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Profiling Health Care ETFs – Why Medicine Is The Best Medicine

Summary According to the World Health Organization, global health related expenditures exceed $6 trillion annually. American population aged 65+, which is a driver of health care spending, is expected to grow by nearly 20,000,000 in the next decade according to U.S. Census Bureau. This list highlights key considerations for those who wish to have exposure to the health care industry ranging from domestic to global, large-cap to small-cap. I made the mistake of signing up for a high deductible health plan when I changed jobs this summer. I’m young and relatively healthy. My wife is young and relatively healthy. Even my daughter (who was born January of last year) is young and relatively healthy. The premiums were cheap, wellness visits and routine check-ups were covered, I got a cool $1,000 to shield me from out-of-pocket costs, and none of us visit the doctor very often. It seemed like the right thing to do. And it was. Until it wasn’t. The three of us had a few “unexpected” minor health urgencies that required, among other things, a couple of visits to rural hospitals, an urgent care stop, and some stupidly expensive but needed basic medical concoctions. When it was all said and done, I paid roughly $5,000 in premiums for the privileged of being able to pay for $5,000 in out-of-pocket costs, which was essentially the entirety of our medical bills. Let me say that everyone has since recovered, we are so blessed that our medical problems were anything but, and their are people either without insurance, or with far more serious medical issues, that spend tens if not hundreds of thousands of dollars more for care than we did. But it still hurt. $10,000 is $10,000 is $10,000. As I sat in the emergency room for the final time of 2014, staring at expensive looking equipment, refusing Tylenol (since I knew it would show up on our chart and be billed accordingly), I thought – I need to get in on this racket. Whether you are as healthy as an ox, or as sick as a dog, when you decide to invest in the healthcare sector, you have several options: Invest in individual stocks of companies that provide healthcare services (Johnson & Johnson (NYSE: JNJ ); Pfizer (NYSE: PFE ); Medtronic (NYSE: MDT ) and so on) Invest in ETFs covering the entire healthcare industry (more on that below) Invest in those that serve the healthcare industry (think hospital REITs like HCP ) Become a healthcare professional (not in the cards for this guy, even with the absurd rise of so called ” second chance” med-schools ) Since I like diversification as much as like good health, and I believe an investment in the healthcare industry should be an investment in the healthcare industry, I opted for option b), investing in healthcare ETFs. Yahoo lists no less than two dozen health-themed ETFs (complete list at end of article), but to keep it simple, I present seven ETFs for further consideration. Profiling the contenders – Unless otherwise noted, information is as of close 2/10/15 (Source: fidelity.com etf screener, all objectives are as listed on the respective funds’ websites without modification). Fidelity MSCI Health Care Index ETF (NYSEARCA: FHLC ) Market price – $33.81 1 year* beta at 1/31/15 (Fidelity) – .84 Expense ratio – .12% Total holdings – 320 Average volume – 198,495 Yield – 1.01% Price/earnings – 25.44 Price/Cash flow – 16.82 Objective – “Seeks to provide investment returns that correspond, before fees and expenses, generally to the performance of the MSCI USA IMI Health Care Index. Investing at least 80% of assets in securities included in the fund’s underlying index. The fund’s underlying index is the MSCI USA IMI Health Care Index, which represents the performance of the health care sector in the U.S. equity market.” Courtesy of Fidelity Top Ten Holdings by Weight (as of 2/6/15) Johnson & Johnson – 8.88% Pfizer – 6.55% Merck & Co (NYSE: MRK ) – 5.28% Gilead Sciences (NASDAQ: GILD ) – 4.59% Amgen Inc (NASDAQ: AMGN ) – 3.58% Medtronic PLC – 