Tag Archives: investment

I’m Keeping A Close Eye On The PowerShares S&P 500 High Dividend Low Volatility ETF

SPHD has yield of around 3.5%. Investors seeking low volatility and dividends should consider the fund. The fund makes distributions monthly. Recently I’ve been looking through numerous dividend focused ETFs to decide which one(s) I would be happy to add to my portfolio. In general, there are a lot of funds that focus on dividends and a lot to like about most of them. However, there are a few specific funds in this space that I like personally. One of these is the PowerShares S&P 500 High Dividend Low Volatility Portfolio ETF (NYSEARCA: SPHD ). The fund tracks the S&P 500 Low Volatility High Dividend Index, which is comprised of 50 of the least-volatile high dividend-yielding stocks in the S&P 500. This makes the funds portfolio fairly distinct compared with some of the other typical higher dividend funds. It is rebalanced twice a year, and distributions are paid to holders on a monthly basis. The expense ratio is 0.30%, which isn’t necessarily low, but isn’t necessarily too high either. The current 12 month distribution rate (yield) is 3.49%. So the real question to answer is, what is the appeal of this fund? Of course the upfront appeal would be the dividends and higher yield. Getting down to what I’m looking for, the appeal to me is how boring this investment is. By boring I’m talking about the consistent distributions and low volatility. At this point you might be thinking about the dozens of other investments that have both of these characteristics. I’m not about to say that there are not plenty of others out there. Sticking with the equity side of investments one such example might be AT&T (NYSE: T ) (AT&T is the 10th largest holding for the fund). However, the fund offers a totally different element; diversification. Diversification is obviously something all investors want in their portfolios, and this would be one of the key reasons behind my consideration of dividend ETFs. It’s pretty easy to see what makes this ETF boring by just glancing at the holdings. Utilities and financials make up a significant portion of the holdings. Upon closer look a majority of the financials are REITs, though. Both the utilities and REITs are obviously a key to what makes this a higher yielding fund. Getting even more specific into why the fund is boring, other than the low volatility, we can see that a lot of these companies, especially these utilities and REITs, have steady and simple reoccurring income (in some cases regulated). This makes a good portion of the holdings defensive in nature and in turn quite boring. This is where the near-term outlook gets a little more complicated. Keeping in mind that a large portion of the holdings are utilities and REITs things may get a little less boring heading into December. If the Fed raises rates these holdings in particular may be effected negatively to some degree making the value of the fund drop. This may present a better opportunity for investors and more than likely a slightly higher yield. Considering part of my long-term strategy is to grow my portfolio utilizing dividends, I believe the fund connects well with my goals. The fact that distributions are made on a monthly basis is also an added plus for my strategy as I choose other investments to add to my portfolio on a regular basis. In conclusion, I find the PowerShares S&P 500 High Dividend Low Volatility Portfolio ETF to be boring in a good way. While it may not be for all investors, those seeking things such as easy security and diversification should consider it. With what seems to be a Fed rate hike finally coming, I believe it would probably be best to wait and see how the more sensitive holdings react to the actual hike before considering the fund currently. I will be keeping a close eye on the fund for now.

