Tag Archives: investment

4 Ways Alternatives Can Prepare Portfolios For The Future

Summary Many advisors and their clients are now in the process of reviewing last year’s performance and discussing how to best position their portfolios for what’s to come. I believe they should examine how alternative investments could be included in portfolios to potentially help achieve specific investment objectives. This piece lists four ways investors can use alternatives in seeking to meet common objectives. By Walter Davis Many advisors and their clients are now in the process of reviewing last year’s performance and discussing how to best position their portfolios for what’s to come. These reviews are taking place against the backdrop of a multi-year bull market in equities, low interest rates, low levels of market volatility, a strengthening dollar and declining oil prices. As advisors and clients look to navigate this landscape, I believe they should examine how alternative investments could be included in portfolios to potentially help achieve specific investment objectives. To help with this task, I have listed four ways investors can use alternatives in seeking to meet common objectives. Objective: Continue to participate in equity market upside, but with some downside protection. Investors have enjoyed a strong run in equities over the past six years, and most analysts I have read predict 2015 to be another positive year. That said, investors have also seen increased risks come into the market, such as Greece’s future in the eurozone. For investors looking to participate in a rising equity market, while also seeking to limit the downside if the market declines, equity long/short funds may be able to help. Equity long/short funds combine both long and short equity positions in a portfolio, while typically being net long to equities. In these types of funds, the long positions would be expected to capture gains in a rising equity market environment while the short positions would be expected to profit in a falling market environment. Because these funds are frequently net long, the direction of fund performance often tracks that of the overall market. Objective: Participate in market opportunities outside of stocks and bonds, such as in the commodity and currency markets. In 2014, the U.S. dollar appreciated over 10% against its counterparts, and the price of oil fell by almost 50%. Global macro funds invest across the global markets in equities, fixed income, currencies and commodities on a long and short basis. Such funds could have had the opportunity to profit from the rally in the U.S. dollar through long U.S. dollar positions, as well as from the decline in oil through short oil positions. Objective: Cushion portfolio during market swings . One theme I have seen repeatedly mentioned by market analysts is the return of market volatility to normal historic levels. Over the past six months, we have seen short periods of heightened market volatility, most recently during the first two trading weeks of 2015. For investors looking to cushion their portfolio during increased market swings, market neutral funds might be appealing options. Such funds seek to eliminate the impact of broad market movements by trading related stocks on a long and short basis, and seek to generate positive returns regardless of market environment. Objective: Generate attractive levels of income in the current low interest rate environment . With interest rates at historic lows, many investors, especially retirees, are seeking to earn an attractive level of current income off their investments. Two places that investors can explore are real estate income funds and bank loan funds. Real estate income funds invest in global real estate equity and fixed income securities and seek attractive current income. Bank loan funds seek to provide a high level of current income and capital appreciation by investing in senior loans made to corporations (usually rated below investment grade) by large banks and other financial institutions. Important Information Before investing, carefully read the prospectus and/or summary prospectus and carefully consider the investment objectives, risks, charges and expenses. For this and more complete information about the products, visit invesco.com/fundprospectus for a prospectus/summary prospectus. There is no guarantee the strategies discussed will meet their investment objectives. Investors should consider their risk tolerance and individual situation and carefully review all financial information before investing. Alternative products typically hold more non-traditional investments and employ more complex trading strategies, including hedging and leveraging through derivatives, short selling and opportunistic strategies that change with market conditions. Investors