Tag Archives: nyse

Deep Value Stocks Bouncing Back Strongly To Close 2015

Summary Deep value, out-of-favor stocks bounced back strongly in the holiday-shortened Christmas week. As part of my premium research service on Seeking Alpha, I am tracking an equity focused “Concentrated Best Ideas Portfolio.”. The Concentrated Best Ideas Portfolio was up 7.43% for the week, while the S&P 500 was up 2.83%. Since its inception on Dec. 7, 2015, the Concentrated Best Ideas Portfolio is up 7.51%, while the S&P 500 is down 1.30%. The three most crowded, intertwined trades could be unwinding and recent price action may foreshadow emerging 2016 trends. “To buy when others are despondently selling and to sell when others are avidly buying requires the greatest fortitude and pays the greatest ultimate rewards.” – Sir John Templeton – 1958 “Knowledge is limited. Imagination encircles the world.” – Albert Einstein Introduction On November 17th, 2015 Reuters published the latest BAML global fund manager survey. It showed that the most crowded trade , by far, among fund managers was long the U.S. Dollar, followed by the related trades of short commodity stocks and short emerging market equities. As a value investor and a keen follower of behavioral analysis, I have been attracted to the opposite side of these trades. In particular, commodity stocks have caught my eye for several years, as valuations have been historically cheap. I illustrated this in a recent article on U.S. Steel (NYSE: X ), which showed that its current price-to-book ratio and price-to-sale valuation ratio are substantially below U.S. Steel’s prior year-end 2008 comparable metrics. This is true across a wide variety of companies, particularly in the material, energy, and emerging markets space, despite the S&P 500 Index, as measured by the SPDR S&P 500 ETF (NYSEARCA: SPY ), trading within shouting distance of its all-time highs. I have highlighted the bifurcated market in several articles, including ” 2 Distinct Markets ,” and I am highlighting the undervalued firms in a series titled ” Too Cheap To Ignore .” For the last several years, historically cheap valuations have been a “value trap,” and investors wading into this deep value space have been punished severely, including your humbled author. Patience and persistence are usually rewarded in life and investing, and this is doubly true in deep value investing. Thus, I have kept researching the undervalued, out-of-favor firms, and I launched a premium service on Seeking Alpha, titled ” The Contrarian ” to try to take advantage of this unique opportunity from a research and portfolio strategy perspective. The premium research service launched on Seeking Alpha on December 7th, 2015, and so far, so good as the portfolios have significantly outperformed the broader markets, including a 90% cash portfolio, whose premise I wrote about in an article titled, ” Why A 90% Cash Portfolio Will Probably Outperform .” Within the service, there are several portfolios that have been put together. One of the equity focused portfolios is called “Concentrated Best Ideas Portfolio”, and it is primarily composed of deep value stocks. While the portfolio remains approximately 40% in cash versus its inception value, it was up strongly last week, registering a gain of 7.43% versus the SPY gain of 2.83%. Since its inception on December 7th, 2015, the Concentrated Best Ideas Portfolio is up 7.51%, while the SPY has declined 1.30%. The outperformance is the tip of the iceberg in my opinion, as I believe value stocks are set for their day in the sun after lagging their growth counterparts for a majority of the current bull market, and the performance to close 2015 may be foreshadowing what is to come in 2016. Concentrated Best Ideas Portfolio Update This portfolio screenshot is from “The Contrarian” premium research service. The portfolios in “The Contrarian” are updated whenever trades are made, and there are weekly updates with commentary. The following is this week’s update for the Concentrated Best Ideas Portfolio and commentary. (click to enlarge) It was a strong, holiday-shortened week for the market, and a very strong week for the “Concentrated Best Ideas Portfolio”. Material and energy stocks bounced back, with Peabody Energy (NYSE: BTU ), Teck Resources (NYSE: TCK ), Freeport McMoRan (NYSE: FCX ), CONSOL Energy (NYSE: CNX ), and Westmoreland Coal (NASDAQ: WLB ) all up more than 10% for the week. Overall, I am very pleased with the terrific relative and absolute outperformance, over the S&P 500 Index , by the Concentrated Best Ideas Portfolio during its first three weeks of inception. The results are even more impressive, considering that 40% of the portfolio’s starting value remains in