Tag Archives: investing

Income Hunters Left Salivating At Dominion Resources’ Future Growth Prospects

Summary On-track, long-term growth-oriented renewable energy generation projects will fuel revenues and earnings growth. Company’s timely and on-budget execution of ongoing projects will create secure and sustainable cash flow base. Strong growth opportunities will bode well for the stock valuation. Sale growth expectation of 5.13% for D is well above the industry median sales growth expectation. Utility stocks have remained a popular investment option for investors, as utilities usually have large exposure to regulated business operations. Additionally, the predictable cash flow base allows utilities to make healthy cash returns, and makes them attractive dividend stocks. Dominion Resources (NYSE: D ) is one of the largest utilities in the U.S., which serves a broader U.S. area with its wider portfolio of energy generation assets. Owing to the company’s on-track, growth-centric projects like regular expansion of renewable energy generation asset portfolio through acquisitions and construction projects, and steady growth of midstream business will drive its future financial growth. Moreover, D’s on time and on budget Cove Point Facility and Atlantic Coast Pipeline (ACP) project will support its long-term growth. The company’s dividend growth has also remained strong, as it generates strong and sustainable cash flows. Additionally, D’s strong balance sheet position supports its dividend growth plan and future growth ventures. The company’s policy of allocating a decent portion of its cash flows for funding growth plans has been helping it apply for constant rate hikes, thereby adding well towards D’s financial numbers. As per the company’s long-term growth plans, average annual capital spending over the next five years will be $3.2 billion , which signals at a bright outlook for the stock. Of all its targeted growth areas, renewables remain most attractive. Over the years, the company has developed itself as a leader in renewables space, with its wider portfolio of renewable energy generation portfolio. To keep its solar energy generation portfolio strong, D is still making solar energy generation deals; the company acquired an 80MW solar energy generation portfolio in VA, which is expected to start construction by the end of 2015, whereas operation of the project will begin in fall 2016. Therefore, this acquisition will help D achieve its target of having established total 425MW of solar energy generation capacity set-up by the end of 2015. Additionally, plans to build a 400MW solar plant in Virginia has been announced, which is expected to begin operations in the next five years. Given the fact that the company will be able to recover the cost of these ongoing hefty solar energy generation-based projects by rate case increases, I think D will witness a boost in its future sales and earnings growth. Moreover, the construction of the company’s Cove Point facility is on track. By the end of 3Q’15, the Cove Point Terminal facility was 47% complete, and remains on time and on budget. After its completion by the end of 2017, the Cove Point Terminal will expand the company’s operations; D will be able to export 5.75 million metric tons of LNG, at its full capacity, every year after its completion in 2017. Furthermore, the company’s another important project, ACP, which is expected to come in operation in 2018, is well on track thus far. Additionally, there are 13 ongoing projects worth $1.2 billion, which will move more than 2 billion cubic feet per day for customers by the end of 2018. Given their ability to expand D’s operations; I believe these 13 ongoing projects combined with Cove Point and ACP projects will aid the company in meeting its long-term earnings growth target and will augur well to improve its profit margins. Furthermore, the company’s investments for the expansion of its Midstream business are on track to supplement its long-term earnings growth plan. Lately, D’s Midstream business acquired a 25.9% stake in the Iroquois pipeline, in order to issue 8.6 million limited partnership units to New Jersey Resources and National Grid. Also, the company’s board has authorized $50 million investment over a period of the next 12 months to buy LP units of Dominion Midstream Partners in open markets. I believe D’s sizeable investments in Midstream business will unlock a substantial return on the entering service. D’s operations have been providing a stable source of cash flows to help it fund its hefty dividend payment plan. The company offers a healthy yield of 3.85% . Given the strong strategic growth prospects of its long-term energy generation projects, well-headed for witnessing earnings and profit margin growth, I believe D’s dividend growth outlook is pretty impressive. Additionally, the expected continuation in the company’s balance sheet strength, shown in the graph below, supports my view about its ability to meet dividend commitments in the longer run without any stress of deterioration in the balance sheet position. And I think D’s management’s targeted dividend growth rate of 8%, from 2015 to 2020, looks highly achievable. Source: 4-traders.com Summation D’s on-track, long-term growth-oriented renewable energy generation projects are rightly headed to fueling its revenues and earnings growth, and to boost its free cash flows in the years ahead. The company’s timely and on-budget execution of ongoing projects like ACP and Cove Point indicate that its efforts to create a secure and sustainable cash flow base will positively affect its stock price by enabling it to meet its dividend commitments in the longer run. Also, strong growth opportunities will bode well for the stock valuation. D is currently trading at a higher forward PE ratio of 17.46x , in contrast to its peers’ forward P/Es (American Electric Power Inc. (NYSE: AEP ) has a forward P/E of 15.04x and Exelon (NYSE: EXC ) has a forward P/E of 10.83x ). D’s higher forward P/E is justified I think, because it has a higher future growth potential than its peers. D’s earnings in the future are expected to grow at an average annual rate of 6.23% . Moreover, the sale growth expectation of 5.13% for D is also well above the industry median sales growth expectation of 1.04% . Therefore, I think D stays a good investment prospect for income hunting investors.