considering alternatives should be aware of their unique characteristics and additional risks from the strategies they use. Like all investments, performance will fluctuate. You can lose money. The dollar value of foreign investments will be affected by changes in the exchange rates between the dollar and the currencies in which those investments are traded. Commodities may subject an investor to greater volatility than traditional securities such as stocks and bonds and can fluctuate significantly based on weather, political, tax, and other regulatory and market developments. Investments in real estate related instruments may be affected by economic, legal, or environmental factors that affect property values, rents or occupancies of real estate. Real estate companies, including REITs or similar structures, tend to be small and mid-cap companies and their shares may be more volatile and less liquid. Most senior loans are made to corporations with below investment-grade credit ratings and are subject to significant credit, valuation and liquidity risk. The value of the collateral securing a loan may not be sufficient to cover the amount owed, may be found invalid or may be used to pay other outstanding obligations of the borrower under applicable law. There is also the risk that the collateral may be difficult to liquidate, or that a majority of the collateral may be illiquid. Short sales may cause an investor to repurchase a security at a higher price, causing a loss. As there is no limit on how much the price of the security can increase, exposure to potential loss is unlimited. The information provided is for educational purposes only and does not constitute a recommendation of the suitability of any investment strategy for a particular investor. Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state tax laws are complex and constantly changing. Investors should always consult their own legal or tax professional for information concerning their individual situation. The opinions expressed are those of the authors, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals. NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE All data provided by Invesco unless otherwise noted. Invesco Distributors, Inc. is the U.S. distributor for Invesco Ltd.’s retail products and collective trust funds. Invesco Advisers, Inc. and other affiliated investment advisers mentioned provide investment advisory services and do not sell securities. Invesco Unit Investment Trusts are distributed by the sponsor, Invesco Capital Markets, Inc., and broker-dealers including Invesco Distributors, Inc. PowerShares® is a registered trademark of Invesco PowerShares Capital Management LLC (Invesco PowerShares). Each entity is an indirect, wholly owned subsidiary of Invesco Ltd. ©2014 Invesco Ltd. All rights reserved. blog.invesco.us.com

Star Gas Partners: A Deeply Undervalued Beneficiary Of Low Oil Prices Offering 40% To 90% Upside

Summary Star Gas Partners is the largest distributor of home heating oil in the United States, serving residential and commercial customers in fourteen states throughout the Northeastern U.S. and Mid‐Atlantic. At the current valuation the Company is selling at an 18% cash flow yield based on our expectations for $68 million in distributable cash flow in 2015. When valuing SGU at close to a 30% discount to its peer EV/ EBITDA multiples the stock is worth over 90% more than the current share price. Star Gas Partners (NYSE: SGU ) is the largest distributor of home heating oil in the United States, serving residential and commercial customers in fourteen states throughout the Northeastern U.S. and Mid‐Atlantic. The Company has a market value of just $375 million, yet in 2014 generated $1.96 billion in revenues and $103 million in EBITDA. SGU’s revenues are highly recurring, with 97% of customers on automatic delivery schedules. The market for home heating oil is mature but extremely fragmented; Although, SGU has a market share that is likely under 5% it is still 200x larger than its average competitor. The heating oil industry also features attractive financial characteristics, with recurring cash flows and contractually determined gross profit per gallon. Star Gas’s gross profit is largely fixed at $1.00/gallon and the Company constantly hedges its exposure. Considering Star Gas has net debt of approx. $75 million (net debt is adjusted after making changes to working capital to reflect receivable collections) the market is drastically undervaluing the Company. At the current share price of $6.55 the Company is selling at an 18% cash flow yield based on our expectations for $68 million in distributable cash flow in 2015. Essentially, if one were to buy the Company outright at the current price they would net an 18% annual cash return before Capex (Capex is running