Tag Archives: investment

4 Utilities To Buy In A Bear Market

Bear market fears continue to dominate the headlines this year. Oil and China are crashing, and the western markets are being sold in anticipation of another global sell-off. Investors are checking their statements in anguish, as they are now faced with a decision to sell everything or hide in areas that are less likely to be affected. Rather than panic and hit the Sell button, investors need to be aware of options that will defend their portfolio against more selling. In a recession, people still have to stay warm and keep the lights on. The consistency of revenues based on those human needs, as opposed to wants, makes the sector favorable in down times. Gas, water and other necessary utilities companies are all considered to be recession-proof industries. These companies can benefit from slowing economic growth, as interest rates will have a tendency to stay lower. Low rates help a utility company by making their dividend look more attractive, plus it allows for cheaper borrowing. The Fed has hinted that rates will be rising, making the dividend of utilities less desirable. However, if global market pressure continues, the Fed will inevitably back off from that thought. The combination of low interest rates, high dividends and market fear make utilities a good place to hide. The Utilities Select Sector SPDR ETF (NYSEARCA: XLU ) is an ETF that reflects the performance of utilities. The chart below marks the performance over the last two years versus the S&P. A closer look shows the divergence since 2016, with smart money supporting the sector. While the ETF will reduce company-specific risk, it also tends to reduce reward and dividends. Let’s take a look at four top-ranked stocks that will enhance the utility play. Idacorp (NYSE: IDA ) is an electric public utility company and a Zacks Rank #2 (Buy) stock. The company is engaged in the generation, purchase, transmission, distribution and sale of electric energy, primarily in the areas including southern Idaho, eastern Oregon and northern Nevada. It operates gas- and coal-fired plants, but the majority of its operations rely on hydroelectric power for their generating needs. The majority of its customers include lodges, condominiums, and ski lifts and related facilities. Idacorp has a market cap of $3.4 billion, with a dividend yield of 3.01%. The company’s EPS growth was up 11.45% over the previous quarter, and it has a good record of surprising EPS to the upside. NorthWestern Corp. (NYSE: NWE ) is a Zacks Rank #2 (Buy) stock and one of the largest providers of electricity and natural gas in the northwest quadrant of the United States. Founded in 1923, it generates and distributes electricity and natural gas to over 700,000 customers in four states, including Montana, South Dakota and Nebraska. The company has a market cap of $2.6 billion and a 3.52% dividend. It sports a forward P/E of 16 and has a Zacks Style Score of “B” in Growth, with EPS growth up 34% from the previous year. While EPS estimates have been coming down lately, sales growth has been steady, an important catalyst for the company. Southern Company (NYSE: SO ) is a Zacks Rank #2 (Buy) stock that operates as a public utility company by means of coal, nuclear, oil, gas and hydro power. The company, with over 26,000 employees, provides a broad range of energy-related services to utilities and industrial companies globally. Southern Company’s businesses include independent power projects, integrated utilities, a distribution company, and energy trading and marketing businesses outside the southeastern United States. Southern has a market cap of $43 billion and offers investors a dividend of 4.6%. EPS growth was up 7.34% from last year, showing why the company has a Zacks Style Score of “B” in Growth and Momentum. It has had an upside surprise six of the last eight times. SCANA Corporation (NYSE: SCG ) is a Zacks Rank #2 (Buy) stock. This is an energy-based holding company whose businesses include regulated electric and natural gas utility operations, telecommunications and other non-regulated energy-related businesses. SCANA’s subsidiaries serve electric customers in South Carolina, North Carolina and Georgia. SCANA offers investors a 3.57 dividend, with an $8.55 billion market cap. Estimates for the company have risen 1.5% over the last 90 days, going from $3.89 to $3.95 a share. In Summary Utilities won’t hit home run, but while the pitcher is throwing a no-hitter, they offer a chance for investors to bunt their way on base. If you are fearful of more market downside, park yourself in utilities until the risks fade away. If interest rates start to rise, or when the fear of global recession is no longer present, exit the sector and add risk. Original Post

How To Beat Goldman Sachs At The Prediction Game