cash. Since the portfolio’s inception, SunEdison (NYSE: SUNE ), Westmoreland Coal , and CONSOL Energy are leading the way, with respective gains of 67%, 42%, and 28%. The outsized gains coincide with the beginning of a reversal in the major three trades that have been put in place by the investing mainstream (long the U.S. Dollar, short commodities, and short emerging markets). Once these three intertwined trades reverse in earnest, the undervalued, out-of-favor, heavily short names will have more room to run, as headwinds turn into tailwinds. Mounting evidence of a reversal lies in the fact that the batting average of the Concentrated Best Ideas Portfolio is an impressive 67%, with 8 out of 12 positions showing gains. Building on this, the 8 “winners” have outsized gains, while the drawdowns of the “losers” have been more modest. Conclusion – With the Market Overvalued, Focus on Portfolio Strategy The underlying theory and thesis behind a deep value portfolio, is that a few “winners” can drive a deep value portfolio higher, offsetting the inevitable losses from companies in the deep value basket that never recover. In certain time frames, like 2008/2009 for financials, consumer discretionary names, and the broader market in general, and 2015/2016 (today) for commodity, energy, material, and emerging market stocks, the batting average can be higher for a deep value focused portfolio, as the extremely depressed valuations present an environment where a broad rebound in deep value stocks is possible, and perhaps even probable. While deep value stocks remain historically cheap, the forecast for broader market returns from today’s price levels looks dicey, as illustrated in a table that I have put together using data from GMO : (click to enlarge) The sell-off of commodity oriented stocks, which started in April of 2011, has driven the valuations of these companies to levels that are significantly below their 2008/2009 bottoms. In a recent article on U.S. Steel, I highlighted how cheap the price-to-book and price-to-sales valuation ratios have become today, even compared to year-end 2008 levels, which were extremely depressed due to the historic sell-off in the broader stock market. To close, the last month of 2015 is hinting at a reversal of the previously crowded trades that could carry over into 2016. The three trades (long the U.S. Dollar, short commodities, and short emerging markets) are intertwined, and the reversal could be a self-reinforcing cycle, the opposite images of the seemingly never ending unwind. With a rebound in out-of-favor names for the last five years looking probable due to their low absolute and relative valuations, and an overvalued broad bond and stock market, now is the time to be contrarian, or at least add a little dose of contrarian thinking to your portfolio. For more information, please click here .

The ETF Monkey 2016 Model Portfolio: Vanguard Implementation

Summary In a previous article, I introduced The ETF Monkey 2016 Model Portfolio. This portfolio offers my suggested model for 2016 based on careful review of the 2016 outlook from multiple high-quality research firms and/or investment providers. In that article, I also promised to build and then track practical implementations of the portfolio using ETFs from three different providers. This is the Vanguard implementation. This article is designed to be read in conjunction with the article in which I introduced The ETF Monkey 2016 Model Portfolio . In that article, I offered what I believe to be a model portfolio for 2016, based on my reading and analysis of materials related to the 2016 outlook from several top-quality sources. I further explained that I would both build and track actual implementations of this portfolio using ETFs from three major providers: Vanguard, Fidelity (featuring iShares funds) and Charles Schwab. This article features the Vanguard implementation. Overview I will start with a couple of tables. The first will briefly recap the asset classes and weightings that I identified in The ETF Monkey 2016 Model Portfolio, followed by the name and symbol of the Vanguard ETF I selected to represent that portion of the portfolio. The second will present a summary of key data for each ETF, including data points such as the expense ratio and average spread, the current dividend yield, and the size and daily volume of the fund. Combined, these will give you, in one glance, a big picture overview of the expenses and returns, as well as some idea of the fund’s tradeability. In this fashion, when I have completed my articles for all three selected providers, you will be able to do some side-by-side comparisons if you wish. Finally, one by one, I will offer other comments and data for