at approx. $10 million per year). The question one might ask is how can such a high return investment be available in the current low return environment we are in? The answer lies in the following non-fundamental issues that have caused investors to bypass making an investment In SGU: SGU has an inefficient corporate structure- Star Gas was formed as an MLP, yet should ideally be structured as a corporation. Star Gas acts as a partnership, which owns Petro Holdings, which acts as the heating oil corporation. Although Petro Holdings is taxed at the corporate level, any cash moved out of the holdings and into the partnership for either dividends or share repurchases may also be taxable to unit holders as dividends. Therefore, shareholders may be obligated to pay a dividend tax without ever receiving a dividend if funds were used to repurchase shares. Although, the current structure is by no means efficient it is not material enough to justify the current discount of the Company’s shares. Low dividend yield- Although Star Gas generates over $60 million in distributable cash flow it pays out less than $20 million in dividends, which implies a 5% yield. MLP peers typically payout over 80% of their cash flow and at higher yields. Highly seasonal business leads earnings to appear volatile- Because Star Gas makes money in the winter season the Company generates all of its earnings during half the year and loses money during the other half. This presents an appearance of inconsistent earnings from quarter to quarter. Declining business due to competition- The main competition for heating oil distributors is customer conversion to natural gas, which is generally significantly cheaper than heating oil. However, for many heating oil users, the local utility has no gas main capable of reaching their homes. For others, however, once their oil burner requires replacement (estimated cost: $2,000‐$3,000) the economics can be compelling. Conversion costs average $10,000, so the incremental costs of converting can be $7,000 to $8,000. Yet, over the past five years, the loss to natural gas conversion has ranged from 1.5%‐2.0% and the Company’s overall net attrition stood at just 0.9% in 2014. All the above issues have existed now for some time, yet Star Gas continues to increase both profits and shareholder value. Since 2010 the Company has increased annual EBITDA by 44% and reduced shares outstanding by 23% from 75 million shares to 57.2 million shares. Thus, on a per share basis the Company has increased EBITDA from $1.02 to $1.79 or by 75% over the last 4 years. The market also fails to realize that Star Gas is a beneficiary of low oil prices. As heating oil prices have gone down Star Gas’s business has received a major tailwind. The company is now able to buy the same quantity of heating oil while using significantly less working capital therefore minimizing borrowing costs and working capital needs. Furthermore, as a result of lower heating bills the Company’s customers are now less likely to switch to natural gas as conversion economics have come down substantially. This tailwind was evident in their most recent Q1 2015 earnings as the company increased EBITDA by 25% to $45 million. Assuming YOY growth remains flat for the remainder of the year, Star Gas should be able to generate $70 million in cash flow and $60 million in Free Cash Flow for 2015. This should allow the company to either significantly increase its dividend or buyback program. To put things in perspective, Star Gas has a distribution coverage ratio of over 3x their current dividend. If their distribution coverage was similar to that of their MLP peers (1.1x to 1.2x) the company would have a current dividend yield of well over 10%. When we compare Star Gas to larger propane and fuel delivery MLPs the investment looks even more compelling. Company Mkt Cap (In millions) P/E Ratio EV/EBITDA P/CF Dvd Yld Average $ 3,163 20.3x 11.17x 9.87x 7.68% SUBURBAN PROPANE PARTNERS LP (NYSE: SPH ) $ 2,721 20.3x 11.1x 9.6x 7.8% FERRELLGAS PARTNERS-LP (NYSE: FGP ) $ 1,937 23.2x 11.8x 10.2x 8.6% AMERIGAS PARTNERS-LP (NYSE: APU ) $ 4,831 17.4x 10.7x 9.8x 6.7% STAR GAS PARTNERS L.P. $375 11.5x 4.8x 6.3x 5.35% As the larger comps clearly have more diversified stable businesses we do not believe Star Gas should trade at a similar multiple. However, we firmly believe the company should trade at a multiple between 6x to 8x EBITDA. Using that range, Star Gas shares would be worth anywhere from $9.15 to $12.50 per share. This implies potential upside of 40% on the low end to over 90% on the high end. Disclosure: The author is long SGU. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

UGAZ Capitulates On ‘The Bloodbath’ – It’s Time To Get Long

