Tag Archives: seeking-alpha

Cushing MLP Total Return Fund: A Lesson For CEF Investors

Summary CEF investors are often attracted by the high yields in this space. SRV’s anomalously high yield and premium provided a ripe recipe for disaster. This article identifies three warning signals that investors could have heeded before the devastating event. The date is Dec. 22nd, 2014. With oil prices collapsing around you, you decide that now would be a good time to dip your toes in an MLP close-ended fund [CEF]. You read Stanford Chemist’s just-published article entitled ” Benchmarking The Performance Of MLP CEFs: Is Active Management Worth It? “, where he recommended, among five MLP CEFs yielding 5.43% to 6.85%, the Tortoise Energy Infrastructure Corporation ( TYG ) due to its strong historical total return and outperformance vs. the benchmark Alerian MLP ETF ( AMLP ). But the 5.43% yield of TYG and the 6.25% yield of AMLP are a bit low for your tastes. You decide to invest in the Cushing MLP Total Return Fund ( SRV ) with a whopping 14.02% yield , more than double that of the other two funds. With twice the yield, you might expect twice the return, right? Fast-forward to today. You have lost half of your investment. The following chart shows the total return performance of SRV, TYG and AMLP since Dec. 2014. SRV Total Return Price data by YCharts What happened to SRV? As with some other high-profile CEFs profiled recently, what transpired with SRV in early 2015 was a distribution cut that triggered a massive collapse in premium/discount value. As can be seen from the chart below (source: CEFConnect ), SRV slashed its quarterly distribution by 68%, from $0.2250 to $0.0730 in 2015. Amusingly, after paying one quarter of its reduced distribution, SRV cut its distribution again by 26%, while simultaneously changing to a monthly distribution policy (perhaps to make the second distribution cut less obvious!). Taken together, the overall change from a distribution of $0.2250/quarter to $0.0180/month represented a 84% reduction for SRV holders. (click to enlarge) The distribution cut was accompanied by a massive reduction in premium/discount value, from some +30% to -10%, as can be seen from the chart below. This explains the severe underperformance of SRV vs. TYG and AMLP since Dec. 2014. (click to enlarge) Obviously, hindsight is always 20/20. But I believe that there were some warning signs that SRV investors could have heeded before the disastrous event. Lesson #1: Consider historical performance While historical performance is no guarantee of future results, the past return of a CEF can give an indication of the management’s competency in running the fund. The 3-year total return to Dec. 2014 (the hypothetical start date of this exercise) shows that even before the distribution cut had occurred, SRV had been severely underperforming TYG and AMLP on a total return basis. SRV Total Return Price data by YCharts On a price-only basis, the underperformance of SRV becomes even more visually striking. SRV data by YCharts The above charts indicate that the high distribution paid out by SRV has prevented it from growing its NAV, despite the bull market in MLPs. Even when total returns are considered, SRV still lagged TYG and AMLP in the three years to Dec. 2014. Lesson #2: Premium/discount matters! As investors in the Pioneer High Income Trust (NYSE: PHT ) (see here for my previous article warning of PHT’s expanding premium) and more recently, the PIMCO High Income Fund (NYSE: PHK ), have found out , a high starting premium simply increases the amount that a fund can fall when adversity strikes. On Dec. 22nd, 2014, SRV’s premium/discount had stretched to a massive +28.4%. In comparison, TYG’s premium/discount was -6.1% at the time. The following chart shows the 3-year premium/discount profiles for SRV and TYG. (click to enlarge) The chart above shows that in the two years leading to Dec. 2014, SRV’s premium/discount expanded from around +15% to over +30%. On the other hand, TYG’s premium/discount declined from +15% to around -10% over the same time period. Does it make any sense to you that the perennial underperformer SRV was immune to the MLP sell-off that began in the summer of 2014, while the benchmark-beating TYG was not? No, it doesn’t make any sense to me either. In fact, SRV’s premium continued to expand even while the oil crash was already well underway. My only explanation for this was that retail investors were enamored with SRV’s high yield and pushed up its market price relative to its NAV. CEF expert and Seeking Alpha contributor Douglas Albo frequently laments the “Insanity of CEF Investors.” I believe that this example qualifies. Lesson #3: Beware of yields that seem too good to be true On Dec. 22, 2014, SRV yielded 14.02% with a premium/discount of +28.4%, meaning that its yield on NAV was even greater, at 18.00% (!). Meanwhile, TYG yielded 5.43% with a premium/discount of -6.1%, giving a NAV yield of 5.10%. Given that both funds employ similar leverage (around 30%), and are investing in essentially the same universe, how can SRV be yielding more than three times on its NAV compared to TYG? It just doesn’t make any sense. Simply put, SRV’s yield was way too good to be true. Summary I believe that there were several warnings signs that could have allowed investors to avoid SRV before the calamitous distribution cut in early 2015. These were [i] a poor historical performance, [ii] a rising premium (while other and better funds in the same category witnessed premium contraction), [iii] a yield that seemed way too good to be true. My main regret is not being able to identify this short opportunity for readers, and/or warn existing holders to exit the fund beforehand. Nevertheless, I hope that this article will help investors pick out similar warning signs in their existing or potential CEF investments to allow them to take action earlier. 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.

