Tag Archives: industry

Robotics Fund Faceoff: ROBO Vs. TDPNX

Summary Automation and robotics are poised to breakout from factories and drive growth in a multitude of industries. Many pure play companies in the field are small or listed overseas, making a fund approach attractive. With lower costs and a more diversified portfolio, ROBO has the edge in this nascent investment arena. Advances in technology as well as economic and social factors are making automation and robotics more feasible for a growing number of companies in a wide assortment of industries. Self-driving cars, drone package deliveries, 3D printing and robot-assisted surgery were once the purview of science fiction. Today, these scenarios are becoming a reality. While industrial automation has been commonplace for decades in developed economies, reduced costs are now making it a viable option in the developing world as well. Once used to replace dangerous, dirty and labor-intensive jobs, automation and robots are being integrated into more aspects of an increasing number of jobs due to advances in tracking sensors, machine controls, nanotechnology and programming. In addition to industrial applications, automation and robotics are also used to deliver needed social services and help people live independent lives. Social, economic and technological trends are pushing advances in the development and integration of automation and robotics. While still in its infancy, the automation and robotics sector offers long-term investment potential. One way to invest in this burgeoning sector is the Robo-Stox Global Robotics And Automation Index ETF (NASDAQ: ROBO ). Another option is the 3D Printing, Robotics and Technology Fund Inv which has two classes of shares. The fund’s institutional class shares trade under the ticker symbol TDPIX while the investor class utilizes the ticker symbol TDPNX . Robo-Stox Global Robotics and Automation Exchange Traded Fund ROBO is a Science and Technology Fund that seeks to replicate the price and yield performance, before fees and expenses, of the ROBO-STOX Global Robotics and Automation Index. The ETF normally invests at least 80 percent of assets in securities contained within the index, which is formulated to measure the performance of companies primarily engaged in or supporting robotics and automation. Securities within the index have a market capitalization in excess of $200 million and a 1-year trailing daily trading average volume of $200,000. The index is divided into four basic categories. This include industrial robots, service robots for government and corporate use, personal- and private-use robotics and firms engaged in supporting robotics and automation. The weight of each category may vary. Managers determine which stocks are deemed bellwether due to their ability to indicate or lead trends for the market segment. The fund maintains a 40 percent weighting in these bellwether securities and 60 percent in non-bellwether shares. The non-diversified ETF utilizes a passive investment philosophy. Of the $100 million in assets in the fund, 38 percent are invested in and 62 percent is invested in foreign issues. In addition to the U.S. and Japan, the ETF has exposure to Developed Europe and Developed Asia. The fund is heavily weighted toward industrial, information technology and healthcare sectors. With an average market cap of $2.7 billion, the fund has 9.9 percent exposure to giant cap companies as well as an 11 percent and 45 percent exposure to large and mid-cap stocks. The fund also holds 17.41 percent and 16.56 percent allocations in small- and micro-cap shares respectively. As of October 15, ROBO had a P/E ratio of 18.05 and a price-to-book of 1.74. The largest holding in ROBO has only 2 percent of assets, making for a well-diversified portfolio. Many holdings in the fund are familiar names that may not make one think of automation, such as Deere (NYSE: DE ), but thanks to the fund’s small allocation in each holding, there’s a lot of pure play exposure to companies such as Mobileye (NYSE: MBLY ), a company working on driverless vehicles. 3D Printing, Robotics and Technology Fund TDPNX seeks long-term capital appreciation by investing at least 80 percent of assets in securities issued by domestic and foreign companies in developed as well as emerging markets engaged in 3D printing, robotics and automation regardless of their market cap. Fund advisers use a top down approach to determine potential candidates for inclusion in the portfolio. A bottom up approach is then utilized to select the stocks for actual investment within the portfolio focusing on factors like company fundamentals and growth prospects within the industry. TDPNX changed its mandate and name in July 2015 due to losses in 3D printing shares, which it was its exclusive focus until then. The fund’s new name and portfolio reflect its branching out into robotics as the 3D printing stocks dipped into a bear market. The new focus is designed to capitalize on the growth in both of these fast growing segments, while avoiding concentration in the narrow slice of the economy. The fund holds 47 percent of assets in domestic