5 Market-Beating Broad International ETFs Of 2015

This has been a pretty rough year for the global stock market. Several China-driven offhand events causing global market rout in mid-year, growth worries in global superpowers like the Eurozone, Japan and Canada, Greek debt deal drama, the vicious cycle of oil price declines, commodity market upheaval, and finally the Fed rate hike in almost a decade kept the global markets edgy throughout the year. The impact of these events was harsh on the bourses. SPDR S&P 500 ETF (NYSEARCA: SPY ) has lost about 1% so far this year (as of December 22, 2015), Vanguard FTSE Europe ETF (NYSEARCA: VGK ) has shed about 5.1% during the same timeframe, iShares MSCI Emerging Markets (NYSEARCA: EEM ) has retreated as much as 16.9%, iShares MSCI All Country Asia ex Japan (NASDAQ: AAXJ ) has plummeted 11.5% and all-world ETF iShares MSCI ACWI (NASDAQ: ACWI ) has gone down over 4.7%. The price performance of these region-based ETFs was enough to tag 2015 as a down year for global stocks, on an average. In fact, as China devalued its currency yuan in a historic move in mid-August, there was a bloodbath in global equities. The U.S. and Asian stocks experienced a three -year low monthly performance in August. Europe saw the most horrible month since the 2011 debt debacle. Commodities crumbled to multi-year lows on demand issues and hit hard all commodity-rich nations. Still, the global market recouped some of its losses as the ECB extended its QE policy, BoJ made pro-growth changes in its accommodative policies and the Fed enacted a lift-off citing steady U.S. economic growth in the latter part of the year. These may give enough reasons to investors to look for international ETF survivors this year. For them, we have highlighted five ETFs that have gained at least 6% so far this year (as of December 22, 2015) defying the broad-based gloom. WisdomTree Intl Hedged Quality Div Growth ETF (NYSEARCA: IHDG ) While the Fed had been preparing for policy tightening the entire year and finally hiked rates, other developed economies of the world and a few emerging economies are going the opposite direction. Due to growth issues, global superpowers like Europe, Japan and Australia are presently pursuing easy money policies. As a result, stocks of these developed nations got an extra boost. Also, a currency-hedged approach was essential to set off the effect of a surging greenback. IHDG serves both aspects. Moreover, IHDG takes care of investors’ income too as the fund selects dividend-paying companies with growth features in the developed world ex U.S. and Canada. This Zacks ETF Rank #3 (Hold) ETF was up over 10% so far in 2015. SPDR SP International Consumer Staples Sector ETF (NYSEARCA: IPS ) This international consumer staples ETF has double-digit exposure in U.K., Japan and Switzerland. Other nations like France, Netherlands, Belgium also get weight in the range of 6-8%. Nestle ( OTCPK:NSRGY ) (13.58%) takes the top spot in the fund followed by Anheuser-Busch InBev (NYSE: BUD ) (5.9%) and British American Tobacco (NYSEMKT: BTI ) (5.85%). Ongoing easy policy measures and non-cyclical nature of the consumer staples sector helped the fund to endure global market shocks. IPS is up 8.8% so far this year (as of December 22, 2015). iShares MSCI EAFE Small-Cap ETF (NYSEARCA: SCZ ) This ETF targets the small cap segment of the developed market space. Small caps are considered the measure of domestic economy. These are less ruffled by global economic concerns and most importantly the surging U.S. dollar. Since cheap money available in Japan, Germany and U.K. resulted in improving consumer sentiment in those regions, this small-cap ETF emerged as a winner. SCZ is up over 7.7%. SPDR S&P International Health Care Sector ETF (NYSEARCA: IRY ) Health care is another recession-proof sector and thus remained less ruffled in the down year of 2015. The fund puts double-digit weight in Switzerland (25.44%), Japan (17.15%) and U.K. (14.30%) and Germany (10.23%). The fund is heavy on pharmaceuticals sector (74.27%) followed by Health Care Equipment & Supplies (9.45%). IRY has advanced over 7% so far this year (as of December 22, 2015). iShares MSCI EAFE Minimum Volatility (NYSEARCA: EFAV ) This fund targets the low volatility stocks of the developed equity markets, excluding the U.S. and Canada. In terms of country profile, Japan and United Kingdom take the top two spots at 28.5% and 24.2%, respectively, followed by Switzerland (10.43%). It is slightly tilted toward financials at 21.7%, closely followed by consumer staples (16.8%), health care (15.9%), industrials (11.1%) and consumer discretionary (10.6%). The fund is up 6.5% so far this year (as of December 22, 2015). The fund has a Zacks ETF Rank #3 (Hold) with a low risk outlook. Original Post