How To Avoid The Worst Sector ETFs: Q3’15

Summary The large number of ETFs has little to do with serving your best interests. Below are three red flags you can use to avoid the worst ETFs. The following presents the least and most expensive sector ETFs as well as the worst overall sector ETFs per our Q3’15 sector ratings. Question: Why are there so many ETFs? Answer: ETF providers tend to make lots of money on each ETF so they create more products to sell. The large number of ETFs has little to do with serving your best interests. Below are three red flags you can use to avoid the worst ETFs: Inadequate Liquidity This issue is the easiest to avoid, and our advice is simple. Avoid all ETFs with less than $100 million in assets. Low levels of liquidity can lead to a discrepancy between the price of the ETF and the underlying value of the securities it holds. Plus, low asset levels tend to mean lower volume in the ETF and larger bid-ask spreads. High Fees ETFs should be cheap, but not all of them are. The first step here is to know what is cheap and expensive. To ensure you are paying at or below average fees, invest only in ETFs with total annual costs below 0.53%, which is the average total annual cost of the 186 U.S. equity sector ETFs we cover. Figure 1 shows the most and least expensive sector ETFs. ProShares provides 2 of the most expensive ETFs while Fidelity and Vanguard ETFs are among the cheapest. Figure 1: 5 Least and Most Expensive Sector ETFs (click to enlarge) Sources: New Constructs, LLC and company filings Investors need not pay high fees for quality holdings. The PowerShares KBW Property & Casualty Insurance Portfolio (NYSEARCA: KBWP ) earns our Very Attractive rating and has low total annual costs of only 0.39%. On the other hand, the Schwab U.S. REIT ETF (NYSEARCA: SCHH ) holds poor stocks. No matter how cheap an ETF, if it holds bad stocks, its performance will be bad. The quality of an ETFs holdings matters more than its price. Poor Holdings Avoiding poor holdings is by far the hardest part of avoiding bad ETFs, but it is also the most important because an ETF’s performance is determined more by its holdings than its costs. Figure 2 shows the ETFs within each sector with the worst holdings or portfolio management ratings . Figure 2: Sector ETFs with the Worst Holdings (click to enlarge) Sources: New Constructs, LLC and company filings PowerShares appears more often than any other providers in Figure 2, which means that they offer the most ETFs with the worst holdings. Our overall ratings on ETFs are based primarily on our stock ratings of their holdings. The Danger Within Buying an ETF without analyzing its holdings is like buying a stock without analyzing its business and finances. Put another way, research on ETF holdings is necessary due diligence because an ETF’s performance is only as good as its holdings’ performance. PERFORMANCE OF ETFs HOLDINGs = PERFORMANCE OF ETF Disclosure: David Trainer and Max Lee receive no compensation to write about any specific stock, sector, 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.