3.28% UnitedHealth Group (NYSE: UNH ) – 3.26% Bristol-Myers Squibb Co (NYSE: BMY ) – 3.08% Biogen Idec (NASDAQ: BIIB ) – 2.96% Celgene Corp (NASDAQ: CELG ) – 2.96% *Fund inception 10/21/13 Investment thoughts – The Fidelity fund’s volume of holdings (the highest among all funds profiled) gives it the highest mark for diversification. It also is tied for lowest expense ratio with Vanguard and when held in a Fidelity account trades commission free. Johnson and Johnson, its largest holding is trading essentially in the middle of its 52 week range (90.66 – 109.49) as of 2/11/15 while Pfizer, its second largest holding hit an intra-day 52 week high . Buy this fund if you don’t mind giving serious weight to mega-cap companies. First Trust Health Care AlphdaDEX ETF (NYSEARCA: FXH ) Market price – $61.96 3/5 year beta at 1/30/15 (Yahoo) – .76/.69 Expense ratio – .66% Total holdings – 75 Average volume – 419,984 Yield – n/a Price/earnings – 27.81 Price/Cash flow – 15.52 Objective – “The First Trust Health Care AlphaDEX® Fund is an exchange-traded fund. The investment objective of the Fund is to seek investment results that correspond generally to the price and yield, before fees and expenses, of an equity index called the StrataQuant® Health Care Index. The StrataQuant® Health Care Index is an “enhanced” index developed, maintained and sponsored by the NYSE Group, Inc. or its affiliates (“NYSE”) which employs the AlphaDEX® stock selection methodology to select stocks from the Russell 1000® Index. The NYSE constructs the StrataQuant® Health Care Index by ranking the stocks which are members of the Russell 1000® Index on growth factors including three, six and 12-month price appreciation, sales to price and one year sales growth, and, separately, on value factors including book value to price, cash flow to price and return on assets.” (click to enlarge) Courtesy of First Trust Top Ten Holdings by Weight (as of 2/6/15) Centene Corp (NYSE: CNC ) – 2.45% AmerisourceBergen Corp (NYSE: ABC ) – 2.38% McKesson Corp (NYSE: MCK ) – 2.38% Aetna (NYSE: AET ) – 2.36% Allergan (NYSE: AGN ) – 2.35% Patterson Companies (NASDAQ: PDCO ) – 2.33% Edwards Lifesciences Corp (NYSE: EW ) – 2.31% BioMarin Pharmaceutical (BM8) – 2.30% Incyte Corp (NASDAQ: INCY ) – 2.28% Henry Schein (HS2) – 2.27% Investment thoughts – The First Trust Health Care ETF’s “enhanced” indexing methodology allows it to represent large and small cap companies that offer attractive buy signals based on quantitative valuation metrics including price multiples and return ratios. Buy this ETF if you don’t mind paying (relatively) higher fees in order to own a fund that doesn’t track a single index but instead seeks to include opportunistic holdings based on price and performance. Also, no stock makes up more than 3% of the fund’s NAV, so don’t expect big swings in any given stock to materially impact the fund’s overall performance. Health Care Select Sector SPDR ETF (NYSEARCA: XLV ) Market price – $70.12 3/5 year beta at 1/30/15 (Yahoo) – .67/.59 Expense ratio – .15% Total holdings – 57 Average volume – 10,235,200 Yield – 1.33% Price/earnings – 24.84 Price/Cash flow – 16.88 Objective – “The Health Care Select Sector SPDR® Fund seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the S&P® Health Care Select Sector Index.” Courtesy of State Street Top Ten Holdings by Weight (as of 2/5/15) Johnson & Johnson – 10.62% Pfizer – 7.70% Merck & Co – 6.25% Gilead Sciences – 5.58% Amgen Inc – 4.32% Medtronic PLC – 3.98% UnitedHealth Group – 3.90% Bristol-Myers Squibb Co – 3.72% Biogen Idec – 3.59% Celgene Corp – 3.55% Investment thoughts – The SPDR ETF, like Vanguard, Fidelity and iShares has significant weight in a single stock (Johnson & Johnson), but only its top four holdings make up 5% or more of NAV on an individual basis. This ETF is by far the most popular health care ETF, with average volume over 10 times its next closest competitor. The SPDR fund is also near the cheapest based on its constituents price/earnings multiple. SPDR is also one of two funds profiled with over 40% exposure to pharmaceuticals. Vanguard