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Best S&P 500 Utility Stocks According To Zweig Principles: Consider Ameren Corporation

Summary Ranking the top 20 S&P 500 utility stocks according to “All-Stars: Zweig” ranking system. Explanation and back-testing of the “All-Stars: Zweig” ranking system. Description and a buy recommendation for the first-ranked stock of the system: Ameren Corporation. S&P 500 utility stocks have underperformed on average the S&P 500 index over the last year. The average return of the 29 S&P 500 utility stocks that are included in the S&P 500 index (included dividends) in the last 52 weeks has been only 0.18% while the S&P 500 index has returned 2.96%. The table below shows all S&P 500 utility companies, ranked according to their 52-week return. (click to enlarge) On one previous article from September 15, 2014, I described the “All-Stars: Zweig” ranking system. However, in this article, I updated the backtesting of the system and ran it on another group of stocks. The “All-Stars: Zweig” ranking system is quite complex, and it is taking into account many factors like EPS Growth, Sales Growth, Market Performance and Insiders activity, as shown in the Portfolio123’s chart below. To find out how such a ranking formula would have performed during the last 17 years, I ran a back-test, which is available through the Portfolio123 ‘s screener. For the back-test, I took all the 6,555 stocks in the Portfolio123’s database. The back-test results are shown in the chart below. For the back-test, I divided the 6,555 companies into 20 groups according to their ranking. The chart clearly shows that the average annual return has a very significant positive correlation to the “All-Stars: Zweig” rank. The highest-ranked group with the ranking score of 95-100, which is shown in the light blue column in the chart, has given the best return – an average annual return of about 17%, while the average annual return of the S&P 500 index during the same period was about 3.2% (the red column at the left part of the chart). Also, the second, the third group, and the fourth group (scored: 90-95, 85-90, and 80-85) have yielded superior returns. This brings me to the conclusion that the ranking system is very useful. After running the “All-Stars: Zweig” ranking system on all S&P 500 utility stocks on November 24, I discovered the 20 best stocks, which are shown in the table below. In this article, I will focus on the first stock of the list: Ameren Corporation (NYSE: AEE ). (click to enlarge) Company Description St. Louis-based Ameren Corporation powers 2.4 million electric customers and more than 900,000 natural gas customers in a 64,000-square-mile area through its Ameren Missouri and Ameren Illinois rate-regulated utility subsidiaries. Ameren Illinois provides electric delivery and transmission service as well as natural gas delivery service while Ameren Missouri provides vertically integrated electric service, with generating capacity of over 10,200 megawatts, and natural gas delivery service. Ameren Transmission Company of Illinois develops regional electric transmission projects. In 2014, the company generated 61% of its electricity from coal, 16% from its Callaway nuclear plant, 2% from hydro sources, 1% from gas, and 20% from outside purchases. (click to enlarge) Source: Edison Electric Institute Financial Conference On November 06, Ameren Corporation reported strong third quarter 2015 financial results, which beat EPS expectations by a big margin of $0.11 (8.5%) and raised the low end of its core EPS guidance range to $2.55 to $2.65 from $2.45 to $2.65 previously. The company showed significant earnings per share surprise in three of its last four quarters, as shown in the table below. Data: Yahoo Finance Ameren announced net income attributable to common stockholders of $343 million, or $1.41 per diluted share, for the third quarter of 2015, compared with $293 million, or $1.20 per diluted share, for the third quarter of 2014. The year-over-year increase in third quarter 2015 earnings reflected higher retail electric sales volumes driven by warmer summer temperatures that were near normal. The comparison also was favorably affected by earnings on increased investments in electric transmission and delivery infrastructure made under formula ratemaking. In addition, earnings benefited from a seasonal rate redesign and the timing of revenues under formula ratemaking for Ameren Illinois’ electric delivery service as well as a lower effective income tax rate. In the report, Warner L. Baxter, chairman, president and chief executive officer of Ameren, said: We are on track to deliver strong earnings growth in 2015. This growth is driven by the execution of our strategy, which includes allocating capital to jurisdictions with modern, constructive regulatory frameworks and managing our costs in a disciplined manner for the benefit of all our stakeholders. In my view, Ameren is well positioned to achieve its target for strong long-term earnings growth. According to the company, it expects 7% to 10% compound annual EPS growth from 2013 through 2018. Ameren’s $8.9 billion, five-year regulated capital spending plan should help to drive long-term EPS growth. The formulaic Illinois rate structure is constructive, and with increased capital expenditures in the Illinois utility, rates will increase further. The company is waiting for rulings from the Illinois Commerce Commission about an electric delivery formula rate increase along with a natural gas delivery rate case that would raise rates. A decision in these cases is expected in December. The company is experiencing a more favorable regulatory climate at the state level than in the recent