“It’s tough to make predictions…especially about the future” The late Yogi Berra’s quip about predictions reminds us that we humans are a funny lot. In ancient times, the ancient Babylonians predicted the future using animal entrails. Today, millions of people still turn to astrology to get a glimpse of what’s to come. And we do the same when reading the financial media. Yet, for all of our relentless commitment to divining the market’s future by reading this morning’s Wall Street Journal , it’s hard to avoid feeling that financial predictions aren’t any more reliable than those we find in the astrology columns. Goldman Sachs’ Call on Oil Just consider the case of Goldman Sachs’ calls on the oil price over the past 12 months or so. In late 2014, Wall Street’s premier investment bank asserted that “downside risks” in the oil price were gaining momentum and it forecast a decline in the price of oil to $90 a barrel in the first quarter of 2015. Three weeks into 2015, and oil was trading below $50, confounding Goldman and nearly every other analyst on Wall Street. Fast forward to December 2015, and Goldman is standing by its latest prediction of a $20 per barrel bottom. To give Goldman its due, it was actually more bearish than its peers, lowering its forecast before other investment banks did. But Goldman has revised its predictions so many times that at this point the only thing certain is that Goldman’s predictions will change – rendering them essentially useless. Here’s what’s surprising. Although Goldman’s analysis moves the markets, no one ever calls Goldman Sachs on its bungled predictions. And it is highly unlikely that any Goldman Sachs oil analyst has ever been fired for making predictions about the oil price that have been wildly off the mark. Contrast that with the fate of any surgeon or airline pilot – all of whom would have been sued or put out of a job for showing similar levels of incompetence. The Achilles Heel of Wall Street’s Complex Models Most of us know deep down that astrological predictions are bunk. And we also realize that what Sam Goldwyn said about Hollywood also applies to Wall Street: “Nobody knows anything.” Yet, we still cling to the irrational hope that a sleep-deprived 26-year-old Goldman Sachs analyst, armed with her elaborate spreadsheet models, can tell us something about the future of oil prices. We are still wowed by a combination of the Goldman imprimatur and the apparent complexity of the firm’s financial modeling and its access to information. One of the myths of Wall Street high finance is that the more variables a financial model accounts for, the more accurate its predictions. Truth be told, any financial analyst worth his salt can construct a model that generates accurate predictions based on past data. But test the model on a different set of data and the predictive ability of the most elaborate model simply evaporates. Complex models are rarely robust. Goldman Sachs’ model to predict the oil price is no different. That’s why the “out of sample” data make Goldman Sachs’ oil price predictions essentially worthless. ‘Fast and Frugal’ Decision Making Prevails As psychologist Gerd Gigerenzer has argued, “fast and frugal decision making” trumps complicated predictive modeling almost every time. Goldman’s elaborate models for predicting the future are likely to be more wrong, more often, simply because they are so complicated. The more complicated the model, the larger the likely error. Gigerenzer cites an example from baseball. An outfielder doesn’t do calculus in his head when he estimates where to run to catch a fly ball. Yet the outfielder’s “fast and frugal decision making,” focusing on the one thing that really matters – that is, keeping the angle of the ball in relation to his line of sight constant – beats complicated models of optimization every time. That’s why simple Wall Street aphorisms such as “cut your losses and let your profits run” work better than overly complex statistical models based on normal distribution curves. In the outfield, you’d expect the Goldman Sachs analyst would try to do the calculus and end up dropping the ball. Of course, in “real life” they really wouldn’t. In fact, even Nobel Prize-winning economists don’t invest according to their own models. Gigerenzer recounts how Harry Markowitz, the economist who shared the Nobel Prize in economics in 1990 for developing the core insights of Modern Portfolio Theory, never used his own theory when investing his retirement funds. Instead, he used the “fast and frugal” heuristic (“rule of thumb”) to guide his investment decisions. Ironically, he actually made more money than he would have if he had stuck to his own Nobel Prize-winning theory. Manage Your Risks Instead With global financial markets off to their worst start of the year in history, clients have inundated me with questions about my views on the direction of global stock markets. My advice? Heed Vanguard founder Jack Bogle’s advice: “Don’t do something, just stand there!” Dozens of studies have shown that trying to time the market is a fool’s game. Miss out on just the 10 best days in the market, and your long-term returns in the S&P will halve. And those 10 days happen to come right after the worst 10 days, making trying to time the market that much more difficult. That picture changes only if you are a short-term trader. In that case, your focus should be on managing your risks. Prediction – whether complex or “fast and frugal” – matters little in investing, unless you have a plan to manage your downside risks. A “fast and frugal” plan to cut your losses, say, at 20% in all your investments in 2008 would have trumped the hundreds of gallons of virtual ink spilled on analyzing the causes and consequences of the global market meltdown. Chances are, that rule of thumb won’t be perfect. But as the economist John Maynard Keynes observed: “It is better to be approximately right than exactly wrong.” And the one thing that you can say with certainty about Wall Street’s complex models is: that they will be “exactly wrong.”

