Tag Archives: investing

Cemig Is Worth Considering At These Levels

Summary The financial results for Q3 2015 are out, and it looks like Cemig will end the year with net income and EBITDA in line with 2014. The ttm EPS is $0.68 USD, which implies a ttm P/E ratio of 2.88 at the closing price of $1.96. The stock has been punished by investors, the main causes of concern being the continued depreciation of the brazilian real and the likelyhood of losing the concessions for 3 plants. Companhia Energética de Minas Gerais (NYSE: CIG ), also known as Cemig, is a state-controlled Brazilian power company, headquartered in Belo Horizonte, the capital state of Minas Gerais. The company operates in all three segments of the electricity market (generation, transmission and distribution), but it also has stakes in other businesses, like telecom and natural gas distribution. Year to date, Cemig’s ADRs have lost a bit over 60% in value. Some of this was of course warranted by the depreciation of the real. Aided by a strong US dollar, we’ve seen the BRL/USD pair drop 30% so far this year. CIG data by YCharts Concessions During this summer, the Superior Court of Justice in Brazil has ruled against Cemig on its hydroelectric power plants Jaguara and São Simão, whose concession contracts expired in 2013 and this year respectively. Cemig has appealed the decision at the Federal Supreme Court, which means Cemig will still be operating them until the dispute is settled. The Federal Supreme Court has recently suggested that Cemig and the Ministry of Mines and Energy come to an agreement and not try to drag this out in court: “In view of the complexity and importance of the debate raised by this case, and the need to encourage voluntary settlement within the Judiciary: Parties to state whether they have interest in holding of a conciliation hearing.” Because these assets are still under dispute, they won’t be available for bidding at the auction scheduled for November 25. However, Cemig has stated its interest to participate in this auction, where they could bid for concessions for new power plants: there will be a total of 29 operating concessions auctioned, with a total capacity surpassing 6000MW. Miranda, another power plant that has investors worried has an operation concession to Cemig which expires at the end of 2016. At the end of Q3, Cemig had an operating generating capacity of 7,759MW, and another 2,457MW under construction. This puts the worst case scenario of losing all three concessions at a 32% loss in current operating capacity, or a 24% loss of total capacity, if we include capacity under construction. Financial results In any case, it looks like Cemig will keep operating these plants until the dispute is settled, so let’s look at their current financial metrics. Note that Cemig reports earnings in Brazilian reals, which is the currency in these graphs. (click to enlarge) Although net revenue has been steady in recent years, EBITDA and net income have not, so I’ve included a moving average for the trailing four quarters, to make the results smoother. (click to enlarge) (click to enlarge) A quick glance at these graphs suggests that Cemig will probably end 2015 with about as much in earnings as it did in 2014. Actually, the net income for the first 9 months of 2015 is 2,134 mil $R, which is 5.6% higher than the 2,019 mil $R in the first 9 months of 2014. The ttm EPS is R$2.58, which, at the current exchange rate, is $0.68 USD. This implies a ttm P/E ratio of 2.88 at the closing price of $1.96. Dividend In May of this year, the company has published a notice to shareholders regarding its dividend policy: the payment of dividends specified in the by-laws, of 50% of the Net profit for the business year, would not be compatible with the present financial situation of the Company, due mainly to the low level of water in the electricity reservoirs, which could lead to a significant reduction in the energy available for sale by the Company’s hydroelectric plants in 2015, affecting the Company’s revenues and cash position. You’ll notice management mentions the current drought as one of the culprits for its financial insecurity. I have dismissed this initially, but it turns out Brazil is facing the worst drought in the last 80 years . As the drought reduces hydropower availability, distributors must supply electricity purchased at much higher rates on the spot market or generated by more expensive power plants. This is significant, as more than half of Cemig’s operational costs during the last quarter was the cost of electricity purchased for resale. I believe Cemig’s bottom line could benefit immensely from a change in Brazil’s weather. If management decides to hold on to the policy of paying only 25% of earnings as dividends, and the exchange rate remains steady, we might see another $0.15 dividend being declared next year, a 7.6% yield at current prices. I consider this a good value, even after factoring in a worst-case scenario of a complete loss of all three power plants discussed above, which is why I’ve recently added to my position in Cemig.

Small-Cap Value ETFs: Key To Win In Post Lift-Off Era?

