Tag Archives: investing

Valuation Dashboard: Utilities- Update

Summary 3 key factors are reported across industries in Utilities. They give a valuation status of industries relative to their history. They give a reference for picking stocks in each industry. This is part of a monthly series of articles giving a valuation dashboard in sectors and industries. The idea is to follow up on a certain number of fundamental factors for every sector, to compare them to historical averages. This article covers Utilities. The choice of the fundamental ratios used in this study has been justified here and here . You can find in this article numbers that may be useful in a top-down approach. There is no analysis of individual stocks. You can refine your research reading articles by industry experts here . A link to a list of stocks to consider is provided in the conclusion. Methodology Three industry factors calculated by portfolio123 are extracted from the database: Price/Earnings (P/E), Price to sales (P/S), Return on Equity (ROE). They are compared with their own historical averages “Avg”. The difference is measured in percentage for valuation ratios and in absolute for ROE, and named “D-xxx” if xxx is the factor’s name. For example, D-P/E = (AvgP/E – P/E)/AvgP/E. It can be interpreted as a percentage in under-pricing relative to a historical baseline: the higher, the better. It points to over-pricing when negative. ROE is already a percentage. That’s why we take the simple difference: D-ROE = ROE – AvgROE. The industry factors are proprietary data from the platform. The calculation aims at eliminating extreme values and limiting the influence of the largest companies. These factors are not representative of capital-weighted indices. They are useful as reference values for picking stocks in an industry, not for ETF investors. The price-to-cash-flow ratio used in my dashboards for other sectors has been eliminated here, because discontinuities and outliers make it often irrelevant in Utilities. Industry valuation table on 11/4/2015 The next table reports the 3 industry factors. For each factor, the next “Avg” column gives its average between January 1999 and October 2015, taken as an arbitrary reference of fair valuation. The next “D-xxx” column is the difference as explained above. So there are 3 columns for each ratio. P/E Avg D- P/E P/S Avg D- P/S ROE Avg D-ROE Electric Utilities 18.06 15.94 -13.30% 1.74 1.22 -42.62% 9.24 10.43 -1.19 Gas Utilities 21.3 17.24 -23.55% 1.4 0.97 -44.33% 10.5 11.49 -0.99 Multi-Utilities 19.44 16.59 -17.18% 1.64 0.95 -72.63% 9.59 9.48 0.11 Water Utilities 22.66 23.68 4.31% 5.06 3.94 -28.43% 3.01 7.96 -4.95 Ind.Power Prod. & Energy Traders* 44.08 34.9 -26.30% 2.59 4.16 37.74% -3.42 -5.15 1.73 * Averages since 2005 Valuation The following charts give an idea of the current status of industries relative to their historical average. In all cases, the higher the better. Price/Earnings: Price/Sales: Quality (ROE) Relative Momentum The next chart compares the price action of the SPDR Select Sector ETF ( XLU ) with SPY (chart from freestockcharts.com). (click to enlarge) Conclusion XLU has underperformed SPY by about 4% in the last 3 months. On this period, the 5 best performing S&P 500 Utilities stocks are NiSource Inc. (NYSE: NI ), Pepco Holdings Inc. (NYSE: POM ), PPL Corp (NYSE: PPL ), SCANA Corp (NYSE: SCG ), TECO Energy Inc.(NYSE: TE ). NI hit an all-time high in November. Valuation factors have slightly improved since last month for Electric and Gas Utilities, but these industries stay in the weakest positions with all metrics in negative territory. Independent Power Producers and Energy Traders are above their baseline in quality, but valuation factors are mixed. There may be quality stocks at a reasonable price in any industry. To check them out, you can compare individual fundamental factors to the industry factors provided in the table. As an example, a list of stocks in Utilities beating their industry factors is provided on this page . If you want to stay informed of my updates on this topic and other articles, click the “Follow” tab at the top of this article.

