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The V20 Portfolio Week #1: Market Tailwind

Summary The V20 portfolio climbed 6% vs. 3% for the index. Poor news hit a major holding, causing a selloff. Discussion about volatility. The V20 portfolio is an actively managed portfolio that seeks to achieve annualized return of 20% over the long-term. If you are a long-term investor then this portfolio may be for you. You can read more about how the portfolio works and the associated risks here . Always do your own research before making an investment. Week In Review It was a great week for the U.S. market, in fact it was the best week this year . With averages up around 3%, it shouldn’t be surprising that the V20 portfolio had a great time as well. You can see from my first article that almost all of the funds in the V20 portfolio was committed, except a 6% cash stake. With a net long exposure of 94%, the V20 portfolio was able to achieve a return of 6.09% over the past week. Not too shabby if I say so myself. This level of performance was achieved despite some “negative” news coming from one of the major holdings, Conn’s (NASDAQ: CONN ). On October 8th, the company released September sales and delinquency data. The sales performance was satisfactory with comparable sales increasing by a modest 1.8%. The “negative” news mainly involved the delinquency rate, which has troubled the company for a while now. After investors learned of the increasing delinquency rate, a selloff began. After the press release, the stock declined 8% from $26.60 to $24.48 where it closed on Friday. Should we be worried? Absolutely not. You can read a bit more about the mechanics behind the delinquency rate here . Its impact is a lot less than you think. Another thing that solidified my confidence in Conn’s is the CEO’s stock transaction. After Norman Miller took over as CEO, he bought half a million dollars worth of stock at an average price of $24.89 per share. Not too often do you see a CEO sink that much money voluntarily right after he or she takes over the helm. Portfolio Beta I touched on the idea of volatility in the introduction. Today I would like to go a bit into the details. I’ve compiled the data since the beginning of the year, and the beta of the portfolio against the S&P 500 thus far is 1.06. In other words, conventional wisdom would suggest that this portfolio should fluctuate roughly in line with the index. Of course, the actual result was very different. The actual performance of the portfolio significantly deviated from the expected return. I posted this chart during the introduction but I’ll use it here again to point out some of the anomalies. (click to enlarge) From January 15th to February 5th, the V20 portfolio suffered a loss of 11% while the index rose by 3%. But from April 30th to May 15th, the V20 portfolio increased by 26% while the index grew a measly 2%. As you can see, the actual volatility of the portfolio was much much higher than what was predicted by the portfolio beta. What does this mean? If you’ve been diligently tweaking your portfolio according to the beta of your individual holdings, do not add this portfolio for its “low” beta! As I mentioned in the previous article, the portfolio may be highly volatile, always keep that in mind when you invest. The Week Ahead There isn’t any scheduled announcements from any of the holdings. However there are a couple of things that I would pay attention to. On Wednesday, the Department of Commerce will release retail sales for September. While we know how Conn’s fared in September, poor industry data could foreshadow problems in the future. Another thing that I would look out for is any announcement coming from Dex Media (NASDAQ: DXM ). Since the company stopped paying interest two weeks ago, shareholders have been left in the dark as to the progress of the ongoing negotiation. The reorganization will significantly influence the future of the equity holders. If maturities are extended, then I think the equity holders will get a lot of value since bankruptcy can be delayed as the CEO tries to turn the company around.

Agriculture, Coffee And Sugar: The Next Rally?