each ETF. So let’s get started. Here is the first table, presenting my ETF selections. Asset Class Weighting ETF Name Symbol Domestic Stocks (General) 30.00% Vanguard Total Stock Market VTI Domestic Stocks (High Dividend) 5.00% Vanguard High Dividend Yield VYM Foreign Stocks – Developed 20.00% Vanguard FTSE Developed Markets VEA Foreign Stocks – Emerging Markets 7.50% Vanguard FTSE Emerging Markets VWO Foreign Stocks – Europe 5.00% Vanguard FTSE Europe VGK TIPS 15.00% Vanguard Short-Term Inflation-Protected Securities VTIP Bonds 10.00% Vanguard Total Bond Market BND REITS 7.50% Vanguard REIT VNQ Here is the second table, presenting key data points. (click to enlarge) You will likely immediately notice the strength of Vanguard’s offerings across all asset classes represented in the portfolio. With the exception of VTIP, every ETF has an inception date at least as far back as 2007 and Assets Under Management (AUM) of over $10 billion, in some cases much higher. Finally, you will notice that the expense ratio across all ETFs is as low as .05% and no higher than .15%, with 5 of the 8 coming in at or below .10%. In summary, these are long-standing, low-expense ETFs with tremendous size and trading volume, representing great liquidity. This can be important during times of market volatility. Note: In view of Vanguard’s standing in the ETF field, I will use this article as the lead, or reference, article for the three implementations. I will in some cases refer back to, and compare, the related Vanguard ETF when discussing the selections I make for the Fidelity and Charles Schwab implementations of the portfolio. With that overview in mind, let’s now take a look at each of the ETFs. Vanguard Total Stock Market I have already written an in-depth article on this ETF for Seeking Alpha, in preparation for including it in The ETF Monkey Vanguard Core Portfolio . Feel free to consider that article if you wish. VTI tracks essentially the entire investable U.S. market in a single ETF. It does so by tracking the CRSP U.S. Total Market Index . As opposed to the S&P 500, which is comprised solely of large companies (large-cap), the landscape covered by VTI also encompasses many smaller companies (mid-cap, small-cap, and even micro-cap). Such companies, while offering a higher level of risk than their larger brethren, also offer greater opportunities for growth . At .05%, VTI still carries one of the lowest expense ratios in the ETF marketplace. While the competitors I will feature from both iShares and Charles Schwab now offer an even lower .03% expense ratio, I suspect Vanguard is standing pat for now because they offer market-leading expense ratios across a wider variety of ETFs than their competitors. As of 11/30/15, VTI contains 3,791 stocks, with its Top 10 holdings comprising 15.1% of the total. As such, this ETF provides about as solid a foundation as you could hope for when developing your domestic stock allocation. Vanguard High Dividend Yield I have also covered this ETF in depth in a recent article . As it happens, in terms of page views this is the most popular article I have ever managed to write for Seeking Alpha. VYM tracks the FTSE High Dividend Yield Index, which represents the U.S.-only component of the FTSE All-World High Dividend Yield Index . This index is comprised of stocks characterized by higher than average dividend yields. It does not include REITS, and also eliminates stocks forecast to pay zero dividends over the next 12 months. It contains 435 stocks, with its Top 10 entities comprising 31.3% of the total. VYM has substantial weightings in sectors such as financials, oil & gas, telecommunications and utilities. This holding is designed to help increase the level of income generated by the portfolio. Its 3.10% yield will act as a nice supplement to the 1.93% yield offered by VTI, while VTI should offer more opportunities for growth . Vanguard FTSE Developed Markets I briefly covered this ETF as well as VWO, the ETF discussed in the next section, in this article . In The ETF Monkey Vanguard Core Portfolio, I use the Vanguard FTSE All-World ex-US ETF (NYSEARCA: VEU ) as my ETF of choice. This is an excellent vehicle if one wishes to obtain ‘comprehensive’ exposure to foreign stocks, including both developed and emerging markets. At the same time, your relative exposure is decided for you, 17.30% in emerging markets as of 11/30/15. In contrast, for The ETF Monkey 2016 Model Portfolio, I am electing to use a combination of VEA and VWO, which allows us to determine our desired allocation between developed and emerging markets. One interesting note is that Vanguard is in the process of enhancing VEA, switching to an underlying index , which includes Canada, whereas