Idacorp Is Overvalued In Light Of 2016’s Weather Forecast

Summary Electric utility IDACORP’s shares performed strongly in the second half of 2015 despite the Federal Reserve’s interest rate increase and a disappointing Q3 earnings report. The share price increase has come even as the company’s earnings estimates have remained stable, however, and its operating outlook has diminished. Snow pack levels in Idaho are currently well below long-term averages, and forecasts of reduced spring precipitation are unlikely to make up the difference. IDA’s shares are overvalued given the prospect of a fall in hydroelectric output at the same time as El Nino results in a hot early summer. Shares of Idaho electric utility IDACORP (NYSE: IDA ) have defied conventional wisdom over the last several months, setting a new all-time high last December despite announcement of the first U.S. interest rate increase in nearly a decade and persistent drought conditions in the company’s service area. In an article published in July, I recommended the company’s shares at the right price, highlighting its excellent earnings and dividend increase records. IDACORP’s share price proceeded to increase 20% by the end of the year, making it one of the market’s better performers as the S&P 500 lost a bit of ground over the same period (it has since lost some ground amidst wider market turmoil). Developments in the company’s service area are likely to impact its returns in 2016, however, and this article reevaluates IDACORP as a potential long investment opportunity. Q3 Earnings IDACORP reported Q3 earnings that, while disappointing compared to expectations, only caused a short pause in the ascent of its share price. The company reported revenue of $369.2 million, down 3.4% from the previous year as the presence of lower temperatures in late summer caused its total sales volume to decline. This was partially offset by a 1.8% increase to customer numbers as the service area’s economy continued to perform well. The company’s cost of revenue fell to $126.4 million from $141.5 million over the same period as energy prices continued to fall after rebounding during the previous quarter. Gross profit rose slightly as a result, from $240.7 million to $242.8 million YoY. Operating income fell slightly to $104.7 million despite this improvement. While customer growth provided $3.4 million in additional income, this was more than offset by a $9.4 million reduction resulting from reduced electricity demand in the service area. IDACORP’s Q3 net income came in at $73.3 million, down from $86.9 million YoY. Contributing to the negative impact of reduced electricity demand was a $11.1 million increase to the company’s income tax following a change to its tax accounting methodology. It should be noted that the company’s net income would have fallen by only 3% but for the one-time accounting change. As it was, the company reported a diluted EPS of $1.46, down from $1.73 YoY and missing the consensus analyst estimate by $0.08. Its EBITDA, which was the best indicator of Q3 performance due to its exclusion of tax costs, fared better, falling only slightly from $154.7 million to $152.9 million over the same period. IDA’s balance sheet remained strong at the end of Q3 for a utility, boasting a current ratio of 2.4x and an assets-to-liabilities ratio of 1.5x. While the company’s free cash flow fell during the quarter on a YoY basis, management felt comfortable enough with its performance to continue its dividend increase record by increasing the quarterly payout by 8.5% to $0.51/share. This decision was aided by management’s expectation that it will not be required to return any revenue to its customers in 2015 following weather-related demand weakness despite returning nearly $5 million in the previous year. Q4 and FY 2016 Outlook IDACORP’s management maintained its previous EPS guidance for FY 2015 of $3.75-3.90 despite the Q3 earnings miss, a decision likely influenced by the fact that the miss fell within the guidance range. Equally important was its announcement that it continues to expect to incur up to $310 million on capex in FY 2016, indicating that it does not expect to have any difficulties financing its operations despite the presence of higher interest rates. This expectation is reasonable given the continued strength of its balance sheet. In July, I discussed the presence of sustained drought conditions in IDACORP’s service area and the potential for this to negatively affect its operations, which rely heavily on hydropower for generating capacity. Management reduced its FY 2015 hydroelectric production estimate from 6-7 MWh in July to 5.7-6.2 MWh at the end of Q3 due to persistent dry