Back To Cash, Back To Basics: Buying Stocks For A Discount

Our Portfolios are over 75% cash as we simply don’t trust these markets. We’re looking forward to going shopping but shopping wisely. That means reviewing some of our basic option strategies – techniques that makes us money. We took the money and ran – now what? As you can see, our Long-Term Portfolio is now swimming with cash as we cashed in our winners and kept the losers. Our losing positions include 24 short put sales that currently represent about $150,000 of that “Negative Market Value,” though it’s not really negative because we already have the Cash on Hand (a great benefit of selling puts), so it’s just a matter of how much cash we need to give back in the end. When we sell a put, we are promising to buy a stock for a certain price (the strike) and we get paid by the holder of the stock to make that promise. They benefit by putting a price floor under their stock and we benefit from getting cash in our pockets and, ultimately, from potentially buying a stock cheaply. Unfortunately, most people are traders, not actual investors, and they tend to forget why they entered a short put trade in the first place. Because of that, when the short put positions turn negative in a market downturn, they tend to start thinking of them as losses, rather than progress made towards buying the stock at our discount target. (click to enlarge) In the 2013 example, the stock that is used is AT&T (NYSE: T ) and the strategy was to sell the Jan 2015 $30 put contracts for $2. This obligated us to buy the stock for $30 in exchange for $2 paid to us by the stockholder. Had it been assigned to us, our net entry would have been $28 (as we had the $2 in our pocket) and, as you can see, $28.90 was the 2014 low and it hit Jan 2015 well above $30. So, in effect, we would have kept the $2 and not owned the stock and we could have then turned around and sold the Jan 2016 $30 puts for $2 and already we can sell the Jan 2017 $30 puts for $2.75 (higher premiums due to market volatility) or the 2017 $28 puts for good old $2. Either way, the concept is we don’t have to own T at all (no cash out of pocket) yet we collect $2 a year, which is more than the $1.88 annual dividend we’d be buying the stock for. If T ever does get a major selloff, we certainly don’t mind owning it cheaply and, since we’ve already collected $6 for not owning the stock, our net entry would be $24 – $8.50 (26%) below the current price. That’s our ” worst case ” – and then we can turn around and sell calls against the stock, promising to sell the stock to someone else at a pre-determined strike. If, for example, we were assigned T at $30 tomorrow, we could turn right around and sell the 2017 $30 calls for $3.50. That would drop our net basis to $24-$3.50 = $20.50 and, if the stock were finally called away at $30, our final profit would be $9.50 (46%) plus 6 dividend payments of 0.47 = $2.82 for a total profit of $12.32 on the $20.50 cash we ultimately put to work (60%). And that is how easily we slide into our 7 Steps to Consistently Making 20-40% Annual Returns: In a video from 2013 and you’ll notice the example was Transocean (NYSE: RIG ), which was trading at $44.13 when the trade was initiated on May 5th of 2012 and is now trading at $13.45 – a total disaster – or was it? As noted in the video, we sold call contracts for $1.60 per month consistently against it, collecting $9.67 before being called away with an additional gain at the $46 strike. In fact, this strategy forces us to cash out when a stock jumps up on us and, as you can see from this chart, that made for the perfect exit in the fall of 2014 at the $46 price mentioned in the video. Once called away, we don’t jump right back in and buy the stock again, because the fact that we wait patiently for a stock to be low in the channel and then sell those puts to give ourselves a 15-20% discount on the next entry and then go back to our call-selling strategy give us a huge edge on passive investors. We combine that with our basic strategies for establishing new positions – especially the practice of scaling in to new positions . We do, in fact, have 50 RIG 2017 $13/20 bull call spreads in our Long-Term Portfolio and it is our intent to sell puts, like the 2017 $13 puts for $4.50, which would drop our net entry to $8.50, which we feel is a good enough value on the stock to commit to owning 2,500 shares (25 contracts at $11,250). This more than pays for the spread so we make a profit on every penny the stock is over $13 times 5,000 shares we control and our worst case is we’ll own 2,500 shares of RIG for the long-term. (click to enlarge) Another great, live example of a put-selling strategy is Sotheby’s (NYSE: BID ), which is in our Options Opportunites Portfolio . Our cur rent position is 20 long Jan $34 calls, which we bought for $4 and are now $2.70 as BID has gone down further than we thought but now it’s very attractive to sell some puts to offset the cost of those calls. With the stock at $34.09, the 2017 $30 puts can be sold for $3.50, which is a net entry of $26.50, a nice 22% discount off the already low price. Selling just 10 of those reduces the basis on our 20 long calls by $1.75 each and now we own those long Jan $34 calls for net $2.25 and we expect Sotheby’s to be back in the $40s after their next earnings report (11/11) – plenty of time for us to cash out with a nice profit! It’s a very choppy market and we’ve gone mainly to cash but that doesn’t mean we won’t be agreeing to take other people’s money in exchange for our promise to buy their stock if it gets 20% cheaper than it is now. As the great Warren Buffett like to say: ” Be fearful when others are greedy and greedy when others are fearful .” Our strategy of selling puts to initiate positions sets us up to be buyers when others are panicking and then, once we own the stock, our strategy of selling calls sets us up to be sellers when others are in a buying frenzy. That’s why it works so consistently! Disclosure: I am/we are long BID, RIG, T. (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. Additional disclosure: Positions as indicated but subject to RAPIDLY change (currently mainly cash and an otherwise bearish mix of long and short positions – see previous posts for other trade ideas). Positions mentioned here have been previously discussed at www.Philstockworld.com – a Membership site teaching winning stock, options & futures trading, portfolio management skills and income-producing strategies to investors like you.