the previous index VEA tracked did not. This ETF currently contains 1,866 holdings, with the Top 10 comprising 11.3% of its assets. It also sports a wonderful .09% expense ratio, stellar for an ETF, which provides international exposure. Vanguard FTSE Emerging Markets As alluded to in the section above, this is the counterpart to VEA. This ETF invests in stocks of companies located in emerging markets around the world, such as China, Brazil, Taiwan, and South Africa. Its goal is to closely track the return of the FTSE Emerging Markets All Cap China A Transition Index . The “transition” basically refers to the fact that, as Vanguard words it, the ETF “over time will build exposure to small-capitalization stocks and China A-shares.” However, they are doing so in a manner, which will minimize the transaction costs associated with this endeavor. This ETF currently contains 3,106 holdings, with the Top 10 comprising 18.2% of its assets. It carries an expense ratio of .15%, once again impressive for an ETF, which provides exposure to emerging markets, with all associated trading costs. Vanguard FTSE Europe This ETF seeks to track the performance of the FTSE Developed Europe All Cap Index , which measures the investment return of stocks issued by companies located in the major markets of Europe. A full 72.5% of the fund’s assets are comprised of companies in the United Kingdom, France, Germany, and Switzerland. This ETF currently contains 1,238 holdings, with the Top 10 comprising 16.0% of its assets. As mentioned in the article in which I introduced The ETF Monkey 2016 Core Portfolio, my goal was to slightly increase the overall weighting, or effect, of Europe in the portfolio. In that vein, if you were to compare the two, you would see that 8 of the Top 10 companies in VGK are also in VEA , with two companies from Japan breaking the Top 10 in VEA. As noted above, this ETF carries an expense ratio of .12%. Vanguard Short-Term Inflation-Protected Securities This ETF seeks to track an index that measures the performance of inflation-protected public obligations of the U.S. Treasury that have a remaining maturity of less than five years. As opposed to the iShares TIPS Bond ETF ( TIP), which I will feature in the Fidelity variant of the portfolio, this ETF keeps the maturity shorter. All TIPS have a maturity of 5 years or less, with the average duration being 2.3 years (as opposed to 8.44 years for TIP). As a result, VTIP can be expected to have less real interest rate risk, but also lower total returns relative to a longer-duration TIPS fund, such as TIP. Vanguard Total Bond Market I have already written an in-depth article on this ETF for Seeking Alpha, in preparation for including it in The ETF Monkey Vanguard Core Portfolio . Feel free to consider that article if you wish. This is a great ETF for achieving across-the-board domestic bond exposure in a single source. It contains both government and corporate bonds and maintains a moderate risk profile. It does not include bonds with a credit rating lower than Baa and has an average duration of 5.8 years. As you may be aware, concern has recently been expressed as to the safety and liquidity of bond ETFs. This article concerning a recent major default may be of interest. It features the fact that the default involved a mutual fund, not an ETF, and also that the fund invested in highly speculative and somewhat illiquid junk bonds. In contrast, BND contains 7,746 different bonds, 63.5% of its assets are in U.S. Government bonds, and no bonds rated lower than Baa are included, as noted above. Put otherwise, this is not a speculative vehicle. Vanguard REIT I briefly covered this ETF, along with two competitors, in this article . VNQ is often described as sort of the pre-eminent player in the field, the “big daddy” if you will. With an inception date of 9/23/04, 154 REITs in the portfolio, $27.39 billion in Assets Under Management (AUM), a low .12% expense ratio, and great daily trading volume leading to a wonderful average price spread of .01%, there are many reasons this ETF has been described using terms such as “the king” and “top of the charts.” This ETF tracks the MSCI US REIT Index . The Top 10 holdings comprise 35.9% of its assets, with Simon Property Group (NYSE: SPG ), its single largest holding, carrying a 7.9% weighting. Summary and Conclusion So there you have them. The 8 ETFS that make up the Vanguard implementation of my portfolio. I plan to follow up with similar articles for both Fidelity and Charles Schwab, and finally with an article that will begin the process of actually building and tracking the portfolios as of the closing price of all the components on December 31, 2015. Until then, I wish you… Happy investing!