Health Care ETF (NYSEARCA: VHT ) Market price – $129.12 3/5 year beta at 1/30/15 (Yahoo) – .68/.64 Expense ratio – .12% Total holdings – 319 Average volume – 363,562 Yield – 1.01% Price/earnings – 25.84 Price/Cash flow – 16.84 Objective – “The Health Care Select Sector SPDR® Fund seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the S&P® Health Care Select Sector Index.” Courtesy of Vanguard Top Ten Holdings by Weight (as of 12/31/14) Johnson & Johnson – 9.40% Pfizer – 6.30% Merck & Co – 5.20% Gilead Sciences – 4.50% Amgen Inc – 3.80% AbbVie (NYSE: ABBV ) – 3.30% UnitedHealth Group – 3.90% Bristol-Myers Squibb Co – 3.10% Celgene Corp – 2.80% Biogen Idec – 2.50% Investment thoughts – The Vanguard fund is tied with Fidelity for lowest expense ratio, and when purchased as Admirals shares, is the cheapest. Also like Fidelity, this fund has over 300 individual holdings giving investors broad exposure to a large number of health care related companies. PowerShares S&P SmallCap Health Care Portfolio ETF (NASDAQ: PSCH ) Market price – $62.97 3 year** beta at 1/30/15 (Yahoo) – .72/n/a Expense ratio – .29% Total holdings – 71 Average volume – 10,903 Yield – n/a Price/earnings – 32.26 Price/Cash flow – 15.61 Objective – “The PowerShares S&P SmallCap Health Care Portfolio ((Fund)) is based on the S&P SmallCap 600® Capped Health Care Index ((Index)). The Fund will normally invest at least 90% of its total assets in common stocks that comprise the Index. The Index is designed to measure the overall performance of common stocks in the health care sector. Included are healthcare companies principally engaged in the business of providing healthcare-related products and services, including biotechnology, pharmaceuticals, medical technology and supplies, and facilities.” Courtesy of Invesco Top Ten Holdings by Weight (as of 2/6/15) West Pharmaceutical Services (NYSE: WST ) – 4.40% PAREXEL International (NASDAQ: PRXL ) – 4.15% Amsurg Corp (NASDAQ: AMSG ) – 3.30% Impax Laboratories (NASDAQ: IPXL ) – 3.15% MWI Veterinary Supply (NASDAQ: MWIV ) – 2.98% Medidata Solutions (NASDAQ: MDSO ) – 2.97% Haemonetics Corp (NYSE: HAE ) – 2.68% NuVasive Inc (NASDAQ: NUVA ) – 2.67% ABIOMED Inc (NASDAQ: ABMD ) – 2.59% Prestige Brands Holdings (NYSE: PBH ) – 2.51% **Fund inception 04/07/10 Investment thoughts – This small cap fund’s top ten holdings contain none of the same top ten holdings as all other funds profiled and could be a compliment to any other fund on the list. Beware that it is the most thinly traded of all funds on the list and could result in undesirable bid-ask spreads when entering or exiting a position. iShares Global Healthcare ETF (NYSEARCA: IXJ ) Market price – $103.08 3/5 year beta at 1/30/15 (Yahoo) – .75/.62 Expense ratio – .48% Total holdings – 95 Average volume – 123,427 Yield – 1.34% Price/earnings – 24.76 Price/Cash flow – 16.47 Objective – “The iShares Global Healthcare ETF seeks to track the investment results of an index composed of global equities in the healthcare sector. IXJ offers exposure to pharmaceutical, biotechnology, and medical device companies from around the world.” Courtesy of BlackRock Top Ten Holdings by Weight (as of 2/5/15) Johnson & Johnson – 6.99% Novartis AG ( NOVN ) – 6.42% Pfizer – 5.07% Roche Holding (NYSE: ROG ) – 4.63% Merck & Co – 4.11% Gilead Sciences – 3.67% Bayer AG ( OTCPK:BAYN ) – 2.94% Amgen – 2.84% Sanofi SA (NYSE: SAN ) – 2.83% Glaxosmithkline (NYSE: GSK ) – 2.73% Investment thoughts – This iShares ETF trades at the lowest price/earnings multiple and also sports the highest TTM yield of all funds profiled. While its called a global fund, be aware that many of its top holdings are also found in U.S. focused funds including Johnson & Johnson, Pfizer, Merk, and Gilead. iShares U.S. Healthcare ETF (NYSEARCA: IYH ) Market price – $148.04 3/5 year beta at 1/30/15 (Yahoo) – .68/.62 Expense ratio – .43% Total holdings – 112 Average volume – 285,592 Yield – 1.03% Price/earnings – 24.91 Price/Cash flow – 16.73 Objective – “The iShares U.S. Healthcare ETF seeks to track the investment results of an index