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Stocks Bleed With Paris, Safe Havens Surge: ETFs In Watch

Ominous clouds over the Eurozone are refusing to pass. At least back-to-back hits last week corroborate this fact. If weaker than expected GDP data for the bloc in Q3 – merely 0.3% – was not enough to dampen investors’ mood, a gruesome terror attack in Paris, slaughtered whatever little bit of risk-on trade investing sentiment over the region was left. In fact, not only the Eurozone, the entire risk-pro global investing backdrop took a beating after the terrorist group ISIS took responsibility for the attack in the French capital on Friday. Squads of Islamic State-backed gunmen assassinated about 129 people in a chain attack at various locations and left hundreds severely injured. This was Europe’s worst terror assault in over a decade, as per Bloomberg . In vengeance, France bombed the Syrian city of Raqqa on Sunday night, which was the most hostile anti-terrorism strike by the former against this Islamic group. With the global superpowers including France now looking confident of bolstering defense against ISIS, geo-political issues may crop up in the coming days. Needless to say, all global risky assets went into a tailspin following this horrible incident. Though the French economy fared better than other biggies in the bloc in Q3, having returned to subtle growth on higher domestic demand , investors did not have time to celebrate the recovery as terrorism took the upper hand over an improving economy. Market Impact Investors appeared to take this bloodbath too seriously and rushed to panic selling in apprehension of a surge in geo-political threats. The sudden elevation of risk aversion in the market brightened the appeal for safe haven assets. Volatility ETFs, which track the implied volatility of the market, also surged thanks to the massacre in the stock market and concerns over a further downturn. This specifically caused the uptrend in a few segments of the financial world that are seeing dire trending of late, but hold promises now. Below, we highlight a few of the biggest gainers from the latest sell-off in the global stock market. Also, these ETFs may continue to thrive should tensions persist in the global economy in the near term. Gainers Gold Gold is often viewed as a hedge against market risk. The precious metal went through a brutal stretch in the last one-month period thanks to the rising greenback and reduced demand from the major consuming nations like China. The metal has seen some strength thanks to this market turmoil. In fact, the solid Fed rate hike bet for December couldn’t hold back this safe haven metal post Paris attack. The ETF tracking gold bullion SPDR Gold Trust (NYSEARCA: GLD ) added over 0.5% after hours on November 13 and is expected to tack on gains in the short term. GLD was down 9% in the last one month. Long-Term U.S. Treasury Though U.S. treasuries were out of favor a few days back due to worries over Fed tightening, heightened global uncertainty brought this safe asset into the limelight. Along with the terror attack, global growth worries and severely low oil price, which put a lid on global inflation should help treasury valuation going forward. Yields on the U.S. benchmark 10-year notes slipped to 2.28% on November 13 from 2.32% recorded the day earlier. Long-term U.S. bond ETF the iShares 20+ Year Treasury Bond ETF (NYSEARCA: TLT ) was up 0.6% on November 13 and added over 0.3% after hours. For the month, the fund is down about 3.9%. Greenback The U.S. dollar or greenback is yet another product, which acts favorably when a flight to safety commands the market. Plus, a ripe prospect of a sooner than expected Fed lift-off also favors this asset class. As a result, the PowerShares DB US Dollar Bullish ETF (NYSEARCA: UUP ) added about 0.4% on November 13, advanced about 0.6% after hours, and soared about 5.4% in the last one month. Yen The Japanese currency, yen, is often considered a classic safe haven asset. Though a somber GDP data for Japan – which indicates that Asia’s second-largest economy is into a recession in Q3 – had the chance of wrecking havoc on the yen, the currency moved higher on a safe-haven appeal. Thus, the CurrencyShares Japanese Yen Trust (NYSEARCA: FXY ) might see a surge ahead. Volatility When sentiments among investors are so shaky, the volatility index is sure to gain. Obeying this law, the CBOE volatility index or “fear gauge” reached its highest tip since October 2. The ProShares VIX Short-Term Futures (NYSEARCA: VIXY ) – the ETF tracking the performance of the S&P 500 VIX Short-Term Futures Index – returned over 6.8% on November 13 and added more than 2.8% after hours. However, investors should note that volatility investments are not meant for long-term traders. Losers Along with several research houses like Goldman , we believe that this market turmoil is here to stay. Yet, we