Tag Archives: management

FireEye Earnings Illustrate Why You’re More Secure With HACK

FEYE showed why owning a single cyber security stock is high risk. FEYE drug down other cyber security focused stocks. This performance supports the notion that owning HACK is a much better way to gain exposure to this industry. I am a big fan of cybersecurity companies and the potential that these stocks have as a unit to become extremely valuable over time. CyberArk Software (NASDAQ: CYBR ) is one of my favorites. Palo Alto Networks (NYSE: PANW ) is a trend-setter, and even FireEye (NASDAQ: FEYE ) is still a great company after its disappointing quarter. However, I have discussed the topic of cybersecurity stocks to members of TTS on a regular basis, and have explained that while the companies may be good, the stocks are very expensive and risky due to lofty valuations and high expectations. For this reason, there’s only one good way to invest in a cybersecurity stock. That way is to own an ETF, a basket of cybersecurity stocks rather than just one alone. My personal favorite is PureFunds ISE Cyber Security ETF (NYSEARCA: HACK ). The reason it is important to own ETFs in these extremely volatile and unpredictable industries like cybersecurity is to protect from sudden downside. FireEye investors know all too well this risk, with FEYE down 24% after reporting earnings. FireEye’s earnings weren’t bad. The company grew revenue 45% and its margins surged due to operating expenses rising just 14%, far slower than revenue growth. However, the problem for momentum stocks like FEYE is that every metric in its earnings report is heavily scrutinized, and has the potential to move the stock in a big way. These metrics are important to maintain the lofty valuation that has been given to such stocks. Therefore, investors showed quite a bit of fear when FireEye reported that billings grew just 28% year-over-year and that its product revenue rose only 24%. These are both signs that future subscription growth could decelerate, as could overall revenue growth. Not to mention, its conservative outlook didn’t help matters much. Nevertheless, FireEye’s earnings performance and its stock collapse dragged competitors down with it. PANW fell 4%, Rapid7 (NASDAQ: RPD ) stock fell 5%, and Fortinet (NASDAQ: FTNT ) also fell 5% in response. However, those losses weren’t nearly as bad as FEYE, and had investors owned PANW, RPD, or FTNT they would still have exposure to the growth of cybersecurity without the big, portfolio changing drop that took place in FEYE on Thursday. As previously said, the answer is an ETF, specifically HACK. What I like so much about HACK is that it’s an ETF that tracks the performance of companies across the globe that are service providers for cyber security companies or provide cyber security services. In other words, all of the components have a connection to cybersecurity. Furthermore, no stock’s weight is greater than 5% of the ETF. With that said, HACK tracks PANW, FEYE, RPD, and Proofpoint (NASDAQ: PFPT ) among others, but it also tracks Juniper (NYSE: JNPR ), Cisco (NASDAQ: CSCO ), and providers of cloud security or cloud storage & security. Collectively, HACK fell 2.7% on a day when cybersecurity focused stocks fell far more, and FEYE lost a quarter of its stock value. Therefore, HACK investors get the exposure to cybersecurity and security in general without the risk that comes with owning one particular stock in this arena. With HACK trading higher by 7% over the last 12 months, it has greatly outperformed the 3.8% gains in the S&P 500. Moreover, spending on IT security is expected to grow at a compound annualized rate of 7% until becoming a $101 billion market in 2018, and the global cyber security market is figured to grow at a compound annualized rate of nearly 10%, exceeding $170 billion by 2020 according to Gartner. These industries are growing far faster than GDP, and suggests that HACK will continue to outperform major indexes in the years ahead.