Summary UGAZ, as expected, capitulated into “The Bloodbath” that was inventory on another miss. UGAZ held $2.50 strong and I believe is a nice round number that energy desks will build positions around. BUY UGAZ or DCA into a lower cost basis if you’re already long – “The Turn” has happened. With the EIA Natural Gas Inventory report coming in at -115 BCF against expectations of -121 BCF and the subsequent drop in natural gas pricing, which is most popularly played using The United States Natural Gas ETF, LP (NYSEARCA: UNG ), I believe post- Blood Bath the bottom for natural gas is in. I’ll explain further. (click to enlarge) After outlining the longer term natural gas bull thesis (click “Blood Bath” above) I believe “The Turn” for natural gas pricing has happened. Now, what does that mean? I can’t possibly outline my positions in real time to readers outside of guiding that I own VelocityShares 3x Long Natural Gas ETN (NYSEARCA: UGAZ ) at $2.90 and will add to my position tomorrow in the early AM to average down my cost basis. Over the next 9 months I’ll be offloading and adding to my net natural gas exposure, inclusive of selling and buying UGAZ and inclusive of selling and buying hedges via UNG options, in an effort to maximize the longer term bullish trend. I’ve ridden trends using this strategy the last two years with great success both on the long and short side. (click to enlarge) So, I’ll outline my thoughts on immediate term, mid-term, and longer term trends with following recommendations – this will become a regular section of these weekly updates, make sure to # FOLLOW me and subscribe to real time alerts for the UGAZ ticker: Immediate Term (next 7 days): bullish, BUY. This is going to be against consensus as weather is expected to be in the mid-70’s for HOD’s for the middle part of the country with LOD’s coming in at just over 50 degrees. Normally, this would be bearish and it just might be during the next 7 days leading into inventory. IF UGAZ is hit – BUY (see Long Term bullet) as we are at what should be generational lows. I’m going against consensus in estimating that UGAZ is higher than its most recent close of $2.48 but 1) I just can’t imagine cooling demand not upticking in the middle part of the country (namely Texas) as this will be the first time in a long time that folks have felt anything resembling heat, I’m betting folks overreact in that it will “feel” hotter than it is and that cooling demand comes on strong and 2) I can’t imagine big energy desks not beginning to build longer term positions right here, that should provide some volume on any drops to pricing. Mid Term (next 30 days): Mixed to flat as of right now, BUY in the immediate term and wait on further buys. Guys, I had watch the inventory report post greater than 90 BCF reports 8 consecutive weeks in the middle of summer (including builds of 91BCF, 87BCF, 94BCF, 105BCF, 112BCF, 97BCF, 90BCF, 92BCF), the middle of what was supposed to be the bull thesis, before the market gave me some credit and ran natural gas pricing down. I was looking VERY foolish for about two months as the price of natural gas was denying all fundamentals. Eventually, everything has to be priced efficiently and thank goodness I had conviction in my short position. That said, I’m never willing to say that my thesis will play out exactly on time or exactly in lock step with developments. Wait on further buys in the mid-term once you get some position on the board at these lows. Long Term (longer than 30 days): bullish, BUY on dips as far as $2.00. I have no question natural gas is higher than its current close in 30 days. If you plan on buying for the long term and not trading around you should build positions on dips down to $2.00. No questions natural gas is at the lows. We’ll see over the next few weeks how many institutional holders have to be wrong (by selling or shorting natural gas) but just like always eventually they’ll come around. If you’re in this name for a once a month buy/sell the decision to buy is easy. Just do it. I understand I can post one update article per regular long article so if a major weather change develops or something else comes along that would change my immediate term opinion I’ll post an update article. Check back daily to make sure no updates have been posted. Remember, mid-term and longer-term reco’s aren’t effected by week to week developments. Also remember, the current bull thesis is as follows: Falling rig counts hurt overall production – that’s good for the supply side of the equation as production is slowed overall. Less oil E&P to come on lower CAPEX across the board for oil and natural gas E&Ps – that’s also good for the supply side of the equation (Source: Bloomberg.com). I’m betting on the fact that spring will start early and summer will be, well, it’ll be hot – that’s good for the demand side of the equation – for clarity these projections are based on