would like to highlight the losers in the wake of the Paris attack. While most of the global equities lost after the massacre, with the U.S. equity gauge the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) losing 1.12% on November 13 and shedding over 0.8% after hours, Europe-based products are likely to be the worst hit. France As expected, France equities and the related ETFs were the worst hit. The pure-play France ETF the iShares MSCI France (NYSEARCA: EWQ ) lost 1.1% on November 13 and plunged over 4% after hours. Euro First a soft GDP report and then the attack weighed on the common currency Euro and its related ETFs. The euro fell to a six-month low versus the greenback. The CurrencyShares Euro Trust (NYSEARCA: FXE ) lost over 0.5% on November 13. Broader Europe Since the impact of this bloodshed would be far-reaching, broader Europe ETFs would also be vulnerable in the coming few days. Already, the Vanguard FTSE Europe ETF (NYSEARCA: VGK ) shed over 0.8% on November 13 and went on to lose over 1.3% after market. Bottom Line Though we do not expect this bearish move to continue especially in the U.S., which has a strong trend underneath, the upheaval in the stock market may persist for a week or so due to the gloomy global backdrop and the rise in fear among investors. However, as the central banks of the U.S., Eurozone and Japan start to speak again, this unsteady market will take solid shape and decide the fate of several asset classes and sectors. Original Post

Some Prefer Southern Company Over Wisconsin Energy: I Just Don’t Get It

Summary I recently published a follow- up article about Wisconsin Energy after the acquisition of Integrys. Several friends told me that I should prefer Southern Company over Wisconsin Energy. They claim that the superior yield is due to some short term hardships that will soon be over. I totally disagree, I believe Wisconsin Energy is by far a superior investment. I will now try to explain why. Introduction A week ago I wrote this article about Wisconsin Energy (NYSE: WEC ). In the article, I tried to analyze the company after the acquisition of Integrys (NYSE: TEG ). The article is really in favor of buying the shares of the company. Several friends told me after reading the article that I should prefer Southern Company (NYSE: SO ) over Wisconsin Energy. They claim that the superior dividend yield and the longer streak of dividend raises make it a superior investment for dividend growth investors. They believe that currently, the company suffers from short-term headwinds. I read a lot about Southern Company and I totally disagree. In this article, I will show the fundamentals and valuation of the company, and then show a comparison with Wisconsin Energy, that I believe will allow me to emphasize the superiority of Wisconsin Energy over Southern Company. Southern Company through its subsidiaries, Alabama Power Company, Georgia Power Company, Gulf Power Company and Mississippi Power Company, supplies electric service in the states of Alabama, Georgia, Florida, and Mississippi. Each of those subsidiaries is an operating public utility company. Additionally, Southern Company owns all of the common stock of Southern Power Company, which is also an operating public utility company, which constructs, acquires, owns, and manages generation assets and sells electricity at market-based rates in the wholesale market. Fundamentals Southern Company has terrible fundamentals, really, it is hard for me to describe it otherwise. The revenues for example grew from $13.554 in 2005 to $18.467 in 2014. This is CAGR of 3%, which might be reasonable if the income is growing at least at the same pace. Yes, it is a utility company which doesn’t show fast growth, but I still have higher expectations. SO Revenue (NYSE: TTM ) data by YCharts EPS growth is even worse, when thinking about the EPS growth together with inflation, well there is practically none. The EPS grew from $2.13 in 2005 to $2.18 in 2014. This is CAGR of 0.23%, which is practically no growth, and when taking inflation into consideration, it is practically declining. Let’s look now towards the future. The analysts’ estimates are for growth of 2.5%- 3% in EPS for the next 3- 5 years. Having said that, I am not happy with the EPS growth in the past and the future estimates. SO EPS Diluted (Annual) data by YCharts The dividend is another weak fundamental in my opinion. The annual payment grew from $1.49 in 2005 to $2.1 in 2014. That is CAGR of just 3.5%. As you read above, as EPS is flat, the dividend rose by expanding the payout ratio. This is not sustainable for the long run, and therefore it makes me worry about the ability of the company to show real growth. In 2014, the payout ratio was over 95%, and even for the estimate for 2015, the payout ratio will be over 75% which is high for utilities. Currently, the company yields just under 5%. I don’t think the yield is