Quarterly Tactical Strategy Using Fidelity Fixed-Income Mutual Funds

Summary This strategy consists of ranking four fixed-income mutual funds based on 3-month returns, and then selecting the top-ranked fund at the end of each quarter. The top-ranked fund must pass a 3-month simple moving average filter in order to be purchased. Otherwise, the money goes into a money market asset. Backtested to 1986, the CAGR is 11.1%, the MaxDD is 5.5%, the worst year is +0.73%, and the return-to-risk ratio [CAGR/MaxDD] is 2.03. The monthly win rate is 79%. The strategy appears to be very robust in terms of relative momentum look-back period length and moving average duration. The strategy can be traded between the end of quarter [EOQ] and the next four trade days without any significant detrimental effect on performance or risk. I have recently been developing monthly tactical strategies that employ mutual funds instead of ETFs (see here and here ). There are a number of benefits in trading mutual funds instead of ETFs. First, mutual funds of a certain class tend to have much less volatility than ETFs in the same class. This permits the use of shorter duration look-back periods and moving averages in a tactical strategy without as much whipsaw. Second, there is the benefit of trading at one closing price, thus avoiding slippage losses (bid/ask losses) associated with trading ETFs. Third, mutual funds tend to have higher liquidity than ETFs. This avoids sudden price changes caused by lack of asset liquidity. Fourth, there are no fees/loads at all if Vanguard funds are traded in a Vanguard account, or Fidelity funds in a Fidelity account. And fifth, using mutual funds with long histories enables backtesting of almost 30 years, back to the mid-1980s. This is in contrast to ETFs that have very short histories, especially bond ETFs, that limit the timeframe of backtests. One of the negatives against mutual funds is the higher management expenses, but in some cases mutual funds actually have similar expenses as ETFs (e.g. Vanguard Admiral funds versus corresponding ETFs). And then there are the practical issues of trading mutual funds. These practical issues are challenging, but can be solved. Until recently, mutual funds did not permit monthly trading; severe short-term redemption penalties were charged or frequent-trading restrictions were imposed. But these penalties/restrictions have been lifted so that monthly trading is now permissible on some platforms, most notably Vanguard and Fidelity. This is the case as long as trades are made at least 30 calendar days apart. So a strict trading schedule must be followed that I have discussed previously (see here ). However, most of the trading issues are eliminated if a quarterly strategy is implemented. In past articles, I have presented monthly strategies using Vanguard mutual funds. But in this article, I am proposing a fixed-income asset allocation strategy that uses Fidelity mutual funds and trades on a quarterly basis. So the trading issues are greatly reduced. Four asset classes are used in the strategy: High yield corporate bonds: Fidelity Capital and Income Fund (MUTF: FAGIX ) High yield municipal bonds: Fidelity California Municipal Income Fund (MUTF: FCTFX ) Mortgaged-backed bonds: Fidelity Mortgage Securities Fund (MUTF: FMSFX ) Money market: CASHX (in Portfolio Visualizer). The overall objectives of this moderate growth/low risk strategy are: To attain a 10% compounded annualized growth rate [CAGR]; To achieve a maximum drawdown [MaxDD] of -5.0% (based on monthly returns); To produce a return-to-risk MAR [CAGR/MaxDD] of 2 or greater; To have positive returns every year in backtesting; and To attain a monthly win rate over 75%. The correlations between these funds are shown below, taken from Portfolio Visualizer [PV]. It can be seen that the funds have low correlation to each