Americans Like Eating Out, We Like BITE

Summary Managed by Factor Advisors and Penserra Capital Management, BITE is the first ETF to track publicly traded U.S. restaurant companies. BITE has an expense ratio of 0.75%, which is close to the average expense ratio of equity funds. Consumers are increasing their spending on eating out and compared to grocery stores, currently Americans spend almost the same amount in restaurants and bars. The equal weighted approach of the Restaurant ETF offers investors an opportunity to gain exposure in this secular trend of increased spending on dining out. A new ETF called the Restaurant ETF (NASDAQ: BITE ) was launched in October. It would track around 50 top publicly traded companies involved in the restaurant business. Managed by Factor Advisors and Penserra Capital Management, it would follow an equally weighted index created by the Chief Executive of Big Tree Capital, Kevin Carter. Companies Included in the Restaurant ETF Currently, 46 U.S. based publicly traded companies are included in the Restaurant ETF. Although some of the companies in the Restaurant ETF have businesses overseas, it did not include any foreign company. Almost all the large brand restaurants are included in the Restaurant ETF. For example, quick service restaurants like Starbucks (NASDAQ: SBUX ), fast casual niche restaurant like Chipotle (NYSE: CMG ) can be found in the ETF along with fine dining restaurant like Ruth’s Chris (NASDAQ: RUTH ). The Restaurant ETF is an equal weighted index, which means all the companies in the index would roughly have the same stakes. The index would be re-balanced every six months in order to adjust the allocations. Right now, almost all companies have a similar percentage of holdings in the Restaurant ETF. For example, McDonald’s (NYSE: MCD ) and Starbucks has almost same allocations, 3.01% and 2.95%, respectively. However, smaller companies like Arcos Dorados (NYSE: ARCO ), that mainly operates and franchises McDonald’s restaurants in the Latin American market, have only 1.35% holdings in the index. Other smaller restaurant companies like Kona Grill (NASDAQ: KONA ), that has a market capitalization of only $183 million, got a 1.88% allocation. The Restaurant ETF currently has an expense ratio of 0.75%. According to the Trends in the Expenses and Fees of Mutual Funds, 2012 report, the average expense ratio of equity fund fell to 0.77% in 2012. Hence, we can say that the expense ratio of the Restaurant ETF is near the average. Why are We Excited about the Restaurant ETF? Just like most Americans, we like eating out, a lot. According to Rasmussen Reports, 58% of Americans eat out at a restaurant at least once a week. The telephone survey found that 14% actually goes eat out up to three times a week! However, compared to eating at home, the same food costs much higher in restaurants. That’s why, although most people only eat out a few times a week, according to the U.S. Department of Agriculture, 31.5% of all food related expenses goes to pay for services provided by food service establishments, a.k.a. restaurants. (click to enlarge) Figure 1: Spending on Food at Home vs. Food Away from Home (1869 – 2013) Source: United States Healthful Food Council The prospectus of the Restaurant ETF mentioned since 1995, the amount spent in restaurants and bars has slowly increased and in 2015, people are spending almost the same amount in restaurants and bars compared to what they spend in grocery stores. This habit of frequently eating out is one of the reasons why In 2015, the Dow Jones U.S. Restaurants & Bars Index delivered a 20.5% return compared to the 11% return delivered by the S&P 500 Consumer Discretionary Sector . Conclusion The Restaurant ETF offers investors an opportunity to gain exposure in one of the oldest businesses in the world. As the U.S. urbanized over the last 200 years’ it prompted people to eat out more and currently people in the U.S. are spending almost the same amount on eating out as they are spending on their groceries. We believe the equal weighted approach of the Restaurant ETF would enable a smaller restaurant company with surging sales to have the same impact on the ETF as a $100+ billion worth company like McDonald’s. Hence, there is a good possibility that investors would be able to have a higher upside potential by investing in the Restaurant ETF under current economic circumstances when the market is in a bullish trend for last several years. However, investors should keep an eye on overall macroeconomic indicators such as the consumer sentiment , as during uncertain economic climates, the first and most obvious place to cutback would be the eating out category in the household budget.