high enough to justify such slow growth. SO Dividend data by YCharts Usually I like it when companies reward shareholders by using big parts of the FCF for dividends and share repurchases. However, with such a high payout ratio, I didn’t expect Southern Company to buy its own shares. Yet, I figured out that not only that the number of shares didn’t decrease, it actually rose by over 22% over the past decade. I don’t mind being diluted when smart acquisitions are made like the acquisition of Integrys by Wisconsin, or by the purchases of new properties by Realty Income (NYSE: O ). In these cases the dilution is used to grow EPS and FFO. In this case, the dilution comes with low growth. Not my cup of tea. Valuation When I look at the valuation of Southern Company, I find a company that is valued cheaper than Wisconsin Energy. The difference in the valuation makes perfect sense as Wisconsin Energy is growing its EPS while Southern Company has stagnated. In my opinion, the difference isn’t big enough. I find Wisconsin Energy fairly valued for a company that will grow at around 6% every year. By looking at the forward P/E for this year and the year after, I can see that the gap is becoming smaller and smaller. As a long term investor, it is hard for me to justify purchasing Southern Company at the current valuation. SO PE Ratio ( TTM ) data by YCharts The lower valuation is not low enough for me to consider Southern Company at the moment. It might sound odd, but I find it overvalued when compared to other high yielding companies, with slower than average growth. Risks As I see Southern Company, there are two main risks to this investment. The first one is the lack of growth catalysts. The company is forecasted to grow its earnings by less than 3% annually over the next several years. This is very low even for a utility company, especially one that expanded its payout ratio so much. The company must find new ways to grow its income and revenues. The second risk is the still increasing expenses of the Kemper project in Mississippi. This project consumes more and more money, and it takes a big part of the cash flow as it increases the capex. In 2014 alone, the expenses on this project cost the company $0.83 per share. Southern Company will have to invest more money in order to finish it. Finishing it will indeed free some if its cash flow, but it will still not be able to serve as a real growth catalyst. Opportunities Southern Company still has several opportunities, but I find them pretty vague. Firstly, most major expenses on the Kemper project are behind us already. The necessary investment will now be much lower, and it will allow the company to use the money in a better way. Another opportunity is the fact that even when it suffers from headwinds, Southern Company still manages to show fair margins and fair return on equity. If the company will be able to find growth prospects, it will be able to utilize its efficient structure to create more income and more value to its shareholders. Comparison with Wisconsin Energy I will now sum the comparison between these companies. I believe that Wisconsin Energy has superior fundamentals when looking at the past decade and the next five years. Southern Company is valued cheaper, but not cheap enough to justify the lack of growth in the EPS. Wisconsin Energy, doesn’t suffer from huge expenses due to problematic projects such as Kemper in Mississippi. This kind of projects consume a lot of capital, and it will be hard for them to return the money invested. Wisconsin Energy has a lower debt burden. The debt to equity ratio is lower, and it gives Wisconsin Energy more flexibility. Southern company has more debt and a very high payout ratio. This is a combination that can be damaging to the company. It puts the dividend in an unpleasant place. Not only that, Wisconsin Energy is working on lowering its debt after the acquisition of Integrys. Southern Company on the other hand has higher margins and return on equity. This is a positive sign, which is not enough when the company can’t find growth prospects. Yet, to be fair, holding a more profitable company is always a plus. I am writing from my position as dividend growth investor, so it makes perfect sense that I will give Southern Company credit for the higher dividend yield. The dividend yield is much higher at almost 5% compared to the yield of over 3.5% that Wisconsin Energy has. If you look for income it is an important aspect. Conclusion I am certain that Wisconsin Energy can show superior returns for the near future. It has better fundamentals and growth opportunities, and I think that dividend growth investors should prefer it over Southern Company. In my opinion, it will also beat Southern Company in total returns even though the latter has higher dividend yield. I would only pick Southern Company if I were a retiree who is looking for income right here and right now.