Summary We discuss the long term bullish case for Rogers Agricultural Index ETN. 3 billion additional middle class consumers will support the demand for agricultural products over the next two decades. We discuss why Rogers Agricultural Index has been in a bear market since early 2011 and what is needed for the next bull market to start. We mention that coffee and sugar might be good investments already in the short term in light of the fundamentals. In 2007 Jim Rogers lent his name to a new line of exchange-traded notes. One of them was dedicated to the agriculture: The Elements Linked to Rogers International Commodity Index Agriculture Total Return Note ( RJA). Jim Rogers has been very positive on agriculture and farmland investments. There are probably tens of interviews where he cites to be more bullish on agriculture than any other commodity. So, why Rogers Agriculture Index has been such a horrible investment since 2007 and could this change? Was Jim Rogers wrong? These are the topics we will discuss in this article. We will also mention a few isolated picks in the agricultural sector that we believe to have more upside potential in the short term in comparison to Rogers Agricultural Index. For those not familiar with Jim Rogers, he was among the most successful and famous hedge fund managers on Wall Street. Currently he is living in Singapore and travels across the world as a guest speaker at investment conferences. Chart Analysis Rogers Agricultural Index is trading 50% below its all time highs reached back in 2008. This index contains around 20 most popular agricultural futures contracts such as corn (13.61%), wheat (13.61%), cotton (12.03%), soybeans (10.00%) and coffee (5.73%). (click to enlarge) Figure 1. RJA ETN price chart. Chart : Ycharts.com The price drop in RJA can be explained by the strengthening of the U.S. dollar, at least partially. Most producers get paid in U.S. dollars. Supply-Demand Fundamentals We went through OECD-FAO Agricultural Outlook 2015 report. This report suggests that the global inventory levels, supply and demand of the agricultural commodities are in a reasonably good balance right now. In the short term we believe that most agricultural commodities will stay at their low price levels. The bull market might be getting ready to start – but not right away. When To Buy Rogers Agricultural Index? Rogers Agricultural Index might not move up before a big change takes place in the global currency markets. The U.S. dollar should start to weaken against other major currencies. However, there is an another major price catalyst in the making. Asia has already 525m middle class consumers. That is more than the whole EU population. Over the next two decades, the middle class is expected to expand by another 3 billion. That will create a spectacular rise in demand. In parallel, the global arable land is expected to increase by only 5% by 2050. That will be a challenge. That means that 90% of the supply increases must come from the yield and farming intensity improvements. We believe that such a staggering increase in the yield might be very difficult to achieve. One option would be to consider genetically modified organisms (GMOs). Changes In GMO Policies and Consumer Habits A major policy shift is occurring in EU in 2015 with a more accommodating approach towards the use of GMOs across the whole European Union . This will surely add more supply to the markets. However, the additional 3 billion middle class consumers will make both European consumers (over 500m) and farms look very small. The demand for several crop products will grow parabolically. The meat consumption is expected to double by 2050. Now, consider that producing 1 lbs of beef does not require 1 lbs of feeds. It requires as much as 5 lbs. For chicken this would be 2 lbs respectively. Consequently, Rogers Agricultural Commodity Index will have a very strong tailwind from the increased meat consumption. Sugar Might Become A Sweet Investment (click to enlarge) Figure 2. The iPath Dow Jones-UBS Sugar Total Return Sub-Index ETN (NYSEARCA: SGG ) and the iPath Dow Jones-UBS Coffee ETN (NYSEARCA: JO ) price. Chart: YCharts.com Sugar is cheaper today than it was in the ’70s. The current supply-demand balance is currently in a deficit and several price catalysts are emerging: New fuel policy in Brazil lifting gasoline prices – this will increase the demand for both ethanol and sugar. Indian sustained drought conditions. Too low sugar price – farmers might as well do nothing for the same close to zero earnings or transfer their cultivations over to something else. We believe that sugar will be pushed higher with these catalysts already in the short term. The flex-fuel cars’ ethanol usage in Brazil might even double in 2015 due to the new policy. Besides sugar we think that coffee is a good investment right now. We covered coffee and the iPath Pure Beta Coffee ETN (NYSEARCA: CAFE ) in an earlier exclusive Seeking Alpha article . Risks and Opportunities We believe that an unexpected breakthrough in genetically modified crops might be among the risk factors hindering the bull market in Rogers Agricultural Index. The recent months low inflation rates, felt globally, could also continue to press the commodity prices lower. Also a short dollar rally could push the prices lower. Rising agricultural prices would be advantageous for the farmers not earning a decent income these days in most producing countries. Through higher salaries and incomes these rural regions would start to prosper. The rising salaries and incomes in the producing countries would increase the inflation levels. Higher inflation would mean higher crop prices. This vicious circle might get stronger and stronger and support the next bull market in the agricultural commodities. Conclusion We are bullish on both Coffee and Sugar, and over a longer term RJA. As the world will count over 3 billion additional middle class consumers over the next two decades, we will see an unprecedented growth in the agricultural products’ demand. In parallel the arable land surface area is going to increase by less than 5%. The changing patterns in the climate continue to reduce the harvests even more frequently. We do not recommend our readers to buy a tractor or a pair of rubber boots. Following up the agricultural commodities prices could do it for the short term if the farmlands’ productivity increases will be sufficient. Disclaimer: Please do your own research prior to investing and taking investment decisions. This article is provided for informal purposes only and any information mentioned may change at any time without a notice. Please consult your investment advisor for finding a proper allocation for your portfolio that is adjusted with your risk levels and personal situation.