past, and, under a Federal Energy Regulatory Commission formula rate plan, is benefiting from returns on its transmission buildout program, which are usually higher than the returns earned on electricity generating and distribution assets. All in all, Ameren is a reliable, fully regulated utility that should provide investors with growing dividend income and long-term share price appreciation. Valuation Year to date, AEE’s stock is down 6.0% while the S&P 500 Index has increased 1.3%, and the NASDAQ Composite Index has gained 7.7%. Moreover, since the beginning of 2012, AEE has gained only 30.8%. In this period, the S&P 500 Index has increased 65.9%, and the Nasdaq Composite Index has risen 95.9%. AEE Daily Chart (click to enlarge) AEE Weekly Chart (click to enlarge) Charts: TradeStation Group, Inc. Ameren’s valuation is fairly good. The trailing P/E is at 16.25, and the forward P/E is at 15.93. The price to book value is at 1.53, and the Enterprise Value/EBITDA ratio is low at 8.32. On October 09, the company declared a quarterly cash dividend on its common stock of 42.5 cents per share, a 3.7% increase from the prior quarterly cash dividend of 41 cents per share, resulting in an annualized equivalent dividend rate of $1.70 per share. The previous annualized equivalent dividend rate was $1.64 per share. The forward annual dividend yield is pretty high at 3.92%, and the payout ratio at 61.2%. The annual rate of dividend growth over the past three years was at 1.2%, and over the past five years was at 0.9%. Ameren expects the dividend payout ratio to be between 55% and 70% of annual earnings. AEE Dividend data by YCharts Summary Ameren delivered strong third quarter 2015 financial results, which beat EPS expectations by a big margin and raised the low end of its core EPS guidance range to $2.55 to $2.65 from $2.45 to $2.65 previously. The company showed significant earnings per share surprise in three of its last four quarters. In my view, Ameren is well positioned to achieve its target for strong long-term earnings growth. According to the company, it expects 7% to 10% compound annual EPS growth from 2013 through 2018. Ameren’s $8.9 billion, five-year regulated capital spending plan should help to drive long-term EPS growth. The company recently raised its dividend by 3.7% to a new annual rate of $1.70 per share. The forward annual dividend yield is pretty high at 3.92%. All in all, Ameren is a reliable, fully regulated utility that should provide investors with growing dividend income and long-term share price appreciation, and its stock is an investment opportunity right now.

The NYSE Introduces New Rules That Will Disadvantage Small Investors

Summary NYSE is removing stop loss orders and good-till-canceled orders. The stop loss orders were significantly less useful for casual investors, but did provide some excellent opportunities for buying at discounts in illiquid stocks. The removal of good-till-canceled orders is a terrible change that reduces market liquidity by pushing out retail investors. There is a way to mitigate at least part of the impact by arranging conditional orders to trigger a “good-till-date” after the desired price is reached. Investors should use a great deal of caution when learning about using new order types to get around this problem. For investors who haven’t heard, the NYSE released an update to tell traders and investors that they would be eliminating two types of orders. Bloomberg focused on the “stop loss” orders , but the bigger change may be regarding the “good-till-canceled” order. Chris Demuth Jr. had an article out recently that covered some of the changes. I don’t read much of what comes out on Bloomberg , but I do browse through the works of Mr. Demuth Jr. and I appreciated his take on it. I’d like to share my take on the investing implications of each change. No Stop Loss Orders While I’m not a fan of removing tools from the hands of smaller investors, I can understand the exchange wanting to remove stop loss orders. They are used very infrequently, and may contribute to absurd price movements. I’ve often warned readers that I consider stop loss orders to be a terrible way to design a portfolio for failure in the mREIT space. Some of my most successful ideas have been designed specifically to take advantage of market failures, where a sell-off by one group of investors would trigger prices to drop low enough to trigger the stop loss orders. For instance, I predicted that the major news reporting sites would declare a huge miss on earnings for Orchid Island Capital (NYSE: ORC ), because analysts were forecasting “Core EPS” and the company only reported “GAAP EPS”. The extremely different calculations were going to result in the news stations reporting “a huge miss”, when there was no such miss. That was a great trade opportunity for investors. The stop loss orders were a great source of profits in the mREIT sector, because prices tend to drop significantly on the ex-dividend date. Even if the investor had their order designed to be adjusted for dividends, a little irrationality among other players could trigger the price to fall far enough to trigger those orders. When it comes to protecting traders from themselves, removing stop loss orders may actually be a good thing. On the other hand, the stop loss orders may also be used by traders that were shorting a security and wanted to exit their short position if something happened that suddenly drove prices higher. In this case, removing the stop loss does little to help investors, because any investor involved in shorting should be competent enough to know the risks and design their strategy accordingly. Implications Removing stop loss orders should