composed of U.S. equities in the healthcare sector. IYH offers exposure to U.S. health care equipment and services, pharmaceuticals, and biotechnology companies.” Courtesy of Blackrock Top Ten Holdings by Weight (as of 2/5/15) Johnson & Johnson – 9.97% Pfizer – 7.23% Merck & Co – 5.87% Gilead Sciences – 5.24% Amgen Inc – 4.06% Medtronic – 3.72% Unitedhealth Group – 3.63% Bristol Myers Squibb – 3.47% Celgene Corp – 3.33% Biogen IDEC – 3.30% Investment thoughts – Another heavy on pharmaceuticals fund, the iShares U.S. fund sticks out as among the weaker candidates. It has limited exposure to health care technology, expenses nearly four times its cost leading competitors (Vanguard and Fidelity) and offers an unimpressive yield that is nearly half of the S&P 500. Closing thoughts: Do not buy more than one of these funds (unless one is the small cap). Reason: you will just end up with varying degrees of the same few large names. Names like Johnson & Johnson, Merck, Gilead and Amgen pepper the top 10 lists of most of these funds. Don’t expect any single stock’s outperformance to move the ETF’s price mountains. No fund has more than a 10% stake in any given company. Monitor your investments and rebalance as necessary. The composition and risk profile of these funds can and does change frequently. ETF NAME TICKER CATEGORY FUND FAMILY 1-YR RETURN 3-YR RETURN 5-YR RETURN RBS Global Big Pharma ETN DRGS Health Royal Bank of Scotland NV 25.42% 26.30% 0.00% SPDR® S&P Health Care Equipment ETF XHE Health SPDR State Street Global Advisors 14.26% 21.81% 0.00% Health Care Select Sector SPDR® ETF XLV Health SPDR State Street Global Advisors 25.14% 27.59% 19.18% iShares Nasdaq Biotechnology IBB Health iShares 33.83% 43.05% 30.36% Market Vectors® Pharmaceutical ETF PPH Health Market Vectors 23.19% 23.90% 0.00% iShares U.S. Pharmaceuticals IHE Health iShares 29.89% 27.45% 23.05% SPDR® S&P International HealthC Sect ETF IRY Health SPDR State Street Global Advisors 6.22% 17.05% 12.18% PowerShares Dynamic Pharmaceuticals ETF PJP Health PowerShares 28.13% 35.42% 30.63% First Trust Health Care AlphaDEX® ETF FXH Health First Trust 25.42% 30.71% 22.97% iShares U.S. Healthcare Providers IHF Health iShares 27.19% 26.81% 19.95% SPDR® S&P Pharmaceuticals ETF XPH Health SPDR State Street Global Advisors 29.45% 32.16% 26.09% Vanguard Health Care ETF VHT Health Vanguard 25.47% 28.67% 20.02% Guggenheim S&P 500® Eq Weight HC ETF RYH Health Guggenheim Investments 29.73% 30.12% 21.01% Fidelity® MSCI Health Care ETF FHLC Health Fidelity Investments 25.06% 0.00% 0.00% iShares U.S. Medical Devices IHI Health iShares 22.72% 25.09% 16.87% iShares U.S. Healthcare IYH Health iShares 25.14% 28.02% 19.46% iShares Global Healthcare IXJ Health iShares 17.29% 23.30% 16.33% PowerShares Dynamic Biotech & Genome ETF PBE Health PowerShares 36.34% 36.05% 24.79% PowerShares DWA Healthcare Momentum ETF PTH Health PowerShares 14.75% 24.28% 18.24% SPDR® S&P Biotech ETF XBI Health SPDR State Street Global Advisors 44.98% 41.86% 28.72% Market Vectors® Biotech ETF BBH Health Market Vectors 30.34% 47.02% 0.00% First Trust NYSE Arca Biotech ETF FBT Health First Trust 47.55% 46.21% 29.02% ARK Genomic Revolution Multi-Sector ETF ARKG Health ARK ETF Trust 0.00% 0.00% 0.00% PowerShares S&P SmallCap Health Care ETF PSCH Health PowerShares 11.13% 24.99% 0.00% ALPS Medical Breakthroughs ETF SBIO Health ALPS 0.00% 0.00% 0.00% Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Dreyfus High Yield Strategies Fund: This Net Asset Value Bargain Offers A Generous 9.7% Yield