Piedmont Natural Gas: Steady, Reliable Income

Summary Dividend history is incredibly stable – 3 or 4% annual raises for more than a decade. Market area (Carolinas and Tennessee) is one of the bright spots in the United States. Shares won’t double overnight, but they don’t have to in order to reward shareholders well. Piedmont Natural Gas (NYSE: PNY ) is a large, pure-play natural gas distribution company with a wide berth of operations across the Southeastern United States. The utility has been growing steadily, with earnings and the dividend tracking along at nearly 5%/year for the past twenty years. Consistency has been the name of the game here. This measured growth has been attributable to the favorable rate environment along with population growth strength in the Southeast coupled with the buildout of pipelines surrounding the Marcellus/Utica shale formations in the Northeast. Natural gas development and production in the United States has been and continues to be incredibly strong, yielding abundant supply and relatively stable pricing for gas utilities like Piedmont Natural Gas, especially over the past five years. This strong, consistent operating performance has yielded shares that have been less volatile and consistently outperformed the broader utility index. Will the future be as strong as the past? Operating Results Revenue is down, as has been the case for many natural gas utilities. This is because utilities dealing with lower natural gas prices have to pass the vast majority of the associated cost benefits passed along to consumers in the form of lower utility bills. Excess consumer demand from cheap energy rarely offsets the associated drop in revenue. Further compounding top-ine issues, weather has been at best normal and at worst seasonally warm in the company’s service areas. Decoupling agreements with the utility commission and strong local population growth have done their best in managing to keep growth flat. The company’s small but highly profitable non-regulated businesses have also done well, helping to improve overall operating margins over the 2011-2015 timeframe. (click to enlarge) Piedmont continues to invest significantly in its pipeline infrastructure through capital expenditures. This has continued to result in cash flow deficits, most obviously in 2013/2014. The company notes that it is pushing for new regulatory mechanisms such as IMR tariffs and accelerated rate requests to allow quicker recovery of its cash outlays. The majority of these initiatives went into place in 2013 and the company has made significant strides in getting back to cash flow neutral between its operating and investing activities. Unfortunately the shortfalls in 2013 and 2014 almost doubled long-term debt from $675M in 2012 to nearly $1.4B today. At 3.3x net debt/EBITDA, however, the company is only moderately leveraged and will have no problem covering interest expense on this cheap fixed-rate debt (blended rate is 3.85% fixed rate). While negative consistent overspending in the cash flow statement is generally a sign of mismanagement, in this case it was simply the case of a company investing in its non-utility power generation service delivery projects. Going forward, I expect cash flow shortfalls to be small and investors need not be concerned yet. Conclusion I view Piedmont Energy as an excellent choice in its peer group compared to overvalued alternatives like Atmos Energy (NYSE: ATO ) ( analyzed here ) or lower yielding options like Southwest Gas (NYSE: SWX ) ( analyzed here ). Dividend growth has been incredibly consistent, plugging along at either 3 or 4% increases every year for more than a decade. At a 3.22% yield as of today, the income being thrown off isn’t anything to sneeze at either. Investors might find themselves falling asleep if they hold the stock in their portfolios. For income investors, that is quite often a good thing rather than a bad thing. While I wouldn’t go running to pick up shares at current levels, current shareholders are likely quite happy with the results they’ve been getting and will likely continue to get. I’m not going to disagree with that sentiment. If you’re long, keep on holding and enjoy what is likely to be one of the most stable companies investors have access to in publicly-traded markets. Share this article with a colleague