result in less total volatility for traders and investors. Less volatility means lower risk premiums, and therefore, higher fair values, assuming investors maintained the same risk tolerance as before. This should be good for the market overall, but it remains a sad day for me as an investor, because finding an opportunity where stop loss orders would be triggered by an irrational price movement was a great strategy for finding good investments at bargain prices. No Good-Till-Canceled Orders Neither the update from NYSE nor the one from Bloomberg were thorough in defining which good-till-canceled orders would be removed. Were these orders indefinite, or were they orders that would be good for 30-60 days unless canceled? Personally, I find this change to be absolutely absurd. This hurts retail investors in a bad way, and it helps large investors. Allow me to explain how I can get around this rule. If I’m no longer allowed to place a “good-till-canceled” order, I’m still capable of placing a conditional command to enter a new limit order to buy shares if a certain condition, such as a price, is reached. The old order would’ve looked like this: “I want to buy shares of the Schwab U.S. REIT ETF (NYSEARCA: SCHH ) at any time in the next 60 days if those shares can be purchased for $35.00 or less.” The new order would look like this: ” If shares of the Schwab U.S. REIT ETF fall below $35.00, enter a new order for the day that I would like to buy shares if they can be purchased for $35.00 or less”. The only difference in these orders is the amount of work to create the order, and how frequently I might need to reset the orders. I had never bothered using the new order type, because the old order was so simple. For any investor who might be confused with the second order type, this is known as a “good-till-date” order, and there was no reference to the NYSE removing “good-till-date” orders. Since this new system would only enter the order after the price of $35.00 was seen, it would have a fairly solid opportunity for the order to execute. I Loved Good-Till-Canceled A substantial portion of my investment portfolio (excluding mutual funds in employer sponsored accounts) was purchased using this order type. I will admit that in one scenario, I forgot I had left one of these orders open and got a surprise e-mail indicating that my order had finally been triggered several weeks later. No problem, I keep enough cash on hand to cover such orders, and had 3 days to get the funds into my account to cover my purchase. My Favorite Good-Till-Canceled Order The date I got those “surprise” e-mails telling me I had some orders triggered was August 24th. Many investors may remember the date for the very short-term price fluctuation that triggered the NYSE to introduce these changes. On that day, I picked up shares of SCHH at $37.52 and shares of the Schwab U.S. Dividend Equity ETF (NYSEARCA: SCHD ) at $34.59. I’m up quite nicely on both positions. Implications Removing this order type should have the exact opposite impact of what the NYSE claims to want. Those good-till-canceled orders encouraged prices to be more efficient, because they allowed buyers who were aware of the risks to effectively leave someone standing in line to buy up any shares that people wanted to sell at a given price. It requires significantly more selling pressure for prices to fall rapidly when numerous investors have left an order that they would be happy to buy at a certain price. Without the good-till-canceled orders to buy up shares of those ETFs, the crash on August 24th could have been substantially worse. The bigger issue here, in my opinion, is that this creates an unfair competitive advantage for the larger players. Many retail investors may not have access to the tools to place the “new order”, but the large traders have had these tools for a long time and have vastly more complicated models to execute them. The gap between the tools available to normal investors and the tools available to large investors will increase, while the liquidity available in the market will decrease. A reduction in liquidity would increase the volatility of price swings and work in precisely the opposite manner of removing the “stop loss” orders. In this case, the increased volatility would encourage lower fair values, assuming the same risk profile for the investor. Clearing Orders One major reason that the good-till-canceled order was so important is the presence of hard selling or buying activity when the market opens. If investors all swap to using conditional orders to create an order to buy a security, then those orders won’t be on the NYSE’s books. Hard selling could result in the opening price being very low, triggering several new “good-till-date” orders to be introduced to buy the security, and the price immediately popping back up. Every investor who was trying to sell at the moment trading opened would have lost out, because many people desiring to buy at those prices would have been excluded from having their order active until the initial price had been recorded. I may need to look into those conditional orders and see if I can create one that simply checks the date, and if it is before a certain date enters a new “good-till-date” limit order. That would be nice for allowing me to have the order in place before the market opens each day. Unfortunately, each investor wanting this option would need to speak with their brokerage and determine if it is available for their account types, and if they would be permitted to use it. Even if their brokerage offers it, investors should be very careful to ensure they know precisely what they are doing before they experiment with new order types.