The U.S. economy will probably experience a shift in era by this year end, if economic conditions remain unchanged. With the Fed now overtly referring to December as the timeline for raising interest rates after a decade and putting global growth issues aside unlike its prior meetings, investors may now have to rush to alter their portfolio and make it in line with the looming Fed rate hike. Though much of the impending shock has been priced in at the current level, gyrations are still expected in the stock market post lift-off. Though the Fed affirmed that the rate hike trail would be slower, investors know that this will be the beginning of the end of the rock-bottom rates era. Naturally, they will be hunting for the right equity investing strategy. Notably, years of cheap money fueled the U.S. growth stocks as evident from the 106% jump by iShares Russell 2000 Growth ETF (NYSEARCA: IWO ) in the last 10 years and its 75% surge in the last five years (as of November 18, 2015). But, value stocks underperformed, as indicated by iShares Russell 2000 Value ETF ‘s (NYSEARCA: IWN ) 45.3% gain in the last 10 years and about 44% rise in the last five years. Growth investing means buying those companies, which exhibit fast-growing earnings, indulge heavily in capital spending and are forecast to earn at an above-industry rate. This group of companies normally pays lesser dividend or no dividend and capital appreciation is the main motive. Quite understandably, this high-growth proposition requires more capital and lower interest rates to be executed. On the other hand, value strategy includes stocks with strong fundamentals – earnings, dividends, book value and cash flow – compared with their current market prices. These stocks trade below their intrinsic value and are undervalued by the market. This pool of companies normally pays sounder dividends too. Thus, it is historically seen that value stocks perform better than growth stocks in a rising rate environment, mainly due to the difference in their modes of operation. Then, as per analysts , the right time to tap value is when the market reaches its zenith and retreats on overvaluation. For fear of a horrendous sell-off, investors seek safety, which value stocks normally offer unlike growth stocks. Since the market is likely to be wobbly, value stocks can predominate. Moreover, in the absence of cheap money inflows, investors are likely to look for cheaper stocks with great potential rather than the pricey and glamorous growth stocks. All in all, there is a high chance that value stocks will rule the U.S. markets over the next few months. The global investment management firm Pimco also expects this trend to be established in the coming future. Analysts noted that: “During the periods when the Fed was raising interest rates, the value stocks had an average return of 1.2% a month, or 14.4% a year, versus the growth index’s 0.7% a month, or 8.3% a year.” Now with the U.S. economy taking root, job reports showing strength and inflation staying decent, small-cap value stocks should be the best bets ahead. Small-cap stocks are the best measure of domestic economic recovery as these are less exposed to foreign lands. Moreover, terror attacks in several parts of the globe and international growth issues can also be stripped out via U.S. small-cap valued ETFs. Below we highlight three such ETFs, which could be in focus in the coming days. S&P Small Cap 600 Value Index Fund (NYSEARCA: IJS ) The fund looks to provide exposure to U.S. small-cap value stocks by tracking the S&P SmallCap 600 Value Index. The $3.14-billion fund holds a total of 468 small-cap stocks. The fund appears diversified as no stock accounts for more than 0.92% of the basket. Among the different sectors, Financials, Industrials and IT occupy the top three positions with 24.36%, 19.75% and 16.59% of weight, respectively. The fund charges a premium of 25 basis points annually. This Zacks Rank #3 (Hold) ETF was up 1.25% in the last one month (as of November 18, 2015). WisdomTree SmallCap Earnings Fund (NYSEARCA: EES ) For a slightly different approach to the small-cap market, investors may want to consider EES, as it follows earnings-generating companies in the small-cap universe of the U.S. stock market. Furthermore, the fund looks to weight by earnings, giving bigger weights to firms that earn more, irrespective of market capitalization. This results in a portfolio of roughly 950 securities. No stock accounts for more than 1.1% of the fund. Financials (27.34%), Industrials (18.48%), Consumer Discretionary (15.68%) and IT (12.24%) are the top four sectors of the fund. This $382-million fund charges 38 bps in fees. The fund has a Zacks ETF Rank #3 (Hold) while it was almost flat in the last one month. Vanguard Small-Cap Value ETF (NYSEARCA: VBR ) This fund provides exposure to the value segment of the U.S. small-cap market by tracking the CRSP US Small Cap Value Index. It holds a large basket of 843 stocks, which is widely spread across individual securities as none of these has more than 0.6% of assets. In terms of sector exposure, Financials dominates the portfolio at 30%, followed by Industrials (20.5%) and Consumer Services (12.2%). The ETF is quite popular with AUM of more than $5.68 billion. It is one of the low-cost choices in the small-cap space, charging 9 bps in fees per year from investors. The fund added about 0.6% in the last one month. VBR has a Zacks ETF Rank #3. Original post .