longer term weather models from Weather.com which may be unreliable. I believe at poor hedging or at lower than ideal aggregate hedging that natural gas E&P names won’t “pump baby pump” as hard into what has been excellent hedging in size the last few years – that’s also good for the supply side. Examples of companies I’ve reviewed that have 1) less than ideal pricing hedging or 2) less than ideal aggregate hedging coverage are Chesapeake Energy Corporation (NYSE: CHK ), Antero Resources Corporation (NYSE: AR ), Ultra Petroleum Corp. (NYSE: UPL ), Halcon Resources Corporation (NYSE: HK ), SandRidge Energy, Inc. (NYSE: SD ), Quicksilver Resources Inc. (NYSE: KWK ), etc. This list could have been 50 names deep. Finally, please read the disclosure section of this article as playing leveraged commodity ETN’s is dangerous and requires a constant monitoring of positions. Good luck everybody, I’ll see you next week in The Lounge. Disclosure The risks of investing in a 3X leveraged commodity trading vehicle like UGAZ/DGAZ are much greater than those of other vehicles. These risks include (Source: Velocitysharesetns.com/ugaz): ETNs are only suitable for knowledgeable investors seeking daily exposure (including inverse or leveraged exposure) to the underlying index. ETNs are intended for short-term trading, therefore investors with a horizon longer than one day trading should carefully consider whether the ETNs are appropriate for their investment portfolio. Because the inverse leveraged ETNs and leveraged long ETNs are linked to the daily performance of the applicable underlying Index and include either inverse and/or leveraged exposure, changes in the market price of the underlying futures will have a greater likelihood of causing such ETNs to be worth zero than if such ETNs were not linked to the inverse or leveraged return of the applicable underlying Index. The ETNs do not guarantee any return of principal at maturity and do not pay any interest during their term. At higher levels of volatility, and since the ETNs are not principal protected, there is a significant chance of a complete loss of ETN value even if the performance of the index is flat. The closing indicative value on each valuation date is determined in part by reference to the daily percentage change in the level of the underlying index. As a result, to the extent the closing indicative value of the ETNs is greater than or less than the initial indicative value, subsequent changes in the level of the index may have a bigger or smaller impact on the closing indicative value of the ETNs than if the closing indicative value remained constant at the initial indicative value. For example, assuming an initial indicative value of $100, if the closing indicative value of the ETNs increases above $100, a subsequent 1% daily change in the level of the index will result in more than a $1 decrease in the closing indicative value of the ETNs. Likewise, if the closing indicative value of the ETNs is less than $100, a 1% increase in the level of the index will result in less than a $1 increase in the closing indicative value of the ETNs. If the level of the underlying index decreases or does not increase sufficiently (or if it increases or does not decrease sufficiently in the case of the inverse ETNs), to offset the effect of the Daily Investor Fee over the term of the ETNs, the investor will receive less than the principal amount of his investment upon early redemption, acceleration or maturity of the Notes. This particular ETN also runs the risk of being decayed by contango which is defined by Investopedia as: A situation where the future price of a commodity is above the expected future spot price. Contango refers to a situation where the future spot price is below the current price, and people are willing to pay more for a commodity at some point in the future than the actual expected price of the commodity. This may be due to people’s desire to pay a premium to have the commodity in the future rather than paying the costs of storage and carry costs of buying the commodity today. Finally, there are general risks that should also be considered such as liquidity risk (Source: Investopedia.com): The risk stemming from the lack of marketability of an investment that cannot be bought or sold quickly enough to prevent or minimize a loss. Liquidity risk is typically reflected in unusually wide bid-ask spreads or large price movements (especially to the downside – which are magnified in leveraged ETNs) . The rule of thumb is that the smaller the size of the security or its issuer, the larger the liquidity risk. Disclosure: The author is long UGAZ. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article. Additional disclosure: The author is long UGAZ at equal sizes at $2.90 and $2.48. The author has a cost basis of $2.69