FVD: Great Sector Allocations For This Dividend Growth ETF

Summary FVD offers a dividend yield of 2.17%, which is fairly low for being included in the discussion of dividend ETFs. The top several holdings include heavy exposure to the major oil companies. The expense ratio is quite dreadful. The sector allocations look great for a dividend ETF, which seems ironic given the weak yield on the fund. The First Trust Value Line Dividend ETF (NYSEARCA: FVD ) looks great for sector allocations, pretty good for individual companies, and weak for yield, and painful for the expense ratio. That is one of the most mixed bags I’ve found when reviewing dividend ETFs. I’ve found ones that are good, ones that seem poorly designed, and ones that are all around average. I rarely see such strong contradicting signals though. Expenses The expense ratio is a .75% on the gross level and .70% on the net level. Is it any surprise I’m not loving the expense ratio? Dividend Yield The dividend yield is currently running 2.17%. That seems strange for a dividend ETF, but I’ve seen low yields on dividend ETFs before so I won’t dwell on it. Holdings I grabbed the following chart to demonstrate the weight of the top 10 holdings: I love seeing Exxon Mobil (NYSE: XOM ) as a top holding. Investors may be concerned about cheap gas being here to stay, but I think money in politics will be around decades (centuries?) longer than cheap gas. Bet against big oil at your own peril. I can say the same about liking Chevron (NYSE: CVX ) and ConocoPhillips (NYSE: COP ). These companies offer investors a good way to benefit from high as prices which would generally be a drag on the rest of the economy and on the personal expenditures of consumers. As we go farther down the list there are a couple of high quality equity REITs incorporated into the portfolio. I should note that while these allocations are fairly far down the list, their allocations are still higher than .58% and the second heaviest weighting is only .63%, so being far down on the list doesn’t mean much in terms of weighting. The high quality equity REITs I see here are Realty Income Corporation (NYSE: O ) and Public Storage (NYSE: PSA ). Realty Income Corporation is a monthly pay equity REIT that runs a triple net lease structure. In short, they are buying up commercial properties and renting them out to businesses. The company has exceptionally high credit standards and screens applicants to reduce their risk of having renters default on the contract. Public Storage on the other hand has a fairly simple business in terms of renting out storage space. This can be a fairly attractive space because there aren’t too many REITs competing in the space which reduces the need for price based competition. Sectors (click to enlarge) The very heavy allocation to utilities is great for investors that don’t already have the exposure in their portfolio. Utilities tend to have a lower correlation with the rest of the domestic market and generate significant income for shareholders which causes them to also have some correlation with the bond markets since investors interested in income are able to pick between bonds and utilities. The high allocation to financials is a bit higher than I’d like to see since equity REITs are only a few of the positions. Most of the financials exposure is coming from the more traditional sources such as banks. Heavy exposure to consumer staples is another positive aspect in my opinion since it makes the portfolio more resistant to selling off during negative market events. Telecommunications usually gets a much heavier weight in dividend portfolios due to the presence of AT&T (NYSE: T ) and Verizon (NYSE: VZ ), but the weighting strategy for this fund giving most equity positions allocations around .6% has resulted in those two companies combining to be only 1.14% of the portfolio. Suggestions I wouldn’t mind seeing this portfolio show a slightly higher allocation to a few dividend champions such as Pepsi (NYSE: PEP ) or Coke (NYSE: KO ). I wouldn’t mind seeing the oil companies get slightly higher allocations either. The final modification would be increasing the presence of sin companies in the portfolio by overweight companies like Altria Group (NYSE: MO ). Of course, this runs contrary to the ETF’s strategy of aiming to have their holdings be roughly equally weighted. Conclusion Overall I like the portfolio that has been created, but the weighting methodology creates the possibility of material changes in the allocation from period to period. There are several companies that were selected by the ETF’s methodology that also meet my definitions for attractive dividend payers, but I’d really like to see the strategy implemented with a lower expense ratio even if that required sacrifices such as less frequent rebalancing of the portfolio.