stocks and 44 percent in foreign shares. In addition to the U.S., TDPNX has significant exposure to Developed Europe and Greater Asia, primarily Japan. The portfolio has a 16 percent weighting in giant cap stocks as well as 17, 21, 22 and 24 percent weightings in large-, medium-, small- and micro-cap stocks respectively. The fund’s average market cap is $4 billion. The portfolio has a P/E ratio of 25.3 and a price-to-book of 2.21. Fund Comparison ROBO has outperformed TDPNX since the inception of the latter in April 2014. TDPIX has declined 23 percent over its life, while ROBO is down approximately 11 percent over the same period. Since changing its mandate in July, TDPNX has outperformed ROBO, losing 6.5 percent versus ROBO’s 11 percent decline-but it’s much too short a period to draw a conclusion from. ROBO is a fund that delivers on its name. The fund’s extensive holdings include companies involved in robotics, from traditional companies within the industry to those new in emerging sectors, such as unmanned vehicles and medical fields. The top holding in ROBO has barely more than 2 percent of the fund’s assets, and the top 10 have less than 22 percent of total assets. The top 10 in TDPNX accounted for 47 percent of assets as of June 30. TDPNX is a broad fund but makes more concentrated investments. The 3D Printing Fund has only 46 holdings compared to the 82 separate investments within the ROBO portfolio. TDPNX also counts large caps such as Hewlett-Packard (NYSE: HPQ ) and General Electric (NYSE: GE ) among its top ten, diluting some of the pure play exposure (the fund reports it has 46 percent pure play exposure ), but this explains why the fund outperformed ROBO over the past three volatile months. (click to enlarge) TDPNX is the more expensive fund. The Institutional Class has a net expense ratio of 1.25 percent while the investor class’ net expense ratio is 1.50 percent. The fund’s adviser has contractually agreed to waive management fees and/or reimburse expenses through April 15, 2016. Shares are subject to a fee of 2 percent when redeemed within 60 days of purchase. ROBO charges 0.95 percent and is subject to brokerage trading fees like most other ETFs. Conclusion The long-term prospects for automation are better than ever as automated software and hardware are ready to move off the factory floor and into the home, office and highways. Investors who take an aggressive approach can achieve broad exposure with the aforementioned funds. The mandate shift by TDPNX is a good one and makes for a more conservative fund, but this niche segment of the economy will be highly volatile even with some exposure to a Dow component such as GE. ROBO is therefore the more attractive fund for now, in addition to being cheaper and offering broader exposure, but the ETF suffers from low volume. The risk isn’t so much in getting in, but in getting out in the event investors rush to the exits. We saw ETFs suffer flash crashes in August and ROBO was among them. Investors can make ROBO a small niche holding in a diversified portfolio, but be prepared for rollercoaster rides during periods of high market volatility.

Should You Be Weary Of Inverse Commodity ETFs?

Last week, we touched on potential markets that might finally be breaking out of the slow moving commodities sell off that’s been going on for around a year. In that post, we do what we do every month, looking at the difference in performance between the commodity futures market (Dec. contract) to its commodity ETF counterpart. This time around, we got to thinking it might be interesting to look at the flipside of that…. How inverse ETFs have performed against those same futures markets. Here’s what we found: (click to enlarge) At first thought, you might think that the ETFs are outperforming the futures counterparts until you realize that those inverse ETFs should all be positive due to the fact that the futures contract they supposedly track are negative. So, technically, if you shorted the December 2015 futures market at the beginning of the year you would have made 22.57%, while the 3x inverse Crude ETN DWTI (NYSEARCA: DWTI ) is down -13.34% YTD. The same can be said about natural gas, but to a lesser extent; the inverse ETF is up 5%, while the futures contract is down -21.02% (Disclaimer: Past performance is not necessarily indicative of future results). Part of the reason for the major disparity in returns is because most of these ETFs follow the front month contracts while the ETF prices are affected by the role in contract each month. Here’s etf.com’s description of the inverse crude ETF DWTI . “Since DWTI tracks an excess return version of the S&P GSCI Crude Oil Index, returns will reflect both the changes in the price of WTI crude oil and any returns from rolling futures contracts.” Be careful though to go off of 10 month or even 12 month returns ( Ben Carlson on A Wealth of Common Sense has a great post on this ), because as an investor, if you would have picked the absolute perfect time to get out of the market (Aug. 24th) you would have been up 97.88%, while the futures contract would have been down -33.31% (you would be up that