Junk Bond CEFs Yielding 9% And Poised To Benefit From Rising Interest Rates (Part 1)

Summary In the high yield bond carnage, there is a group of funds that has gone oversold despite their insulation from rising interest rates. These funds do not borrow money to invest, so rising interest rates will not negatively impact their net investment income (NII). There remains risk to these funds’ NAV from further declines in the bond market, but dividends are safe for all but one fund. Junk bond markets have gone through a panic and are now in a lull, although many expect more turbulence with future interest rate hikes hurting both the value of issued debts and the borrowing costs of levered closed-end funds. There is a small group of non-levered CEFs that invest in junk bonds but do not use leverage, thereby insulating themselves from higher borrowing costs that will narrow spreads and impact their net investment income in much the way that earnings are hindered by mREITs and BDCs who depend on a spread between low borrowing costs and high investment income from debts. (click to enlarge) Source: Google Finance, SEC Edgar Instead, these funds focus on the high yield market and pass on net investment income to shareholders without borrowing to boost returns. Despite that, these funds’ distribution yields are familiar to investors of levered CEFs, ranging from 4.5% to 12.28%. These funds are: the MFS Special Value Trust (NYSE: MFV ), the Putnam High Income Securities Fund (NYSE: PCF ), the Western Asset High Income Opportunity Fund (NYSE: HIO ), the Western Asset High Yield Fund (NYSE: HYI ), and the Western Asset Managed High Income Fund (NYSE: MHY ). Despite their lower risk profile, these funds have suffered declines similar to levered CEFs, with double-digit declines in the past year across the board, and most losses incurred in the last six months: (click to enlarge) Source: Google Finance With the exception of MFV, these funds were relatively strong performers and were outperforming many levered CEFs thanks to their lower risk profile until the summer. Then as yields rose sharply for high yield debt and default rates continued to rise, these funds joined the junk sell-off to reach their 52-week lows. Source: Moody’s The increase in yields is in part a result of higher defaults and credit downgrades across the market, and has also caused NAVs for these funds to fall alongside all other junk bond funds. This dynamic means that these funds’ current discount to NAV is in fact close to its highest discount in the last year, despite being near 52-week lows: (click to enlarge) Source: CEFA’s Universe Data Is the Risk There? There remains a risk that, if yields rise and bond values fall, the NAV of these funds will decline. However, there is not a commensurate risk of NII declines for two reasons. Firstly, higher borrowing costs are a non-issue for these funds. For funds that are 40% levered or more, higher borrowing costs could damage their ability to make a profit from borrowing to buy junk bonds. What’s more, funds that will need to de-lever because of fears of declining NAVs will be forced to sell off when values are plummeting, causing a similar dynamic that resulted in the shuttering of bond funds like Third Avenue’s . This is a non-issue for these non-levered CEFs. Without borrowing costs or redemptions an issue, they do not need to sell issues unless their NII-to-distribution coverage falls below 100%, which is currently not the case in any of these funds except for MFV. (I will discuss NII coverage of these funds in a future article). With the exception of MFV, this is a rare group of funds which investors can purchase without fears of declining NAVs resulting in distribution cuts. With a sustainable yield of around 9%, these funds are worth considering as an option for immediate and reliable income. Avoid MFV The only fund of this group that is under-earning its distributions is MFV. This is in part due to a recent change in its investment strategy that allows it to focus more on equities in addition to debt: The fund currently has an investment policy that MFS normally will invest the fund’s assets primarily in debt instruments. Effective on December 9, 2015, that policy will be changed to provide that MFS normally invests a majority of the fund’s assets in debt instruments. The change allows the portfolio management team greater flexibility to increase the fund’s exposure to equity securities. There are no other changes to the way the fund is being managed. The good news about this shift is that it will allow the fund to avoid the turbulence of the high yield market with greater flexibility to diversify into equities. The bad news is that this will negatively impact the fund’s immediate income and make it more dependent on capital gains-and active trading-to maintain payouts. Currently, the fund has devoted a third of its assets into equities, limiting its income producing opportunity: (click to enlarge) At the same time, the fund’s equity allocations are slightly skewed towards financial services companies; an ironic decision, considering these companies will benefit the most from rising interest rates: (click to enlarge) It is unclear why the fund’s management has decided on this shift and chosen what very may well be near the bottom of the junk bond market to do so; a decision to shift towards equities earlier in 2015 would have demonstrated much more foresight. So Which to Choose? In part 2 of this series I will discuss the credit quality and income durability of the other funds, but suffice to say for now each currently has NII in excess of its distributions, with coverage ranging from 107% to 128%: (click to enlarge) The relatively low yield on PCF, combined with its high distribution coverage, means that it is unlikely to cut dividends in the short term as it did in 2012, 2013, and 2014, but it also makes the fund’s income stream relatively low compared to HIO HYI, and MHY. In the cases of these funds, distribution coverage is currently solid, making any of these a worthwhile addition to a diversified high yield income portfolio.