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Does East Going West Make Sense For Southern Co.?

Southern is copying PCG strategy by combining its electric utility with a natural gas company. The deal will take Southern’s profitability over that of PCG. Its nuclear plant remains a risk. Southern Co. (NYSE: SO ) today announced its most transformative deal to date, an agreement to buy AGL Resources (NYSE: GAS ), parent of Georgia utility Atlanta Gas Light, for $68 in cash, a 38% premium over Friday’s close. Southern will also assume AGL’s debt, making the deal worth $12 billion. Does this make sense? If your interest lies in controlling customers, controlling a regional economy, and maintaining your dividend yield, it makes perfect sense. The model here is Pacific Gas & Electric (NYSE: PCG ), which controls both natural gas and electric utilities businesses in northern California. Over the last year PCG has done much better, as a stock, than Southern, and is still up 9% over the last year despite Monday’s sell-off. Southern, by contrast, has been flat for the year, and is now down. This has happened despite PCG having a much, lower-yielding dividend than Southern, 3.5% vs. 4.9%. It has happened despite PCG having much less control over its home state’s politics than Southern. PCG is in California, while Southern is in Georgia, Alabama, Mississippi and Florida. This means that when someone puts up a solar panel in northern California, PCG pretty much has to buy their excess power. It means that when someone wants to compete against PCG with their own grid, PCG’s ability to fight that is limited. It means that if PCG wants to build another coal-fired or nuclear power plant, and throw that cost on the back of ratepayers over the next 20-30 years, its regulators aren’t going to just roll over and ask to have their bellies tickled. Southern Co. has succeeded in slowing the growth of alternative energy throughout its service area. It has been successful in getting new power plants built and put into the rate base. It has used this to spin a story that it is a more stable investment than a company like PCG, which is subject to both market and regulatory discipline. The market says that argument is nonsense, so Southern is now interested in copying the PCG strategy, at least to the extent of offering heating as well as cooling. The impact of this deal will not be as great as many think, because Southern is much, much bigger than AGL. The combined company had revenue last quarter of $5.014 billion, and $685 million of net income. Compare that to the $406 million in net income on $4.217 billion achieved by PCG over the last quarter – Southern actually comes out a bit ahead with 13.6% of gross going to net against 9.6% for PCG. Then consider the “synergies,” the administrative expenses Southern can cut out, and this looks very good, indeed. Southern still has some serious problems. Southern’s latest nuclear effort has already cost it $1 billion in overruns – Southern subsidiary Georgia Power is on the hook for a little less than half that, $467 million. Can it sell that extra power for enough to justify the expense? That is becoming a real risk. Excepting that, this is a pretty good deal. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

3 Country ETFs Impacted By China’s Currency Devaluation

Wise were those analysts who had foreseen the start of a currency war post China’s yuan devaluation story. China shook the global markets on August 11 when its policymakers devalued the country’s currency by 2% against the greenback to boost its sagging exports. This resulted in the largest single-day decline since the historical devaluation in 1994 . Though the Chinese central bank defended its currency intervention ‘as a free-market reform’, global experts’ apprehensions of a currency war in the near future, especially among its Asian neighbors, are turning into a reality. Most export-centric economies will likely be forced to depreciate their currencies to stave off competition and rev up their exports. And analysts were not wrong at all, as this currency war is already underway. Let’s take a look at the country ETFs which were hit hard by the yuan devaluation. Vietnam To fight against the dark impact on its exports, Vietnam weakened its currency, dong, on August 19. This was the third time that the country devalued its currency this year and the second time in a week. The trading band has now has been widened to 3% from 2%, per Reuters. Like China, Vietnam also acts as a low-cost producer and earned some edge over China in recent times, as Chinese wages are on the rise. With a stronger currency, Vietnam would lose this competitive advantage. Not only exports, Vietnam is unable to sell products to domestic consumers due to the surge in cheaper Chinese imports, resulting in a widening trade deficit. In the first seven months of 2015, deficit in trade with China was $19.33 billion, worse than $14.88 billion of deficit in the year-ago period, according to Reuters . Following the latest depreciation in currency, dong fell 4.5% in interbank on August 18. In the last one month, the greenback gained 2.3% against dong. The Market Vectors Vietnam ETF (NYSEARCA: VNM ) – the pure play on Vietnam – lost about 5% in the last five trading sessions. Malaysia The Malaysian equity market has been an impacted area post the yuan devaluation. Also, a falling oil price marred the stocks of oil-rich Malaysia, which happens to be one of the largest Asian crude exporters. Political crisis is another cause of concern for Malaysia. On the other hand, China’s currency devaluation hurt its competiveness as an exporter. This, coupled with a strong U.S. dollar amid the looming Fed rate hike, recently sent Malaysia’s currency, ringgit, to a 17-year low. This resulted in the depletion of Malaysia’s foreign exchange reserves, and in turn soured investors’ mood toward Malaysian investing. Ringgit fell over 7% in the last one month against the U.S. dollar. Pure play-Malaysia ETF, the iShares MSCI Malaysia ETF (NYSEARCA: EWM ), was off 17.9% in the last one month (as of August 20, 2015). Indonesia Following the yuan move on August 11, Indonesia’s currency, rupiah, tumbled the most in 2015. This currency also touched a 17-year low after the yuan episode. Rupiah was the second worst-performing Asian currency this year. The country was already grappling with weak exports and a five-year low GDP growth. Indonesia ETF, the iShares MSCI Indonesia ETF (NYSEARCA: EIDO ), was down over 14% in the last one month. Original Post