The Making Of A Value Investor: The 2015 Edition

Summary Looking back at the last 18 months this is what I learned, in the order I wish I learned it. I discuss my thoughts on: framework, where to search for stocks, how to analyze them, portfolio sizing, etc. I share some of my favorite books and Seeking Alpha authors. I started my quest to becoming an investor during the Summer of 2014. Since then, I have read countless books, chosen financial markets as my major, met multiple hedge fund managers, became a contributor for Seeking Alpha, and most importantly started investing. Along the way I have learned much. Looking back at the last 18 months, I asked myself, if I had to do it all again, where would I start? This is my best answer, my try at a roadmap, and a few lessons I learned along the way. If I learn as much in the next year, I will be satisfied. I hope this will be helpful to readers just starting out. I also hope it will help readers get to know me as a Contributor. I. A Value Investor’s Framework. Warren Buffett’s notoriety helped me get started. As I was facing the mountain of information available in books and online, it was extremely overwhelming to figure out where to start. So I picked Buffett. My rationale was straightforward: This guy obviously figured it out, so what are his tricks? What are his secrets? Quickly enough I was led to Graham’s book: The intelligent investor. You’ll meet very few people with an interest in the stock market who will admit to not having read the book. Everyone has an opinion on it too: some say it is the cornerstone of value investing. Others say it’s outdated, and that there is no such thing as net-net anymore. I read it. The real lessons were in between the lines. The magical secret that I thought would make me a zillionaire by the end of the month didn’t exist. My key takeaway is that being a successful investor is function of your state of mind more than the tools at your disposal. Source: Sheknows.com If you don’t understand value investing in 5 minutes, you never will. – Ben Graham Simple, but it is a concept which is at the core of value investing and my beliefs as an investor: Buy something for less than it’s worth. The difficulty resides, of course, in determining how much something is worth. For that you will need several tools, and you will need to think in a way most people don’t. As such, being a value investor doesn’t apply only to stocks, but to buying groceries, shopping for clothes, and how you choose to spend your time. The eternal question is: Am I getting more than I’m giving? You can’t do the same things others do and expect to outperform. Unconventionality shouldn’t be a goal in itself, but rather a way of thinking. – Howard Marks. This is an oversimplification of the framework within which I have chosen to analyze the markets and securities. Here are my favorite books for anyone who wants to embrace this mentality and view of the world. Howard Marks: The Most Important Thing Seth Klarman: Margin of Safety George Clason: The Richest Man In Babylon George Soros: The Soros Lectures II. Where To Look For Securities? Source: Featurepicks Understanding the framework is one thing, operating within it is when the fun starts. If we group together all securities listed on the NYSE, Nasdaq and TMX Group, there were a total of 9012 as of January 2015. It is unlikely that any of us will ever have time to sift through all of them to find a mispriced gem. As such, we must find places where there might be a structural or emotional reason which justifies a discrepancy between price and value. In a market there must be a buyer for every seller, and a seller for every buyer, and understanding what motivates your counterparty is key. Try to imagine what the person on the other side of the trade was thinking. – Leon Levy It is Seeking Alpha’s contributor Chris Demuth Jr. who first got me to think this way. He takes pride in ” looking for non-economic counterparties “. There are many places one can search to reduce the amount of securities you need to look at to find an opportunity: worst performing stocks on any given daily session, spinoffs, mergers, upcoming inclusions or recent exclusion of major indices, articles in Wall Street Journal or Barrons (If you are going to subscribe make sure you get a discount, and once the discount is up call them to cancel, they will give you another), people you talk to, and authors on Seeking Alpha. You want to be looking in places where any of these apply: Your counterparty is panicking, and you can provide the liquidity they need at the price you want. Your counterparty isn’t looking, maybe there is no or little Wall Street/Bay Street coverage? Your counterparty doesn’t have a choice, like an S&P 500 ETF (NYSEARCA: SPY ) having to sell all of their position in the 500th stock when it becomes the 501st largest stock. Or like dividend funds having to sell their