Finding Value With The Piotroski F-Score Year 2: Part 1

Summary The Piotroski F-Score was designed to find companies that are cheap and recovering. The first year showed mixed results. This year the portfolio has been adjusted in an attempt to improve performance. This is the first article of the second series of articles looking at the investment performance of the Piotroski F-Score. In the first series, I covered the performance of a Piotroski F-Score long only strategy over the space of twelve months. The results were extremely disappointing. The value of the portfolio declined by 49.3% over the period . Still, giving up on the strategy after only one year wouldn’t accomplish much. So, this year two of the study. The details of the study are below. Finding value In the world of value investing, there are many ways to hunt for value opportunities. However, few are as well defined as the Piotroski F-Score, which aims to identify the healthiest companies amongst a basket of value stocks through applying a set of nine accounting-based stock selection criteria. The F-Score was designed to hunt out value opportunities that are profit-making, have improving margins, don’t employ any accounting tricks and have strengthening balance sheets. However, as usual, this strategy cannot be employed alone, it needs to be combined with another screening tool to produce a suitable set of results. One point is awarded for each criterion the company passes and the stocks that score the highest, eight, or nine are regarded as being the strongest candidates for recovery. Piotroski recommended scoring the bottom 20% of the market in terms of price to book value and then working from there. Using the following system, Piotroski’s April 2000 paper Value Investing: The Use of Historical Financial Statement Information to Separate Winners from Losers , demonstrated that the Piotroski score method would have seen a 23% annual return between 1976 and 1996 if the expected winners were bought and expected losers shorted. According to the American Association of Individual Investors , year to date the F-score screening criteria with a low P/B value would have returned 3.4%. Over the past five years this return would have been 33.9% and the ten-year return was 26.7%. The screen I’m testing the F-Score, as both a way to discover value stocks and trade them without fundamental analysis. The screening criteria and investments are based purely on the financials in an attempt to remove any emotional bias — something that holds back investment performance. The F-Score screening criteria are as follows: Profitability Signals 1. Net Income – Score 1 if there is positive net income in the current year. 2. Operating Cash Flow – Score 1 if there is positive cashflow from operations in the current year. 3. Return on Assets – Score 1 if the ROA is higher in the current period compared to the previous year. 4. Quality of Earnings – Score 1 if the cash flow from operations exceeds net income before extraordinary items. Leverage, Liquidity and Source of Funds 5. Decrease in Leverage – Score 1 if there is a lower ratio of long term debt to in the current period compared value in the previous year. 6. Increase in Liquidity – Score 1 if there is a higher current ratio this year compared to the previous year. 7. Absence of Dilution – Score 1 if the Firm did not issue new shares/equity in the preceding year. Operating Efficiency 8. Gross Margin – Score 1 if there is a higher gross margin compared to the previous year. 9. Asset Turnover – Score 1 if there is a higher asset turnover ratio year on year (as a measure of productivity). And the 20 largest companies that qualify in the current environment are as follows (in order of mkt. cap): NRG Energy Inc (NYSE: NRG ), Noble Corp plc (NYSE: NE ), Darling Ingredients Inc (NYSE: DAR ), EP Energy Corp (NYSE: EPE ), DigitalGlobe Inc (NYSE: DGI ), McDermott International (NYSE: MDR ), Atwood Oceanics, Inc. (NYSE: ATW ), Cash America International Inc (NYSE: CSH ), Navigator Holdings Ltd (NYSE: NVGS ), Danaos Corporation (NYSE: DAC ), DHT Holdings Inc (NYSE: DHT ), Roadrunner Transportation Systems Inc (NYSE: RRTS ), Century Aluminum Co (NASDAQ: CENX ), Ocean Rig UDW Inc (NASDAQ: ORIG ), West Marine, Inc. (NASDAQ: WMAR ), Marchex, Inc. (NASDAQ: MCHX ), Luby’s, Inc. (NYSE: LUB ), Manning and Napier Inc (NYSE: MN ), Hardinge Inc. (NASDAQ: HDNG ), Trans World Entertainment Corporation (NASDAQ: TWMC ). P/B figures rounded to the nearest whole number. To assess the F-Score, I’m starting a hypothetical portfolio with a $1,000 investment in each company. Investment prices are based on the closing price on 11/20/2015. These positions are based on financial data only; there’s no weighting to fundamental factors. I’ve decided to use this method in an attempt to take all of the emotion out of the trading and running of the portfolio, only when a stock qualifies under the set criteria will it be included in the portfolio and held for the next 12 months until rebalancing. Like the original Piotroski F-Score, as well as buying a basket of stocks that qualify for the screen, I’m also shorting a hypothetical basket of stocks. The short basket will be composed of companies that have the lowest F-Score in my screen. For liquidity issues, I’m excluding any companies with a market cap. of less than $100m from my short basket. Here are the short candidates, in order of market cap: Vertex Pharmaceuticals Incorporated (NASDAQ: VRTX ), Tesla Motors Inc (NASDAQ: TSLA ), Under Armour Inc (NYSE: UA ), Ctrip.com International, Ltd. (ADR) (NASDAQ: CTRP ), BioMarin Pharmaceutical Inc. (NASDAQ: BMRN ), Endo International plc (NASDAQ: ENDP ), Annaly Capital Management, Inc. (NYSE: NLY ), OneMain Holdings Inc (NYSE: LEAF ), Seattle Genetics, Inc. (NASDAQ: SGEN ), STERIS Corp (NYSE: STE ), Renren Inc (NYSE: RENN ), Southwestern Energy Company (NYSE: SWN ), Impax Laboratories Inc (NASDAQ: IPXL ), bluebird bio Inc (NASDAQ: BLUE ), The Medicines Company (NASDAQ: MDCO ), SolarCity Corp (NASDAQ: SCTY ), HRG Group Inc (NYSE: HRG ), Federal National Mortgage Assctn Fnni Me ( OTCQB:FNMA ), Prothena Corporation PLC (NASDAQ: PRTA ), Nord Anglia Education Inc (NYSE: NORD ). The short portfolio is being run with the same rules as the long portfolio. The companies have been selected based on financial data only; there’s no weighting to fundamental factors. Stocks will be included in the portfolio and held for the next 12 months until rebalancing. To reiterate, there’s no bias here. The companies selected are only included because they have the lowest F-Score of the largest 11,300 US companies my screen covers. The number of shares sold short will have an initial value of $1,000. Putting it altogether Here are the two initial portfolios based on the closing prices as of 11/20/2015. The bottom line Those are the 40 picks. I will admit that some of the companies mentioned above are risky bets but on a purely financial basis, they conform to the F-Score criteria, so they have been included. I’m tempted to include some fundamental analysis for each company, but that’s not the point of this study. Research has shown that emotional bias is one of the investors’ worst enemies; the F-Score tries to eliminate that That’s the introduction, over the next few months I will be assessing the portfolio’s performance on a regular basis with a final round-up this time next year. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Portfolio Development – My Approach

