Tag Archives: management

Best And Worst Q4’15: Mid Cap Blend ETFs, Mutual Funds And Key Holdings

Summary The Mid Cap Blend style ranks eighth in Q4’15. Based on an aggregation of ratings of 18 ETFs and 344 mutual funds. IJH is our top-rated Mid Cap Blend style ETF and LSIRX is our top-rated Mid Cap Blend style mutual fund. The Mid Cap Blend style ranks eighth out of the twelve fund styles as detailed in our Q4’15 Style Ratings for ETFs and Mutual Funds report. Last quarter , the Mid Cap Blend style ranked ninth. It gets our Dangerous rating, which is based on aggregation of ratings of 18 ETFs and 344 mutual funds in the Mid Cap Blend style. See a recap of our Q3’15 Style Ratings here. Figures 1 and 2 show the five best and worst-rated ETFs and mutual funds in the style. Not all Mid Cap Blend style ETFs and mutual funds are created the same. The number of holdings varies widely (from 21 to 3330). This variation creates drastically different investment implications and, therefore, ratings. Investors seeking exposure to the Mid Cap Blend 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 ProShares S&P MidCap 400 Dividend ETF (NYSEARCA: REGL ) and the Validea Market Legends ETF (NASDAQ: VALX ) 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 Boston Trust & Walden Funds SMID Cap Fund (MUTF: BTSMX ), the Nationwide Herndon Mid Cap Value (MUTF: NWWQX ) (MUTF: NWWPX ), and the Boston Trust & Walden Funds MidCap Fund (MUTF: BTMFX ), are excluded from Figure 2 because their total net assets are below $100 million and do not meet our liquidity minimums. The iShares Core S&P MidCap ETF (NYSEARCA: IJH ) is the top-rated Mid Cap Blend ETF and the Legg Mason Partners ClearBridge Mid Cap Core Fund (MUTF: LSIRX ) is the top-rated Mid Cap Blend mutual fund. IJH earns a Neutral rating and LSIRX earns a Very Attractive rating. The State Street SPDR Russell Small Cap Completeness ETF (NYSEARCA: RSCO ) is the worst-rated Mid Cap Blend ETF and the Satuit Capital Management US SMID Cap Fund (MUTF: SATDX ) is the worst-rated Mid Cap Blend mutual fund. RSCO earns a Neutral rating and SATDX earns a Very Dangerous rating. Cullen/Frost Bankers (NYSE: CFR ) is one of our favorite stocks held by Mid Cap Blend ETFs and mutual funds and earns our Attractive rating. Since 2010, Cullen/Frost has grown after-tax profits ( NOPAT ) by 8% compounded annually and improved its NOPAT margin from 25% to 28%. The company currently earns a return on invested capital ( ROIC ) of 9%. CFR has been beaten down 15% this year despite solid fundamentals. At its current price of $64/share, CFR has a price to economic book value ( PEBV ) ratio of 1.2. This ratio implies the market expects Cullen/Frost to grow its NOPAT by only 20% over the remainder of its corporate life. If Cullen/Frost can continue to grow NOPAT by 8% compounded annually for the next five years , the stock is worth $78/share today – a 13% upside. Cavium Inc. (NASDAQ: CAVM ) is one of our least favorite stocks held by Mid Cap Blend ETFs and mutual funds and earns our Dangerous rating. After turning a $10 million profit in 2010, Cavium’s NOPAT has fallen to -$23 million on a trailing-twelve-month basis. Cavium currently earns a bottom quintile ROIC of -7%, which is a significant decline from the 7% earned in 2010. Despite the deteriorating fundamentals, CAVM is up 15% on the year and the expectations baked into the current stock price leave shares with significant downside risk. To justify its current price of $71/share, Cavium must immediately achieve pre-tax margins of 6.5% (same margin as 2010) and grow revenue by 20% compounded annually for the next 26 years . Given the competitive semiconductor industry in which Cavium operates, it seems highly optimistic to expect double-digit revenue growth for nearly three decades. Figures 3 and 4 show the rating landscape of all Mid Cap Blend ETFs and mutual funds. Figure 3: Separating the Best ETFs From the Worst ETFs (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, or theme.

