Tag Archives: power

The Market Peak Is In

Summary In April I wrote an article that predicted the conditions necessary for a market peak to have occurred. In August these conditions were met. I detail some investment options to consider if a peak has in fact been made. In this article, I will be explaining why I believe the market has peaked or will peak soon, which means this bull run is over. In an article I wrote in April titled ” Constructing A Market Peak Blueprint ” I detailed three metrics that when combined have predicted the end of the previous two market tops in 2000 and 2007. The metrics I looked at were the monthly S&P 500 (NYSEARCA: SPY ) Shiller PE ratio, high-yield bond spreads and interest rates. In the final paragraph, I noted, “While none of these metrics currently are near a point at which all three will align to predict a top, it is still something that investors can watch for in the future. Well, the future I talked about in my article is now! I never like being the bearer of bad news, however since I wrote my article, all three metrics have aligned to the specifications I laid out in my article. That is why I am predicting the market peak is in. Market Peak Conditions The conditions needed to be met to declare a market peak are the following conditions listed below. I collected Shiller PE data from Multipl.com , High-Yield Spread data from the St.Louis Federal Reserve and historical interest rate data from Yahoo Finance . [Note all data is monthly] As the data in the tables below show that in August, all of these conditions were met. Shiller PE of greater than 25 Shiller PE declines 4 Months in a row High Yield Spreads Increase 4 Months in a row 10-year Interest Rate decreases 3 Months in a row Shiller PE   High Yield Spreads   10-Year Interest Rate May 26.87   May 4.51   May 2.10 June 26.62   June 4.66   June 2.34 July 26.55   July 5.11   July 2.21 August 26.54   August 5.66   August 2.20 Previous Peaks There have been three previous times in the last fifteen years where these conditions have all aligned and those were in November & December 2000 and August 2007. This can be seen graphically in the following two monthly charts, which show the point at which the conditions were triggered. (click to enlarge) (click to enlarge) [Charts from ThinkorSwim Platform] What can investors do? -Don’t Panic! The number one thing is not to panic if the market peak is in. I am in no way saying to go out and panic selling. However, as I detail below, there are some investment actions investors can make to lessen the pain if a market peak has already occurred and a major correction follows. Investment Option #1: Get Defensive With ETFs, investors have a number of choices that are quality ETFs that own defensive equities. The PowerShares S&P 500 Low Volatility Portfolio ETF (NYSEARCA: SPLV ) is attractive because it holds stocks with the lowest volatility in the S&P 500. The Guggenheim Defensive Equity ETF (NYSEARCA: DEF ) is attractive because it holds fundamentally strong, dividend paying companies that have a history of outperforming according to its Fact Sheet . “DEF uses a rules-based quantitative approach, the index selects stocks based on fundamental characteristics such as a strong balance sheet, dividend payments, conservative accounting practices, and a recent history of out-performance during weak market days.” The Barclays ETN+ VEQTOR S&P 500 Linked ETN (NYSEARCA: VQT ) or the PowerShares S&P 500 Downside Hedged Portfolio ETF (NYSEARCA: PHDG ), which both dynamically allocate between stocks, VIX futures & cash. The following chart from the VQT prospectus shows that in late 2008, the allocation to volatility was increased which is shown by the steep increase in the index value. [Chart from VQT Prospectus] Investment Option #2: Add a short position to hedge downside risk The two main options for shorting the overall market are the ProShares Short S&P 500 ETF (NYSEARCA: SH ), which is the DAILY inverse of the S&P 500. The second option is the AdvisorShares Ranger Equity Bear ETF (NYSEARCA: HDGE ), which is an actively managed short ETF. Investment Option #3: Consider Adding Precious Metals During the large decline in the market two weeks ago, gold (NYSEARCA: GLD ) & silver (NYSEARCA: SLV ) performed quite well because of investors seeking safety. For those looking for investment choices in the precious metals space there is obviously the GLD or SLV or there is the broad ETFS Physical Precious Metal Basket Trust ETF (NYSEARCA: GLTR ), which holds physical gold, silver, platinum & palladium. Investment Option #4: Employ a barbell approach Investors can employ a barbell approach where they own short-term fixed income to preserve capital and generate some income and high quality growth stocks. The PIMCO Enhanced Short Maturity Strategy ETF (NYSEARCA: MINT ) is an actively managed ultra-short term bond ETF designed to generate above money market returns and is a good capital preservation tool. In addition, if you still want capital preservation but are looking for a higher yield, a quality choice is the Vanguard Short-Term Corporate Bond Index ETF (NASDAQ: VCSH ), which invests in short-term investment grade corporate bonds and currently yields just less than 1.90%. For the other end of the barbell, investors can look for high growth companies that have growth and have minimal debt. For example, earlier this year I wrote an article , where I determined it was the number one stock in the world was Visa (NYSE: V ). I determined Visa was the number one stock because they have $4.7 billion in cash, no-debt, they pay a dividend, is expected to grow earnings 17.74% over the long-term, is buying back shares and in 2016 they start their new deal replacing AMEX (NYSE: AXP ) at Costco (NASDAQ: COST ). Other quality stocks like Gilead Sciences (NASDAQ: GILD ), which have strong balance sheets and clear growth drivers, should be considered when using the barbell approach. Closing Thoughts If a market peak is in fact in, investors need to be mindful and give extra scrutiny to investments for their potential performance during a down market. If a market peak has occurred, as I highly suspect that it has, individual stock selection and/or tactical allocation to ETFs is something that will become extremely important. This kind of environment is where great investors shine. I do not know who said the following quote but it applies to this situation and it goes something like “Anyone can be a good investor in a bull market, however, what separates good investors from great investors is bear market performance.” Disclaimer: See here . Disclosure: I am/we are long SPLV, GILD. (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.