percentage if shorting). (Disclaimer: Past performance is not necessarily indicative of future results) Chart Courtesy: Barchart Our point: Unless you’re making a career out of trading these markets, trying to time when to enter and exit a commodity market is dangerous and can be costly. Case in point, the first sentence of the DWTI ETF… Like most geared inverse products, DWTI is designed to be used as a tactical trading tool, not as a buy-and-hold investment. But that doesn’t mean that you shouldn’t have access to strategies that allow you to reap the gains. If you haven’t guessed what’s coming next, we’re about to name drop Managed Futures. These strategies are built to seek return drivers off of rising and falling markets. This is how the industry did as a whole during crude’s collapse. (Disclaimer: Past performance is not necessarily indicative of future results) Source: Newedge Data through Jan. 12th, 2015 Our firm is dedicated to searching through the managed futures space in order to find the best strategies out there. Some managers will tell you where they think commodities are going; some will tell you they let the algorithms do the talking. In our experience, we like to know that they have a feel for the market but at the end of the day they leave the emotions out of the decision making. Ultimately, we, nor they, can tell you where commodities are going, but that’s the beauty of Managed Futures strategies; they don’t know, but it doesn’t matter if prices fall or rise, it’s more about capturing the trend as it continues to fall of rise. P.S. – To understand where Alternative Investment return drivers come from, download our whitepaper, ” The Truth and Lies in Alternative Investments. ”

UGI Corporation: Little Bit Of This, Little Bit Of That

Summary UGI Corporation has its hands in many pots, with businesses all around the world. Peeling back the onion reveals that management has maintained control of operations. With manageable debt, high profitability, and below average valuation multiples, investors could pick much worse in the utility sector. UGI Corporation (NYSE: UGI ) is a holding company that operates a variety of businesses involved in the transportation and distribution of energy products. The company has been on an acquisition spree, spending over $2B over the past five years acquiring a vast swath of business lines. Shareholders have rewarded the exuberant spending with outsized returns over the broader utility index. Are more returns set to come or has the company lost direction? What Does UGI Corporation Do? As mentioned, the company owns a substantial interest in a variety of businesses: General Partner of AmeriGas Partners (NYSE: APU ), prior research by me found here International liquid petroleum gas businesses Midstream & Marketing operations (energy services and electric generation businesses) An electric generation segment (ownership interests of approximately 250MW of power generation) A gas utility business (serving nearly a million customers in Pennsylvania and Maryland) Phew. Simple this company is not. The above five operating segments actually simplify a variety of businesses that really don’t deserve to be comingled (revenue from co-ownership of power plants and pipeline building are intertwined in the Midstream & Marketing segment as an example). The AmeriGas’ ownership interest constituted just under half of 2014 revenue and profit, so the importance of this interest to operating results cannot be understated. AmeriGas is a propane distributor, with operations across the vast majority of the United States. Through its distribution network, AmeriGas provides propane to customers who have no real alternative for heating and cooking in their homes and businesses. 2014 was a stellar year for propane due to a colder than average year that drove operating margins due to scarcity of supply – 12.7% operating margins compared to 5.8% operating margins in 2012. Investors should be careful and consider that 2014 should not be a base case scenario for AmeriGas and is rather unlikely to be repeated. 2015 has been shaping up to be an average year in regards to operating results. This weakness year/year is part of the reason why earnings per share are set to fall in fiscal 2015 compared to fiscal 2014 for UGI Corporation. I’d highly recommend reading my prior article on AmeriGas for a deeper understanding, but as an overview, there are quite a few headwinds facing AmeriGas going forward. UGI highlights the main risk in its form 10-K: “Retail propane industry volumes have been declining for several years and no or modest growth in total demand is foreseen in the next several years. Therefore, the Partnership’s ability to grow within the industry is dependent on its ability to acquire other retail distributors and to achieve internal growth, which includes expansion of the Propane Exchange program and the National Accounts program (through which the Partnership encourages multi-location propane users to enter into a supply agreement with it rather than with many suppliers), as well as the success of its sales and marketing programs designed to attract and retain