Best And Worst Q3’15: Large Cap Value ETFs, Mutual Funds And Key Holdings

Summary Large Cap Value style ranks first in Q3’15. Based on an aggregation of ratings of 43 ETFs and 836 mutual funds. SCHD is our top-rated Large Cap Value ETF and MDIVX is our top-rated Large Cap Value mutual fund. The Large Cap Value style ranks first out of the 12 fund styles as detailed in our Q3’15 Style Ratings for ETFs and Mutual Funds report. It gets our Attractive rating, which is based on an aggregation of ratings of 43 ETFs and 836 mutual funds in the Large Cap Value style. See a recap of our Q2’15 Style Ratings here. Figures 1 and 2 show the five best and worst-rated ETFs and mutual funds in the style. Not all Large Cap Value style ETFs and mutual funds are created the same. The number of holdings varies widely (from 17 to 1007). This variation creates drastically different investment implications and, therefore, ratings. Investors seeking exposure to the Large Cap Value style should buy one of the Attractive-or-better rated ETFs or mutual funds from Figures 1 and 2. Figure 1: ETFs with the Best & Worst Ratings – Top 5 (click to enlarge) * Best ETFs exclude ETFs with TNAs less than $100 million for inadequate liquidity. Sources: New Constructs, LLC and company filings The First Trust NASDAQ Rising Dividend Achievers ETF (NASDAQ: RDVY ), the iShares Enhanced U.S. Large-Cap ETF (NYSEARCA: IELG ), and the SPDR Russell 1000 Low Volatility ETF (NYSEARCA: LGLV ) are excluded from Figure 1 because their total net assets are below $100 million and do not meet our liquidity minimums. Figure 2: Mutual Funds with the Best & Worst Ratings – Top 5 (click to enlarge) * Best mutual funds exclude funds with TNAs less than $100 million for inadequate liquidity. Sources: New Constructs, LLC and company filings The Schwab U.S. Dividend Equity ETF (NYSEARCA: SCHD ) is the top-rated Large Cap Value ETF and the BMO Dividend Income Fund (MUTF: MDIVX ) is the top-rated Large Cap Value mutual fund. Both earn our Very Attractive rating. The Guggenheim S&P 500 Pure Value ETF (NYSEARCA: RPV ) is the worst-rated Large Cap Value ETF and the Northern Lights Good Harbor Tactical Equity Income Fund (MUTF: GHTAX ) is the worst-rated Large Cap Value mutual fund. RPV earns a Neutral rating and GHTAX earns a Very Dangerous rating. Travelers Companies (NYSE: TRV ) is one of our favorite Large Cap Value stocks and earns our Very Attractive rating. Since 2012, Travelers has grown after-tax profits ( NOPAT ) by 22% compounded annually. The company has improved its return on invested capital ( ROIC ) to 12% from 4% in 2011. In addition, Travelers has generated over $3.4 billion in free cash flow on a trailing twelve-month basis. Despite the steadily improving business, the stock price remains undervalued. At its current price of $105/share, Travelers has a price to economic book value ( PEBV ) ratio of 0.7. This ratio implies that the market expects Travelers’ NOPAT to permanently decline by 30% from current levels. This expectation is overly pessimistic, and if Travelers can grow NOPAT by 3% compounded annually over the next five years , the stock is worth $193/share today – an 83% upside. Perry Ellis (NASDAQ: PERY ) is one of our least favorite stocks held by TILDX and earns our Dangerous rating. From 2011-2014, Perry Ellis’ NOPAT has declined by 17% compounded annually and its ROIC has fallen from 8% to a bottom quintile 3%. Most troubling is that over this same timeframe, Perry Ellis’ NOPAT margin has declined to 2% from 5%. Despite the company’s declining fundamentals, PERY is priced for significant growth. Even if Perry Ellis were able to increase its NOPAT margin to 3%, the company would still have to grow NOPAT by 12% compounded annually for the next 12 years to justify the current price of $25/share. This expectation is rather optimistic considering that over the last 12 years Perry Ellis only grew NOPAT by 4% compounded annually, and the business has seen profits decline as of late. Investors interested in a quality retailer would be better off avoiding Perry Ellis and looking at recent Stock Pick of the Week Ralph Lauren. Figures 3 and 4 show the rating landscape of all Large Cap Value ETFs and mutual funds. Figure 3: Separating the Best ETFs From the Worst Funds (click to enlarge) Sources: New Constructs, LLC and company filings Figure 4: Separating the Best Mutual Funds From the Worst Funds (click to enlarge) Sources: New Constructs, LLC and company filings D isclosure: David Trainer and Kyle Guske II receive no compensation to write about any specific stock, style, style or theme. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.