other, as desired. (click to enlarge) The strategy consists of ranking the 3-month total returns of each fund, and selecting the top-ranked fund at the end-of-the-quarter [EOQ]. The top-ranked fund must then pass a 3-month simple moving average [SMA] screen in order to be purchased. Otherwise, the money goes to the money market fund. It’s a pretty simple set of rules. What seems to make this strategy work is the relatively high return of FAGIX and its low correlation to FCTFX and FMSFX that have moderate return. CASHX is included as an absolute momentum filter to control risk. Backtest Results Using Portfolio Visualizer The strategy was first backtested using the PV software. All of the funds have histories that date back to at least 1985, so the backtesting went from Jan 1986 to Nov 2015. By using only Fidelity funds and trading on a quarterly basis, there are no trading costs, loads or restrictions if a Fidelity platform is used. The backtest results are shown below. Trading is done at the EOQ. (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) The tactical strategy is compared with a buy & hold strategy in which the four funds are held continuously and rebalanced annually. The thing that jumps out at you is the large annual returns in 2003 and 2009; the rest of the time the tactical strategy has more modest returns as expected. The overall results show that the tactical strategy has a much higher CAGR (11.1% to 6.5%) and much lower MaxDD (-5.5% to -10.0%) than the buy & hold strategy. The worst year for the tactical strategy is a positive 0.7% (in 2008), while the buy and hold strategy has a worst year of negative 8.6%. It can be seen that the tactical strategy matches the buy & hold strategy over much of the timeframe, but in times of market stress, the tactical strategy performs much better than buy & hold. Backtest Results Using the Haynes’ Backtester The next step in backtesting was to assess the effects of look-back period length, SMA length, number of assets held, and trade day on the performance and risk of the tactical strategy. These calculations were performed using Herbert Haynes’ backtester. We first made sure that the Haynes’ backtester matched PV’s results for EOQ calculations. The comparative results are: PV’s Summary Results, CAGR = 11.1%, MaxDD = 5.5% (monthly basis); Haynes’ Summary Results, CAGR = 11.2%, MaxDD = 5.5% (monthly basis). Overall, we see very good agreement. All of the quarterly selections were exactly the same. The very small difference between CAGRs is probably caused by small variations in the adjusted price data between the two calculations. We proceeded to look at the effects of SMA duration. Rather than looking at calendar months, the SMA duration was switched to trade days. Twenty-one trade days corresponds to one calendar month, forty-two trade days corresponds to two calendar months, etc. The SMA duration was varied from 20 trade days to 70 trade days, and it was seen that SMA length had little impact on the results. CAGR varied from 11.2% to 11.3%, and MaxDD remained fixed at 5.5% Next, we studied the effect of the relative momentum lookback period. The lookback period was varied between 20 trade days and 84 trade days while the SMA screen was varied between 20 trade days and 50 trade days. As long as the SMA duration was 40 trade days or greater, the lookback period could be 2-months (42 trade days), 3-months (63 trade days) or 4-months (84 trade days) without any significant difference in CAGR or MaxDD. A final matrix was run in which the number of assets (1 to 3) and trade day (EOQ-20 to EOQ+20) were independently varied. For this matrix, the lookback period was fixed at 3 calendar months and the SMA screen duration was maintained at 63 days. The tabulated values and heatmaps are shown below for CAGR, MaxDD, and MAR. The tabulated values have the trade day on the top line (EOQ-20, EOQ-18, etc.) and the number of assets (1 to 3) in the first column. CAGR Results: Range = 6.1% [red] to 11.2 [blue] (click to enlarge) (click to enlarge) MaxDD Results: Range = -16.7% [red] to -4.0% [blue] (click to enlarge) (click to enlarge) MAR Results: Range = 0.5 [red] to 2.0 [blue] (click to enlarge) (click to enlarge) As expected, increasing the number of assets results in lower performance and lower risk. In terms of the return-to-risk