customers.” Retail propane is AmeriGas’ core business and has been declining slowly. This is due to a variety of factors, such as the expansion of natural gas further into rural territories (on a BTU/price basis, propane cannot compete and that is unlikely to change) and shrinking demand from customers due to milder temperatures and customer energy conservation. AmeriGas’ management believes that a propane exchange program (i.e., swapping out bottles for your grill) might help plug the slow leak of lost customers, which I find a stretch. Neither does consolidating the industry more, which isn’t going to stem the demand problem. The UGI International segment is another large contributor to revenue. The division sells LPG products throughout portions of Europe such as France, Belgium, the Netherlands, Austria, etc. Like AmeriGas, these sales are primarily to residential and small businesses that use the gas for heating and cooking. Unfortunately, LPG prices are much higher in Europe than in the United States. This has made electricity, which is immensely more expensive on a BTU basis than LPGs in the United States, a viable competitor to European LPG for heating and cooking in Europe, especially in France. So just like in the United States, customer demand is on a slow, marginal decline barring cold weather spikes: “The LPG markets in France and the Benelux countries are mature, with modest declines in total demand due to competition with other fuels and other energy sources… due to the nuclear power plants, as well as the regulation of electricity prices by the French government, electricity prices in France are generally less expensive than LPG. As a result, electricity has increasingly become a more significant competitor to LPG in France than in other countries where we operate. In addition, government policies and incentives that favor alternative energy sources can result in customers migrating to energy sources other than LPG in both France and the Benelux countries.” As a bright spot, the gas utility segment bears promise. I’m a fan of gas utilities; the environmental risk is much lower but allowed rates of return are generally similar to electric utilities. Gas utilities also have a steady stream of capital expenditures (replacement of pipe) that are easy to pass along to consumers, on which gas utilities are entitled to their fair rate of return. Additionally, being located in Pennsylvania, UGI’s gas utility business is located near many heavy industries such as metal and paper manufacturers. This allows better diversification of revenue away from the residential consumer that some utilities do not benefit from. From a sourcing perspective, being next to Marcellus and Utica shale formations provides a readily available and cheap source of natural gas to sell along to consumers. Being able to provide cheap natural gas prices for local consumers means higher relative demand compared to other areas of the United States. Midstream & Marketing is a growing but convoluted segment. Bundled up in operational results here are the operating results from natural gas liquefaction, LPG storage, energy peaking business (selling stored gas to utilities during times of high demand), pipeline construction, and partial ownership in coal, natural gas, and solar power plants (250MW worth). This makes our jobs as investors incredibly difficult as it becomes tedious to analyze and project future earnings potential. In general, however, this segment is like the others in that it benefits from cold weather spikes in the Northeast, such as during 2014. Peaking businesses can be highly profitable but can also sit on stored LPGs for some time waiting for the opportunity to sell. Cash Flow With all these businesses, how has operational cash flow performed? You might be as surprised as I was to see a fairly healthy cash flow statement. Operational cash flow has been growing and capital expenditures light (which makes sense given the asset-light nature of the retail LPG businesses). Because of strong operational cash flow, UGI would have actually been generating net cash balances excluding its acquisitions, a rarity for companies operating in the utility industries that have been running through cash in a cheap debt, low interest rate environment. At 3x net debt/EBITDA, UGI has much less leverage than most utility peers. Conclusion Trading at a ttm EV/EBITDA of less than 8x, shares appear cheap from that valuation perspective. The variety of businesses here appear to still be well run despite the amalgamation of holdings that management has collected over the past few years. While the company still relies heavily on propane/butane sales, worldwide geographical diversity does limit some of the risk. While I don’t think operating income can expand much from here outside of boosts from cold weather events, management still has plenty of room to bump the dividend to reward shareholders without getting themselves into cash flow problems. If you’re interested in AmeriGas, this might be a safe way to get exposure to the company while getting some worldwide exposure and regulated utility business diversification as well.