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

Summary The Small Cap Value style ranks tenth in Q3’15. Based on an aggregation of ratings of 16 ETFs and 187 mutual funds. VBR is our top-rated Small Cap Value ETF and RSEIX is our top-rated Small Cap Value mutual fund. The Small Cap Value style ranks tenth out of the 12 fund styles as detailed in our Q3’15 Style Ratings for ETFs and Mutual Funds report. It gets our Dangerous rating, which is based on an aggregation of ratings of 16 ETFs and 187 mutual funds in the Small 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 Small Cap Value style ETFs and mutual funds are created the same. The number of holdings varies widely (from 14 to 1511). This variation creates drastically different investment implications and, therefore, ratings. Investors seeking exposure to the Small Cap Value style should buy one of the Attractive-or-better rated mutual funds from Figure 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 Direxion Value Line Small & Mid Cap High Dividend ETF (NYSEARCA: VLSM ) and the First Trust Mid Cap Value AlphaDEX ETF (NYSEARCA: FNK ) 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 Vanguard Small-Cap Value ETF (NYSEARCA: VBR ) is the top-rated Small Cap Value ETF and the Royce Special Equity Fund (MUTF: RSEIX ) is the top-rated Small Cap Value mutual fund. VBR earns a Neutral rating and RSEIX earns an Attractive rating. The PowerShares Russell 2000 Pure Value Portfolio (NYSEARCA: PXSV ) is the worst-rated Small Cap Value ETF and the ASTON River Road Independent Value Fund (MUTF: ARIVX ) is the worst-rated Small Cap Value mutual fund. Both earn a Very Dangerous rating. Universal Insurance Holdings, Inc. (NYSE: UVE ), is one of our favorite stocks held by Small Cap value Funds. After-tax profit ( NOPAT ) growth has picked up in recent years, and NOPAT has grown by 53% compounded annually since 2011. Universal currently earns a top-quintile return on invested capital ( ROIC ) of 43%, which is almost three times the 16% earned in 2011. Universal has dug itself a strong competitive position within the insurance industry, but the stock price does not yet reflect the strong cash flows the company generates. At the current price of $25/share, Universal has a price to economic book value ( PEBV ) of 1.0. This ratio implies that the market expects the company to never meaningfully grow profits for the remainder of its corporate life. If Universal can grow NOPAT by 16%, less than a third of the current rate, compounded annually for the next 5 years , the stock is worth $45/share – an 80% upside. Acacia Research Corp (NASDAQ: ACTG ) is one of our least favorite stocks held by Small Cap Value funds and earns our Very Dangerous rating. Since 2012, Acacia’s NOPAT has fallen from $60 million to -$42 million. The company currently earns a bottom-quintile -10% ROIC, which is well below the 22% earned in 2012. It appears that the market has not taken into account these fundamental issues, as the stock remains overvalued. To justify the current price of $9/share, Acacia must immediately achieve a 10% NOPBT margin (compared to -42% in 2014) and grow revenue by 16% compounded annually for the next 13 years . Figures 3 and 4 show the rating landscape of all Small 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 Max Lee 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.

