectric facilities from PPL Montana was a game-changer for the company, shifting more than 50% of available base-load generation to renewable water and wind. Hydroelectric is a great source of power for utilities to meet light-load requirements on most operational days. There is no fuel cost to worry about, which reduces operational headaches, and the assets are obviously quite clean when it comes to greenhouse gas production and waste. Best of all, NorthWestern got these facilities for a steal of a price. Montana In Focus The vast majority of NorthWestern’s earnings comes from its Montana operations. When you think of Montana, you probably think of something like this: ‘ * Wildnatureimages.com This honestly isn’t too far from the case. Montana is a vast state, with low population density and a high concentration of people over the age of 65. However, this doesn’t make it a poor market for a utility. The unemployment rate has remained under the U.S. national average for many years (currently at an incredibly low 4.0%), and population growth remains stable. * NorthWestern Energy Investor Presentation Along with this, bad debt write-offs for NorthWestern are incredibly low, even during the recession where you would expect a jump in defaults. With more than 80% of Montana revenue coming from residential customers, low unemployment and bad debt write-offs creates a situation of high stability and predictability when it comes to company earnings. For utility owners, this should be far more important than chasing growth potential. Steady as she goes is the name of the game. Operating Results (click to enlarge) Electric operations revenue growth has accelerated, especially for full-year 2015, due to approval of increased rates related to the hydroelectric acquisitions that have come into effect. Gas operations revenue has fallen, but like with all natural gas utilities, this is a function of the underlying commodity price rather than a lack of demand. As natural gas prices have fallen, the cost of gas passed along to consumers as part of rider agreements falls as well, resulting in lower revenue. Investors should remember, however, that NorthWestern’s fixed margin per unit of gas sold remains the same. Lower gas prices mean higher gross and operating margins for the natural gas division, which we can see coming down in 2015’s estimated full-year results. (click to enlarge) As I usually do with utilities, I look to see that operational cash flow can cover capital expenditure requirements and dividend payments. If not, the utility is likely stuck in a cycle of taking on debt to cover its obligations. For NorthWestern, total cash flow from operations will grow greatly in 2015, eliminating some of the slightly larger deficits we saw in 2013 and 2014, likely a result of larger capex requirements for its new hydroelectric facilities. Overall, leverage for NorthWestern has gone up as a result of its hydroelectric and wind acquisitions, which cost a touch over $1B. Total long-term debt now stands at $1.8B, putting its net debt/EBITDA ratio at around 4.5x, which is on the high side but manageable for the time being. Management here has been traditionally cautious – all of NorthWestern’s debt is non-callable, long-term fixed rate debt. The company does have $455M of debt coming due by 2019 ($150M 2016, $55M 2018, $250M 2019), which it will have to refinance. I’d expect this to price around 4.5% on mid-term extensions (coming due in 2030) which will actually reduce the company’s interest expense somewhat given the 6%+ coupons these issuances have carried. Conclusion Overall, NorthWestern is a well-run utility. Management seems to be taking all the right steps and the 3.75% annual dividend yield is solid. 12.5x ttm EV/EBITDA is on the high side, but the company likely carries a premium given the strong growth performance and future earnings profile. I wouldn’t be a buyer at current prices, but I’m keeping the shares on my watchlist.