Summary Standard portfolio development theory provides a great foundation. Unfortunately, the stock and bond markets don’t always cooperate. Take the approach of accepting what the markets offer to improve total return. Introduction There are literally dozens of articles and books written on the subject of portfolio development theory. Most of those articles and books approach the development of a portfolio using a mix of stocks and bonds with the mix dependent on the investors tolerance for risk and the investor’s age. I think that this “standard” approach to portfolio development is great if you have the luxury of time to build that portfolio over a number of years and business cycles. Without the luxury of time, I don’t believe the “standard” approach works all that well. Making things even more difficult, today we have a unique investment environment. Yes, it really is different this time. We are currently in a period of ultra low interest rates with the most likely course going forward being slowly rising rates. Bonds may not return much over the next few years and if the economy and inflation accelerate, total return could be negative. What is an investor to do? My approach is to accept what the market has to offer. Standard Portfolio Development As stated in the introduction, there is a lot of information available on portfolio development theory. It is not my intent to provide a detailed discussion on the subject of standard portfolio development. I will summarize what I consider to be the standard approach in this section and refer the reader to articles available on the internet if more detail on the standard approach is desired. Most portfolio development starts with identifying the investor’s tolerance for risk. Because the risk of having poor or even negative returns can be mitigated with time invested, an investors risk tolerance also has an age component. Younger investors can generally tolerate more risk because they have many years to invest and accumulate wealth. To see the market behavior over various time periods, you could look at available charts . Another option is to use a market return calculator to look at various time periods. While you might be able to find a 30 year period with a slightly lower return if you work at it, the stock market has returned 8% – 9% average per year for any 30 year period since 1900. The bottom line is that time in the market lowers your risk of having a poor return provided you have a reasonably diversified portfolio of stocks. The standard portfolio model also uses diversification between asset classes to mitigate risk. Assets are typically divided primarily between stocks and bonds with a cash account outside the portfolio sufficient to cover 3 – 6 months of living expenses or for other emergencies. The rationale behind splitting the main portfolio between stocks and bonds is that the two asset classes typically complement each other. If equities have a terrible year, the investor should still receive a positive return from their bond holdings. One long standing rule of thumb for the split between stocks and bonds is to use 120 minus the investors age as the percentage for equities in the portfolio. As an investor ages, the portfolio percentage dedicated to stocks drops. The table below illustrates the portfolio stock percentage as a function of age. While this is a decent rule of thumb to follow, there is no universally agreed split between stocks and bonds and some recent thinking is that the typical split between stocks and bonds as a function of the age of the investor may need to weight more heavily stocks versus bonds. The reason for this shift to a relatively higher asset allocation to stocks is because we have had a long bull market in bonds and current yields are extraordinarily low. This makes it less likely that bonds will provide adequate returns going forward at least relative to historical returns. Stocks and bonds should also be diversified within the respective asset class. Depending on the value of the portfolio, it may not be practical for an individual investor to achieve the level of diversification necessary to adequately mitigate risk. Diversification in stocks is easier to achieve because stocks can typically be purchased in small increments. This is not the case with individual bonds. As an example, a round lot for a stock investment is 100 shares and the cost penalty for an odd lot (