High yield bonds are rebounding and still offer generous yields. The Dreyfus High Yield Strategies Fund is trading at a significant discount to net asset value. With a yield of nearly 9.7% and a discount of nearly 6%, this closed end fund looks particularly attractive now. The Dreyfus High Yield Strategies Fund (NYSE: DHF ) is a closed end fund that invests in higher yielding bonds. As of December 31, 2014, this fund has around 221 holdings, which indicates it is well-diversified. It is also invested in a broad range of industries which includes telecommunications, consumer discretionary, healthcare, and others. This diversification helps reduce potential downside risks. Some of the top ten holdings in this fund include First Data and Sprint Nextel (NYSE: S ) bonds. Duration risk is a potential downside for bond investors, however, this fund has an average duration of just 3.93 years, which mitigates this potential risk. (click to enlarge) The SPDR Barclays High Yield Bond Fund (NYSEARCA: JNK ) is a well-known way for investors to buy high yield bonds. As the chart above shows, junk bonds experienced a decline in mid-December over concerns that some energy companies could be more likely to default due to the plunge in oil prices. Those concerns appear overblown and oil has firmed up in the past few weeks. The Dreyfus High Yield Strategies Fund has only about 10% of its portfolio in the energy sector, so I believe that with roughly 90% of it being invested in other sectors, the risks here are mitigated. While some energy companies might be more challenged, many other industries are benefiting from lower oil prices, which helps offset this potential risk. Over the past 52 weeks, this fund has traded at a premium to net asset value or “NAV,” because it offers very limited duration risk and because of the high yield. For the past year, this fund has typically traded at a nearly 1% premium to net asset value. As of February 9, the net asset value was reported at $3.82, and yet the closing share price was just about $3.60. That means this fund is trading for nearly a 6% discount to net asset value. Since this fund usually trades for about a 1% premium, that means the current discount of nearly 6% is more like getting 7% off of what investors have historically paid. The chart of historical premium/discount information below shows that it is rare for this to trade for the large discount that it has now: This fund offers a yield of about 9.7% and it pays a monthly dividend at a rate of 2.9 cents per share. For many income investors, getting paid every month (as opposed to quarterly) is attractive because it means you won’t have to wait long to get paid. This fund typically goes ex-dividend around the 7th of each month and it typically makes the payment around the 25th of each month. Here are some key points for the Dreyfus High Yield Strategies Fund: Current share price: $3.60 The 52 week range is $3.35 to $4.35 Annual dividend: 2.9 cents per month which yields about 9.7% Data is sourced from Yahoo Finance. No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor. Disclosure: The author is long DHF. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Duke Energy: Ramping Up Its Solar Ambitions

Summary Duke Energy has acquired a majority stake in REC Solar, which should allow Duke Energy to stake a foothold in the promising distributed solar markets. Duke Energy and REC Solar make for an incredibly synergistic partnership, with Duke Energy providing for cheap capital and influence, and with REC Solar providing for its experience an talent. Because REC Solar’s business directly conflicts with Duke Energy’s centralized fossil fuels business, such an acquisition will only be worthwhile if distributed solar eventually becomes the dominant electricity generation model. Duke Energy is smart to expand its renewable energy profile, especially in light of solar’s continually increasing cost-effectiveness and its exponential growth path. The fight between utility companies and distributed solar companies have heated up markedly over the past year. Some major utilities have even started resorting to underhanded tactics , such as influencing congressmen to do their bidding. While most utilities are trying to quash distributed solar, the savvy utility companies are embracing the change. Duke Energy (NYSE: DUK ) has been one of the rare few utilities that have actually seen the rise of distributed solar as a huge opportunity. Duke Energy is currently the largest electricity holding company in the U.S., and has assets all over North and South America. While Duke Energy has a huge reliance