Why These Funds Are Happy When Energy Players Are Sad

If you believe that breaking a record is always a good thing, you’re actually wrong. For instance, the price of crude has been on a record-breaking mode since mid-June last year. However, every record has been for the worse as oil prices could set only new lows. Last Wednesday, U.S. crude prices fell below the psychologically-resistant level of $40 for the first time since late August. The downward pressure intensified when last Friday the Organization of the Petroleum Exporting Countries (OPEC) – the international cartel of oil producers – decided not to cut oil production especially in the already over-supplied crude market. Obviously, this has spelled doom for investors who chose to hold on to their energy funds or stocks. For example Zacks Mutual Fund Rank #5 (Strong Sell) energy funds such as BlackRock Energy & Resources Inv A (MUTF: SSGRX ) and RS Global Natural Resources A (MUTF: RSNRX ) have nosedived 30.1% and 41.4% over the last one year, respectively. The agony is such that none of the energy funds under our coverage has a positive year-to-date or 1-year return. The least loss has come from Fidelity Select Energy Portfolio (MUTF: FSENX ), which is down 13.4% year to date and 17.7% over the last one year. However, we don’t want to sound too pessimistic as you gear up for your year-end celebrations. Losses in the energy sector can actually translate into gains for some other sectors. While auto and transportation are the direct beneficiaries, sectors such as retail, consumer discretionary and consumer staples also gain from low oil prices. So, investing in and profiting from favourably ranked mutual funds that focus on these sectors will make December merrier. The Recent Headwinds for Oil Last Wednesday, the U.S. government data revealed a 10th straight weekly increase in U.S. oil supplies. The federal government’s Energy Information Administration (EIA) report revealed that crude inventories increased by 1.2 million barrels for the week ending Nov. 27, 2015. U.S. crude inventories are now at the highest level witnessed around this time of the year for the first time in 80 years. As a result, U.S. crude oil prices settled below $40 for the first time since August, while Brent crude oil plummeted to an almost 7-year low. A curb in production from the OPEC was most wanted to lift the already-low crude price. However before the meeting, OPEC decided to raise the ceiling of daily production from the prior level of 30 million barrels to 31.5 million barrels. The cartel was considering an output cut during the 7-hour meeting last Friday, but found that lowering of output only by the OPEC members will not be enough to lift oil prices. Crude plunged to settle below the $40 per barrel mark post meeting. WTI crude slipped nearly 3% to $39.97 per barrel. Oil Price to Move Further South? The slide in the price of crude has been quite dramatic given that it was hovering above $100 around a year ago. Several factors suggest that the end of the slump is nowhere near to be seen. Oversupply has distressed the industry for a long time now. This is due to two factors – the U.S. shale boom and OPEC’s decision to keep output unchanged despite the slump in prices. Lower consumption across the world is the reason for lower demand. Europe and Japan continue to struggle even as they make vigorous efforts to boost their flagging economies. But the biggest worry on this front is China. The world’s second largest economy may never again experience the pace of growth it witnessed until recently, leading to falling demand even in the long term. Funds to Enjoy Crude’s Loss Auto & Transportation: Fuel cost accounts for a considerable portion of expenses of the trucking companies. The U.S. trucking industry is currently poised to benefit in two ways. Lower oil prices will reduce their operating expenditure, thereby boosting the bottom line. On the other hand, capacity constraint in the form of driver shortage and new government regulations will drive top-line growth. A decline in oil prices is probably even more crucial for airlines. Lower jet fuel prices have been a boon for the airline industry given the inversely proportional relation between crude prices and the value of aviation stocks. Fidelity Select Automotive Portfolio (MUTF: FSAVX ) invests a majority of its assets in companies that manufacture, market and sell automobiles, trucks, specialty vehicles, parts, tires, and related services. The non-diversified fund invests in both US and non-US companies, primarily in common stocks. This Fidelity fund currently carries a Zacks Mutual Fund Rank #2 (Buy). Year-to-date, FSAVX has gained just 1.8%, but it is showing an increasing trend since late September. The 3- and 5-year annualized returns are 18.9% and 8.2%, respectively. Consumer Funds: Another class of stocks gaining from this phenomenon is consumer staples. The Federal Reserve has expressed satisfaction over an improvement in the labor market situation. However, its inflation target of 2% still seems some way off. This is again a result of lower oil prices. Lower inflation has led to a considerable fall in input costs. This again would cushion the bottom line. Fidelity Select Consumer Discretionary Portfolio (MUTF: FSCPX ) invests a lion’s share of its assets in securities of companies mostly involved in the consumer discretionary sector. FSCPX primarily invests in common stocks of companies all over the globe. Factors including financial strength and economic condition are considered before investing in a company. FSCPX currently carries a Zacks Mutual Fund Rank #1 (Strong Buy). FSCPX has gained 7.7% and 9.3% over year-to-date and 1-year period, respectively. The 3- and 5-year annualized returns are 18.6% and 14.7%, respectively. Putnam Global Consumer A (MUTF: PGCOX ) invests in mid-to-large companies that are involved in the manufacture, sale or distribution of consumer staples and consumer discretionary products and services. PGCOX uses the “blend” strategy to invest in common stocks of companies. PGCOX currently carries a Zacks Mutual Fund Rank #1. PGCOX has gained respectively 6.3% and 5.3% in the year-to-date and 1-year period. The 3- and 5-year annualized returns are 13.9% and 11%, respectively. Original Post

What You Don’t Own

By Andy Hyer What a year it’s been for Energy. Its rout can be seen in the chart of XLE shown below: Price return only, not inclusive of dividends. Updated through 12/8/15 However, it is not just 2015 where Energy has been weak. Consider the relative strength chart below of the Energy Sector SPDR ETF (NYSEARCA: XLE ) versus the S&P 500 (SPX): (click to enlarge) Price return only, not inclusive of dividends. Updated through 12/8/15 As shown above, Energy has been weaker than the S&P 500 for the majority of the time since June 2008 – although the worst of the relative performance has clearly come in the last year or so. When a sector is weak, a relative strength strategy seeks to underweight that sector. After all, what you don’t own is every bit as important as what you do own . Consider the chart below of the Energy exposure in the Dorsey Wright Technical Leaders Index (used for the PowerShares DWA Momentum Portfolio ETF (NYSEARCA: PDP )): As of 10/1/15 This index is constructed by taking a universe of approximately 1,000 U.S. mid- and large-cap stocks and ranking them by their PnF relative strength characteristics. The top 100 stocks make it into this index. Each quarter, the index is reconstituted to kick out any stocks that have lost sufficient momentum and to replace them with stronger names. One of the unique characteristics of this index is there are no sector constraints. If a sector is weak, it may have little or no exposure in the index. This quarter is now the 4th quarter in a row where PDP has had zero Energy exposure. Much is made of how momentum strategies seek to own the “hottest” stocks. Perhaps, more should be made of momentum strategies seeking to avoid the biggest losers. In the end, that matters every bit as much. The relative strength strategy is NOT a guarantee. There may be times where all investments and strategies are unfavorable and depreciate in value. See www.powershares.com for a prospectus on PDP.