position when a company cuts the dividend, or spins off a division. What gets us into trouble is not what we don’t know. It’s what we know for sure that just ain’t so. – Mark Twain Flip the question, what does your counterparty know, that just ain’t so? There are three books I would recommend you read to help you find the best people to buy and sell from. Joel Greenblatt: You Can Be A Stock Market Genius Leon Levy: The Mind Of Wall Street Ken Fisher: The Only Three Questions That Still Matter Immature poets imitate; mature poets steal. – T.S. Eliot Here on Seeking Alpha, we are lucky enough to have among us some great minds. Sift through different authors, find authors who have a style you like. Think for yourself, but feel free to steal ideas, trust me the stocks don’t care whether your hard work found the opportunity or someone else’s did. These are my 3 favorite authors, but based on your style, there are many others which can offer you what you need. In no particular order: Also, look up value funds in your town. Send them an email, have a chat, ask questions, build relationships. Motivate your friends into learning more about investing, you’ll be doing them a favor. Everyone you know with a common interest in investing might have a great idea for you. III. How To Analyze The Stocks You Find? Source: Crossfitinvasion Once you have found a security with a reason to justify its mispricing, you will want to figure out what is the company worth. As an investor you will come to look at stocks as companies, not as lottery tickets. In doing so you will have to analyze companies’ business models and industries. It might seem like a daunting task and you might not have access to professional industry reports (I don’t), but a few quick searches on Google will help you gain the insights you need. Warren Buffett says he looks for companies which have large moats around them, companies whose returns on invested capital remains above their cost of capital for a long period of time. You will also want to analyze the management and strategy of the companies. To help you understand great business models and great management, there are two books which I recommend: Michael Porter: Competitive Advantage Mckinsey: Value, The Four Cornerstones of Corporate Finance. You will gain many insights from reading biography type books of successful investors. Time Horizon is a framework for patience. The two are almost the same thing but the first helps with the second. Knowledge and time horizon team up so you can more easily be patient. – Frederick Kobrick I enjoyed these: Peter Lynch: Beating the Street Mark Stevens: King Icahn Frederick Kobrick: The Big Money Peter Cundill: There’s Always Something To Do Obviously you will need to have a working knowledge of corporate finance, accounting principles, and valuation models. I use comparable ratio analysis as a guide to how a company fares against the competition. I will question any discrepancies in multiples within an industry to understand why some companies command higher relative prices than others. There usually is a good reason. I will also perform a DCF valuation of stocks I analyze. My thoughts on such models are mixed, since the output is only function of the inputs. Bullsh*t in, Bullsh*t out. When I talked to Natcan’s previous CEO Pascal Duquette, he told me of a time when he had to value an oil rig which was privately owned by a fund he worked for during his career. He had all the information, from the number of workers, to the amount of planned production. After just two years, his previsions of earnings were off 25% because one input hadn’t been correctly modeled. On the other hand a business’s value is equal to the present value of the future cashflows the business will generate, so you can’t ignore the model. The way I proceed is by reverse engineering the DCF. Assuming constant margins, what revenue growth is required to justify today’s price? Is such growth attainable? If not, what kind of margin improvement will be necessary at a lower growth rate to justify today’s price? Once again, is it achievable? From there I’ll use my judgment, are the assumptions priced into the security underestimating its potential, or overestimating it? By how much? Are they being underestimated enough that even if my conservative estimate is off, the security is still mispriced? Thinking as an investor, means creating a distribution of potential outcomes in your mind. If X, Y or Z happens, what does it mean for the price of the security? How likely are X Y or Z? What is the weighted value of the security for these given outcomes? It is an approximate exercise, but it’s the best we have. It’s what Howard Marks would call “second level thinking”. IV. How Many Securities Should You Buy? Source: icollector Now we come to portfolio allocation. I have to say, I’m unimpressed by Markowitz’s portfolio theory, and most of modern finance’s