metric [MAR], the optimal number of assets is one. One asset also produces the highest CAGR. The optimal trade days for one asset is seen to be EOQ to EOQ+4. It should be noted that this is not the equivalent of making a selection using EOQ data and waiting up to four days before making the trade. The way the program assessed the effect of trade day was to determine the fund selection and make the trade on the same day. Conclusions from Backtesting The tactical strategy is very robust in terms of the lookback duration length and SMA duration length. Significant variation of these parameters does not seem to greatly affect the backtest results. The selection of one asset each quarter (versus two or three assets) produces the best overall performance and risk adjusted returns. When only one fund is selected each quarter, the optimal trade day is EOQ to EOQ+4. Other trade days produce inferior results based on backtesting. 30-years of backtest results (1986 – 2015) show a CAGR of 11.1%, a MaxDD of 5.5%, and a MAR of 2.03. There are no losing years, and the monthly win rate is 79%. Some Practical Considerations These funds distribute their dividends on a monthly basis at the end of the month [EOM]. The dividend distribution does not make its way into the daily data until a number of days later. Thus, the selection that PV makes at EOQ may be in error until the correct data is available. The problem is that we don’t know exactly when the latest distribution information has been added to the adjusted data in PV’s selections. So a quarterly fund selection made by PV at the latest EOQ might change a few days later. Thus, each investor cannot just blindly use PV’s selection at the EOQ. Rather, each investor needs to look at the 3-month returns of the funds based on data that include the latest dividend distribution. There are two ways to determine the correct 3-month returns. One way is to take adjusted data from Yahoo and correct it for the latest dividend distribution. A second way is to use stockcharts.com (after the dividend distribution has been added to their data). Either way will work. There is an added benefit that can be achieved from this strategy that I want to discuss. It turns out that high yield mutual funds have a unique characteristic that I do not totally understand: when distributions occur on ex-div day, the price of the fund doesn’t drop by the amount of the distribution. For most funds, ETFs and stocks, whenever a dividend distribution occurs on ex-div day, the price of the asset drops by that amount. However, this does not occur for high yield mutual funds. I’m not exactly sure why the actual price does not drop on ex-div day, but it doesn’t. We can use this aspect of high yield mutual funds to our benefit. Thus, it will be better to always move from money market to FAGIX or FCTFX on EOQ-1 rather than on EOQ or later. In this way, you will receive the dividend without any accompanying loss in price. It’s like getting a free dividend payment. Likewise, if you are moving from FAGIX or FCTFX to money market, it will always be better to sell on EOQ or later (after the distribution is given). Because FMSFX has a relatively small distribution, the same rules apply to it too, i.e. selling FMSFX and buying FAGIX or FCTFX should be done on EOQ-1, and selling FAGIX or FCTFX and buying FMSFX should be done on EOQ or later. An Alternate Basket of Funds for Schwab Accounts For those investors who have Schwab accounts, an alternative basket of funds is recommended. Although there will be small costs for trading some of these funds, the costs will not be excessive because only one fund is traded each quarter. The basket of funds I recommend for use on the Schwab platform are the following: FAGIX, the Nuveen High Yield Municipal Fund (MUTF: NHMAX ), the Vanguard GNMA Fund (MUTF: VFIIX ), and a Schwab money market fund [CASHX in PV]. These funds can only be backtested from 2000 – 2015, and the results using PV are shown below, compared to the Fidelity version over the same years. Schwab Version (2000 – 2015) (click to enlarge) Fidelity Version (2000 – 2015) (click to enlarge) It can be seen that the Schwab version gives superior results in terms of CAGR (13.2% to 12.0%) while maintaining the same MaxDD (-5.5%). This is mainly caused by the superior returns of NHMAX compared to FCTFX.