on fossil fuels, which has been essential for the vast majority of the its business, the company is slowly making a transition to solar. Unlike most other utilities, Duke Energy is incorporating solar not as a means of meeting federal requirements, but to ensure the company’s survival in a rapidly changing energy landscape. In fact, Duke Energy already has more renewable assets than many of the top renewable companies, with a sizable renewables portfolio consisting of around 1.8 GW worth of solar and wind assets . There are few other fossil fuel based utilities doing the same, with NRG Energy (NYSE: NRG ) being almost the sole exception. Duke Energy has reaffirmed its commitment to solar by acquiring a majority state in REC Solar , which focuses on distributed commercial installations. Duke Energy is willing to invest up to $225M into REC, with the clear intentions of trying to stake a foothold in the commercial solar sector. REC Solar will operate under Duke Energy Renewables(which is the green arm of Duke Energy) and should benefit tremendously from Duke Energy’s financial clout and low costs of capital. As per Duke Energy CEO Allen Bucknam, “We plan to extend the benefits of clean, distributed energy solutions to previously underserved small and medium-sized businesses,” and that “The Duke Energy relationship realizes our strategy to be the one-stop shop for commercial solar by securing a predictable and streamlined customer financing process.” This is what a typical commercial REC Solar install looks like. (click to enlarge) Source: REC Solar The Importance of Maintaining an Early Foothold The utilities sector has seen little to no change in over a century, which means that sudden industry change likely seems extremely threatening, and even alien to most utilities. This could explain why the majority of utilities have been violently opposed to the proliferation of distributed solar companies such as SolarCity (NASDAQ: SCTY ). Instead of working with these companies, which would likely end up being better for everyone involved, most of these companies are fighting tooth and nail to resist change. Duke Solar is clearly an anomaly in this sense, not only accepting such change, but actually transitioning its business model to become more solar friendly. The company’s majority stake in REC Solar leaves no doubt about the company’s renewable ambitions. Not only does REC Solar’s business model come in direct conflict with that of Duke Energy’s, but it also represents an existential threat to the company’s centralized business model. Instead of combating such REC Solar, Duke Energy has gone the infinitely wiser route of acquiring it. By controlling REC Solar’s commercial solar operations, Duke Energy will have a foothold into the promising ditsributed solar sector . Because the vast majority of Duke Energy’s business is based upon centralized fossil fuel generation, the acquisition of a distributed solar company seems counterproductive at best. That is, for every distributed solar customer that Duke Energy signs up, that is one less customer for its main centralized business. While this is a no-win situation for Duke Energy, the company is looking at the long-term energy landscape, where distributed generation may very likely replace centralized generation. Without staking a foothold in the distributed solar sector now, Duke Energy may become obsolete later on. At the relatively small cost of $225M, Duke Energy is setting itself up for future success in an immensely promising market. While $225M is a sizable sum of money for the solar sector, it is merely pocket change for the $60B valuated Duke Energy. Incredible Synergy Duke Energy’s acquisition of REC Solar should amount to some incredibly synergistic effects, especially in financial and political matters. Despite all the talk about distributed solar’s coming dominance, this form of electricity generation currently only amounts to below 1% of total electricity generation, which unfortunately results in a lack of perceived credibility and influence. This is of course where Duke Energy