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.

Is This The Worst Time For MLP ETF Investing?

The double whammy of the recent crash in crude oil price below $40 and the Fed’s hawkish stance on interest rate hike are causing mayhem in the master limited partnership (MLPs) business. MLPs are involved in the business of transportation and storage of oil and gas, and they are suffering even more than the oil producers from the downturn in the market. MLPs primarily benefit from an uptick in oil production. However, U.S. oil producers are resorting to a cutback in oil production in response to falling prices. Oil drilling companies have idled over half their rigs from last month. The latest data from Baker Hughes Inc. (NYSE: BHI ) revealed that rigs engaged in the exploration and production of oil and gas totaled 767 for the week ended November 13, 2015, a decline of 4 from the prior week’s count and the lowest level seen since April 2002. The nationwide rig count is still less than half the prior-year level of 1,928. Despite a marginal rise to 574 last week, the oil rig count continues to be on the low end of the five-year range and is significantly below the previous year’s level of 1,578. International Energy Agency (EIA) has also reduced U.S. production outlook for 2016 by 1% to 8.77 million barrels per day. Some might think that the oil price is hitting its bottom but in reality it might head further south. This is because EIA has indicated that the global supply glut could get even worse as global stockpiles have reached the record level of 3 billion barrels owing to abundant supply from the OPEC countries as well as Iraq and Russia. Secondly, a strengthening U.S. dollar supported by the possibility of an interest rate hike weakens the demand scenario for greenback-priced commodities such as crude. A rising interest rate environment would also adversely impact the performance of MLPs for a number of reasons. Firstly, higher interest rates lower the appeal for high-yielding stocks such as MLPs, which have historically offered around 5% in yields and hence attracted investors’ attention due to ultra-low interest rates. Secondly, MLPs heavily depend on external financing to run their operations as they distribute most of their income as dividends. As a result, a rise in interest rates would increase their financing costs, which in turn would diminish their ability to keep distribution payments at the existing level. The adverse developments in the oil and gas sector and the threat of a looming interest rate hike are heavily weighing on MLP stocks and ETFs and indicate the worst may not be over yet. Below we highlight three MLP-based ETFs that have witnessed double-digit fall so far this year and may continue to experience a downspin in the near future as well. Alerian MLP ETF (NYSEARCA: AMLP ) This is the most popular MLP ETF with AUM of $7.3 billion. It tracks the Alerian MLP Infrastructure Index, measuring the performance of 25 energy infrastructure MLPs. The fund’s top three holdings include Enterprise Products Partners LP (NYSE: EPD ), Magellan Midstream Partners LP (NYSE: MMP ) and Energy Transfer Partners LP (NYSE: ETP ), together accounting for 25.4% of assets. The ETF trades in a solid volume of 7.1 million shares per day and is very expensive with 5.43% in expense ratio. It offers a robust dividend yield of 9.3% and has lost around 27% in the year-to-date timeframe (as of November 18, 2015). Credit Suisse X-Links Cushing MLP Infrastructure ETN (NYSEARCA: MLPN ) MLPN follows the Cushing 30 MLP Index, measuring the performance of 30 mid-stream stocks in North America. The note is well distributed with its top 10 holdings comprising around 35% of the assets. It has an AUM of $505 million and exchanges roughly 192,000 shares in hand per day. MLPN charges 85 bps in annual fees and has a dividend yield of 6.8%. The note tumbled nearly 34% so far this year. iPath S&P MLP ETN (NYSEARCA: IMLP ) IMLP tracks the S&P MLP Index measuring the performance of MLP stocks that are classified in the GICS Energy Sector and GICS Gas Utilities Industry. Enterprise Products Partners, Energy Transfer Equity LP (NYSE: ETE ) and Energy Transfer Partners are the top three holdings in the fund with a combined exposure of nearly 35%. The product has amassed around $413 million in assets and trades in a moderate volume of roughly 97,000 shares per day. It charges 80 bps in investor fees and offers a dividend yield of 7%. IMLP shed 31.6% in the year-to-date timeframe. Original post .