theory of investing. They teach us how markets should be, not how they really are. The single reason ultimate diversification doesn’t work, is that in times of crisis, correlations go to one, and you lose as much money as everyone else. As for eliminating firm specific risk, the consequence is also eliminating firm specific return. Risk doesn’t lie in the volatility of returns, but comes from the operations of the companies in which you invest in, and the price you paid for those companies. So how many stocks should you buy? It depends. It depends on your goals, on your aversion to losing money. I have met with the money managers from different firms, here are a few who have different outlooks: Brian Pinchuk from Lorne Steinberg Wealth Management , this value firm believes in investing no more than 3% of the portfolio in an individual security. Patrick Theniere, from Barrage Capital who believes in concentrated portfolios with stocks taking up as much as 10-15% of the portfolio. Paul Beattie from BT Global Growth , who has a couple dozen positions long and short. All three are successful money managers and have good track records, so there is no one size fits all answer. On one hand, if you have a stock go up 50% when it is only 1% of your portfolio, it will only represent a .5% gain for your portfolio, on the other hand a 50% loss on a 10% position is a 5% loss for your portfolio. I believe Ken Fisher summed it up when he said: Don’t aim to beat your benchmark by more than you are comfortable lagging it. No matter how many stocks you choose to buy, give yourself the chance to initially be wrong on the price you pay to double down several times to reduce your price. I adhere to Chris Demuth’s outlook on portfolio sizing which you can read more about here . V. Measuring Your Performance. Source: Rowealth You will also choose how to measure your performance. Are you aiming for absolute performance, or to beat a benchmark? Even if your goal is absolute performance, you will be confronted to comparing yourself to the benchmark. Why? Because if after several years you are unable to do better than an appropriate benchmark, why not spare all the effort and just invest in an ETF? You have to admit, over a long period of time it seems like a decent idea. SPY data by YCharts On the other hand I smirk every time I read a fund manager says he is happy because this year he delivered a performance of -10% whereas the S&P 500 did -20%. Yes it seems tough to deliver absolute returns during bad years for the markets, and I don’t claim to be able to do so, time will tell. Ultimately I’m seeking to perform on an absolute basis, as should all individual investors who are investing with the goal of spending that money someday. The problem with trying to beat the market is that many money managers have become closet indexers during the years. The question for these people is no longer: Do I want to own Apple (NASDAQ: AAPL ) or not at these prices? The question becomes: Should I overweight or underweight Apple relative to its weighting in the index? For me, this just isn’t intelligent investing. VI. Don’t Be Afraid To Share Your Ideas. Source: Wordpress Once you start to analyze stocks and find ones you would like to own, why not share your ideas on Seeking Alpha? One thing we all have in common here, from contributors, to readers, is we want to find great stocks for our portfolio. Writing articles here will help you put your ideas on pen and paper, the editorial team will help you go further on parts of your analysis you might have overlooked, and confronting comments will help you think of your thesis in a different way. Like everyone you are going to have some dogs in your portfolio, and it will be easy for you to blame it on the market or on bad management or whatever, but having your bad picks publicly available on Seeking Alpha will force you to question where you went wrong. I for example, recommended buying Volkswagen earlier this year. Not so great looking back, and rather than just shrug it off, I’ve learned that I should be weary of companies with obscure corporate structures since it creates opportunities for management to employ devious practices. VII. Final Words. I look forward to everyone’s comments, please feel free to confront me on anything you disagree with, constructive criticism is always welcome. If you liked this article, please consider following me on Seeking Alpha. Also in this article I gave a list of my favorite books. The price of these books quickly adds up. My tip to saving money on books was buying a kindle reader. You can get their latest tablet for $50. Kindle books are usually a bit cheaper, but subscribing to Scribd was my favorite way of reading all these books cheaply. I have no business with them but the subscription costs $10 a month, and if you use this link you’ll get two months free (No I’m not getting compensated for this.)