Bargain Bin Stocks Part 1: Greece’s Public Power Corporation

Summary This series seeks to find extremely cheap stocks and determine whether they are deep value opportunities or deep value traps. Public Power Corporation is one of the cheapest stocks on the already depressed Athens Stock Exchange. If Greece can turn a corner, it could be a surprising winner, subject to major political risks. But how long until Greece turns a corner? Greece’s financial markets have had a rough ride but for those willing to put some capital on the line some very cheap equities are available. Here I’ll be looking at Public Power Corporation of Greece (OTC: PUPOF ) (ATHENS: PPC.AT) to see whether its deep value position is actually worth investing in. Background Public Power Corporation of Greece, hereafter referred to as PPC, is often talked about as Greece’s power monopoly. And there’s good reason for that. PPC supplied 97.9% of Greece’s electricity in 2014 and is vertically integrated owning mines, generation facilities, and transmission lines. Traditionally, a major utility company would be seen as one of the safest investments but PPC experienced troubles over the past few years since many customers lacked the ability to pay due to the economic depression in Greece. PPC is also majority state-owned although this could change as EU regulators push for greater privatization. Valuation Compared to the high valuations paid for the “safety” of U.S. utilities, PPC trades at an extremely low valuation.   2014 est. 2015 est. 2016 est. 2017 Price to Earnings 10.7x 3.9x 4.6x 4.2x These numbers equate to a roughly 25% forward earnings yield which is clearly pricing in a large amount of risk and skepticism. PPC also trades far below its end of 2014 book value of 26.4 euros per share giving a price to book value of 0.16x. While this may seem like a steal, it doesn’t mean much on its own since PPC is unlikely to break up to maximize asset values given that it’s a government controlled power company. Dividends For 2015, PPC paid an annual dividend of 0.05 euros per share for a yield of 1.2%. Even compared to the low yield U.S. markets, this is a small yield, especially for an utility. Although the dividend was a high as 0.90 euros per share in 2004, it was gradually reduced falling to only 0.10 euros per share prior to the financial crisis. Because of this dividend record, I do not see PPC as a near-term dividend play since there would have to be significant changes in capital allocation to produce a sizeable yield. However, if PPC were to show signs of dividend growth, I may be willing to reconsider this point. Catalysts to realize value Buying undervalued stocks is no good unless the market eventually realizes the value and drives up the stock price or dividend. Like many deep value stocks, PPC does have some potential catalysts but investors may need to be willing to wait. Privatization Reducing the government’s stake in PPC could help drive its value higher by lessening political risk and there are some powerful groups trying to push this forward. EU regulators have been pushing Greece to open up its electricity market for years yet PPC has remained a government monopoly. It turns out that powerful groups in Greece are also opposed to privatizing more of PPC. When the previous Greek government proposed selling off some of its PPC shares, workers protested by shutting off power to certain areas. To some extent, it’s easy to understand why these workers are protesting. Since the government reduced its PPC stake about a decade ago PPC worker wages have fallen about 60%. For its own part, SYRIZA has also opposed further privatizing PPC throwing up another roadblock. If PPC is further privatized, I see it as a long-term event and not a near term catalyst for value recognition. Economic recovery PPC shares also suffer from a low valuation caused by the clouds of uncertainty hanging over Greece in conjunction with the depressed economy. While Greece’s economy is actually starting to slowly grow again, an unemployment rate over 25% signals that a turnaround is far from complete. On top of that, the recent bailout package really did not solve Greece’s debt problem so issues relating to the sovereign debt are likely to continue cropping up. As long as these issues stick around, investors will be reluctant to take Greece out of the financial penalty box thus preventing PPC’s valuation from rising in the near-term. Public Power takeaway If you’re looking for a long-term recovery pick for Greece, PPC shares may be worth an investment, however, a lack of near-term catalysts reduces their appeal as a deep value turnaround investment. I will continue to follow the latest on PPC and may be willing to acquire shares if the dividend is significantly raised, major progress is made toward restructuring Greece’s debt, or privatization plans actually gain significant traction. Note: Trading in PUPOF is extremely illiquid and the best liquidity is found on the Athens Stock Exchange. For those without access to the Athens exchange, shares trade with reasonable volume on the Frankfurt exchange. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks. 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. Additional disclosure: The author does not guarantee the performance of any investments and potential investors should always do their own due diligence before making any investment decisions. Although the author believes that the information presented here is correct to the best of his knowledge, no warranties are made and potential investors should always conduct their own independent research before making any investment decisions. Investing carries risk of loss and is not suitable for all individuals.