can fill the void, and in return, Duke Energy gets REC Solar’s talent and years of solar industry experience. The distributed solar industry has traditionally suffered from high capital costs , largely due to solar PV’s relatively novel technology. While solar PV has been around for 40+ years, the technology has not seen statistically significant adoption until the last decade or so. Because finance companies have had so little to work on in terms of accessing solar PV’s stability/reliance, such high capital costs are not at all surprising. REC Solar’s capital costs have been no exception in this regard, which makes its Duke Energy partnership perfect for this situation. Duke Energy Renewables has billions on its balance sheet, which should drastically lower REC Solar’s capital costs. Instead of trying to find outside funding for its commercial projects, REC Energy could now go directly to Duke Energy. A lowered cost of capital means that REC Energy would be able to increase its profit margins, expand its commercial operations, or both. This, of course, also benefits Duke Energy. What makes Duke Energy’s acquisition of REC Solar particularly intriguing is if/how Duke Energy will be able to leverage its financial clout to influence politics. For instance, the company’s renewable arm has the majority of its solar assets in North Carolina, which unfortunately does not allow for solar leases/PPAs. While traditional distributed solar companies have nowhere near the political clout to significantly alter North Carolina’s state policies/laws, Duke Energy has more than enough influence to do so(especially considering the fact that the company is based out of North Carolina). If Duke Energy chose to support the legalization of leases/PPAs in the state, REC Solar would benefit tremendously, which would in turn benefit Duke Energy. With such a powerful utility heavyweight entering the distributed solar game, it will be interesting to see how Duke Energy deals with policies negatively impacting solar leasing/PPA. On one hand, these policies help Duke Energy’s core business of centralized fossil fuel generation, but on the other hand, they would severely limit its distributed REC Solar business. Given Duke Energy’s seemingly forward looking nature, it is likely that the company will aid in trying to eliminate such policies, at least in its home state of North Carolina. Risks and Obstacles As was previously stated, REC Energy’s business comes in directly conflict with Duke Energy’s main business of centralized generation. If distributed solar does end up dominating the electricity generation scene, this will prove to be an ingenious acquisition. If such a scenario does not play out though, REC Solar would likely just be taking revenue from Duke Energy’s main business, resulting in a zero-sum game. This could even turn out to be negative-sum game considering all the time and effort that would likely be put into REC Solar. In addition, REC Solar’s business primarily deals with the distributed commercial sector, which has struggled to grow over the past few years. Duke Energy may have a harder time than anticipated in growing REC Solar’s commercial business due to the numerous problems plaguing the commercial solar sector(i.e. lack of efficiency, standardization, etc). While such problems are possible to overcome, they will nevertheless represent daunting obstacles for Duke Energy’s REC Solar acquisition. Conclusion Duke Energy is one of the largest energy companies in the world, having over 7 million customers in North America alone. Despite making its fortune on fossil fuels, the company is smart enough to realize that centralized fossil fuel dominance will not last forever. The company’s transition into renewables, and more importantly, distributed solar, will prove to be key for the company’s future success. With a valuataion of $60B and a P/E ratio of 19 , the company still has upside due to its increasing involvement in the immensely promising solar market. Disclosure: The author is long SCTY. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.