PEY: Great Companies, Great Sector Allocations And Solid Yields

Summary PEY offers a dividend yield of 3.39%. The individual company allocations include some relatively heavy concentrations. The sector allocation looks nice, but the volatility on the ETF has been surprising. I like the underlying allocations, but rather than using an ETF that trades the companies I’d prefer a simple “buy and hold” strategy. The PowerShares High Yield Equity Dividend Achievers Portfolio ETF (NYSEARCA: PEY ) has an excellent yield at 3.39% and the sector allocations look great. A heavy allocation to utilities and consumer staples seems like a solid way to build a defensive portfolio, however the volatility of the fund has been surprising. Expenses The expense ratio is a .54%. This is quite a bit too high for my tastes. Holdings I put grabbed the following chart to demonstrate the weight of the top 10 holdings: The heaviest weighting by a slight margin was given to the Vector Group (NYSE: VGR ). The stock has an incredibly high 6.7% dividend yield and is in the cigarette business. While I’m not thrilled with the actions of tobacco companies, the dividend is very strong, and their product benefits from being highly addictive. For the investor addicted to reliable income, this is an industry that simply makes great financial sense. I thought it was interesting that the Vector Group received such a heavy weighting when I didn’t see Altria Group (NYSE: MO ) near the top. Digging deeper into the holdings I found that Altria Group was included and currently represents almost 2% of the portfolio. You may also notice a few oil companies in the portfolio. ConocoPhillips (NYSE: COP ) and Chevron (NYSE: CVX ) both get respectable weights and offer investors exposure to the oil industry which seems to be entirely out of favor. When it comes to oil allocations, I’m fine with having them in the ETF or doing them individually. In the case of ETFs with higher expense ratios, I would lean towards just buying the oil companies individually since I see the sector as a simple “buy and hold” area. Market Cap and Style The style demonstrates a fairly heavy focus on value companies with a willingness to allow blended allocations. It should be noted that they do have a fairly notable allocation to both the small-cap and mid-cap areas which I would expect to increase volatility. Sectors This was the chart that I thought provided the best selling point for PEY. They offer investors a significant allocation to utilities and consumer staples. These heavy allocations should result in a portfolio that is capable of being significantly more defensive and able to withstand downturns in the economy. I wanted to check and see if things had played out that way, so I ran a quick regression on PEY with the S&P 500 going back to December of 2004. It turns out that PEY got hammered pretty hard. The worst drawdown during the recession was saw the S&P 500 fall by about 55%, but PEY managed to lose over 72% of the funds value. I don’t believe that the fund is currently as volatile as those numbers would suggest, but I would prefer to see more diversification in the portfolio allocations since running allocations greater than 3% to anything other than a company like Exxon Mobil (NYSE: XOM ) is simply introducing additional price risk. Conclusion The yield is solid and the sector allocations give the fund a definite appeal for investors looking for that steady source of income. During 2008 and 2009 the fund took some pretty harsh beatings, but I wouldn’t expect them to see that kind of loss again. One of the challenges that I believe the fund faces is having the objective to track the price and yield performance of the Nasdaq US Dividend Achievers® 50 Index. The lack of diversification within the index makes creates a challenge for building any diversification into the fund. The individual holdings include several great dividend growth champions, but I don’t see a benefit in creating higher levels of concentration or trading the positions frequently. The underlying companies are the kind where an investor might serve their family well by simply taking physical delivery of the shares and stuffing them in a safe with the door closed for the next 50 years. There are some areas where more frequent trading makes sense, but when it comes to these dividend champions, I don’t see a need to have any frequent changes. If the fund dropped the expense ratio to .05% and indicated that there would be almost 0 trades over the next few decades, I’d be very bullish on the fund because the underlying companies offer investors a solid growing stream of income. In essence, I like the allocations more than the strategy that created them.