conditions during the quarter. Reduced hydroelectric supply didn’t negatively impact the company’s FY 2015 guidance due to reduced cooling degree-days in its service area in late summer and the seasonal weakening of electricity demand in Q4. There is a higher probability that continued dry conditions in Idaho will negatively impact IDACORP’s earnings in 2016, however, especially as hot conditions return in Q2 and Q3. This year’s particularly strong El Nino event has resulted in lower-than-average winter precipitation levels in Idaho, with the company forecasting a 40-50% chance of drier-than-average conditions between November and January. While the forecast period has yet to end, the precipitation data suggests that this has indeed occurred. The snow pack in the areas surrounding the company’s hydroelectric capacity is currently 20-25% smaller than average, and in some areas, snow pack levels are currently on track to set record lows (although it should be noted that it normally doesn’t peak until mid-April). The snow pack will need to achieve 125% of its normal growth rate between now and April just to reach its average peak level. Such a result is increasingly unlikely to occur given that past El Nino event’s have been associated with reduced precipitation levels in Idaho over the same period. While Idaho’s snow pack levels are not yet expected to fall to the lows seen in California that have resulted in a sharp reduction in hydroelectric output, the state’s output is likely to fall even as electricity demand in IDACORP’s service area exceeds the long-term Q2 average. Previous El Nino events have also been associated with early summer temperatures that are well above average . Q3 has historically been a major contributor to the company’s annual earnings, generating 33% of its annual EPS over the TTM period, for example. A shortfall in hydroelectric output could force the company to utilize capacity with higher variable costs and, while a favorable regulatory scheme would mitigate the impact of such an increase on its bottom line, higher prices could also result in another reduction to sales volumes despite the presence of warm temperatures. One topic that I didn’t cover in my previous article was the Clean Power Plan, which the Obama administration rolled out last summer. The plan requires U.S. states to achieve predetermined reductions to the carbon intensities (i.e., greenhouse gas emissions per kilowatt-hour of electricity generated) of their electric utilities. While many Mountain West states are required to achieve large reductions under the plan, Idaho’s heavy reliance on zero-emission hydroelectric capacity means that it must achieve only a 10% reduction to its carbon intensity by 2030. Only 31% of the company’s generating capacity is coal-fired, with the rest being either zero-emission hydro or low-emission natural gas. IDACORP is unlikely to be impacted by the Clean Power Plan’s implementation as a result, especially in light of Idaho’s low burden under it. Conclusion Idaho electric utility IDACORP’s share price was a strong performer in the second half of 2015 as its robust balance sheet and advantageous operating location offset investor concerns about higher interest rates. Even a Q3 earnings result that missed the consensus estimate failed to daunt the company’s investors for more than a few weeks. This resilience has caused the company’s P/E ratio to continue rising, however, reaching 18x its FY 2016 earnings late last month before settling to 17x today. While it is tempting to encourage investors to view IDACORP as a port of safety during this time of market turmoil, I am concerned that an unusual set of weather conditions will begin to have a negative impact on the company’s earnings in 2016. While its heavy exposure to hydroelectric generating capacity will allow it to mostly avoid the terms of the Clean Power Plan that were laid out last August, this same exposure will also prove a challenge in Q2 if above-average temperatures resulting from El Nino combine with reduced snow pack levels to push generating costs higher. The company’s favorable regulatory environment will insulate it to a certain degree, of course, and I do expect its shares to continue to outperform the broader market in the short term should the current volatile trading environment persist. That said, IDACORP’s shares are very expensive at 18x its FY 2016 earnings estimate, and earnings growth does not seem likely at this time. I encourage potential investors to wait for a better buying opportunity before initiating a long position since the shares’ premium does not reflect the headwinds that the company is likely to encounter in the first half of 2016.