Dollar May Hit Parity With Euro: Bet On These ETFs

With the prospect of interest rate hike back on the table, dollar is likely to hit parity with Euro anytime soon. This is especially true as the Fed hinted at a modest December lift-off if the U.S. economy remains on track. The tight monetary policy will reduce the supply of money flowing into the economy, leading to strength in the greenback. As a result, dollar resumed its clear upward journey against the basket of other currencies, rising over 6% in the past one month. And guess what? The latest string of economic data is clearly supporting this view with October payrolls logging the biggest gain this year, unemployment falling to a new seven-year low of 5% and average hourly wages showing the sharpest growth since July 2009. Consumer confidence is also up, with the University of Michigan consumer sentiment index rising to 93.1 in early November from 90 in October, after dropping to 87.2 in September from 91.9 in August. While the manufacturing sector expanded at its slowest pace in more than two years in October on a weak global economy and strong dollar, rise in new orders spread some hopes in the sector. After two straight months of decline, inflation also rose a modest 0.2% last month – an important factor in the Fed rate hike decision. All these suggest that the U.S. economy is showing an impressive rebound after a lazy summer and looks strong enough for a December rate increase. On the other hand, euro has been slumping against the dollar and tumbled 6% in the past one month. The European Central Bank (ECB) has been looking for more stimulus measures as soon as December to spur growth in the economy and fight against deflation. Currently, the ECB is pumping €60 billion ($68 billion) per month into the sagging economy courtesy of its QE program that began in March and will run through September 2016. These diverging policies will continue to drive the U.S. dollar upward, thereby resulting in depreciation of the euro against the greenback. Further, the latest terrorist attack in the capital of France parked geopolitical tensions and raised concerns over the slowly recovering economy, pushing the euro down. Meanwhile, the tragedy has shaken investors’ confidence around the world, encouraging them to take a flight to safety in the U.S. dollar. If the current trend persists, the EUR/USD parity may be seen as euro will continue to fall while dollar will continue to rise. Investors seeking to tap this opportune moment could bet on the following ETFs. PowerShares DB US Dollar Bullish Fund (NYSEARCA: UUP ) UUP is the prime beneficiary of the rising dollar as it offers exposure against a basket of six world currencies – euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. This is done by tracking the Deutsche Bank Long US Dollar Index Futures Index Excess Return plus the interest income from the fund’s holdings of U.S. Treasury securities. In terms of holdings, UUP allocates nearly 57.6% in euro while 13.6% collectively in Japanese yen and 11.9% in British pound. The fund has so far managed an asset base of over $1 billion while sees an average daily volume of around 2.2 million shares. It charges 80 bps in total fees and expenses, and gained 4.9% over the past one month. The fund has a Zacks ETF Rank of 3 or ‘Hold’ rating with a Medium risk outlook. WisdomTree Bloomberg U.S. Dollar Bullish Fund (NYSEARCA: USDU ) This product offers exposure to the U.S. dollar against a basket of 10 developed and emerging market currencies by tracking the Bloomberg Dollar Total Return Index. The fund allocates higher to the Euro at 30.3%, closely followed by Japanese yen (18.5%), Canadian dollars (11.8%) and Mexican peso (10.1%). Other currencies like British pound, Australian dollar, Swiss franc, South Korean won, Chinese yuan and Brazilian real receive single-digit allocation in the fund’s basket. This ETF has amassed $248.4 million in its asset base and charges 50% in expense ratio. Volume is light as it exchanges nearly 195,000 shares a day on average. The fund added 3.5% over the past four weeks. ProShares Short Euro (NYSEARCA: EUFX ) This fund seeks to deliver the inverse return of the daily performance of euro versus the U.S. dollar. It is often overlooked by investors as it has just $17.9 million in its asset base while volume is light at around 16,000 shares per day. It charges 95 bps in annual fees and added 6.3% over the past month. Original Post