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Conservative Sector ETF Ideas For September

Over the last 20 Septembers, the S&P has posted an average performance of zero. If history repeats in September 2015, investors will want to take a conservative approach to sector exchange traded funds this month. The Utilities Select Sector SPDR ETF is usually the top performer among the nine sector SPDRs in the month of September. By Todd Shriber, ETF Professor September is here and that is great news for fans of American football, but financial market data indicate equity bulls would do well to curb what enthusiasm they have left after a trying August. For believers in seasonal trends, it must be noted that over the last 20 Septembers, the S&P has posted an average performance of zero. The benchmark U.S. equity index is traditionally flat in September over that period, according to Equity Clock data. That does not mean sector-level opportunities cease to exist in the ninth month. Rather, the opposite is true, but if history repeats in September 2015, investors will want to take a conservative approach to sector exchange traded funds this month. Utilities The Utilities Select Sector SPDR (NYSEARCA: XLU ) is usually the top performer among the nine sector SPDRs in the month of September, averaging a modest gain in the ninth month of the year, according to CXO Advisory . XLU is in the midst of what is supposed to be a seasonally strong period for the largest utilities ETF as the fund is usually the second-best of the nine SPDRs in August. Indeed, XLU lived up to that track record, but underscoring just how poorly stocks performed last month, XLU lost 4 percent. Only the Energy Select Sector SPDR ETF (NYSEARCA: XLE ) was better among the nine SPDRs. Consumer Staples According to CXO data, the Consumer Staples Select Sector SPDR ETF (NYSEARCA: XLP ) is usually the second-best of the nine SPDRs this month, though like the S&P 500, is usually about flat this month, reminding investors that sometimes less bad is good. However, before backing up the bus on XLP, investors should note that the largest staples ETF was usually the best of the sector SPDRs in August, but that historical data did not mean much as XLP tumbled 6.1 percent last month. Materials & Tech In terms of the worst of the nine SPDRs in September, that dubious honor goes to the Materials Select Sector SPDR ETF (NYSEARCA: XLB ) followed by the Technology Select Sector SPDR ETF (NYSEARCA: XLK ). This is where things get interesting and those things are a reminder that seasonal trading often requires the user to be nimble. Historical data, courtesy of CXO, indicate XLU is usually the best SPDR this month, but that is before it turns into October’s worst. Conversely, XLK is historically the second-worst SPDR in September before it becomes the best of the nine in October. Disclaimer: Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation. 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.

PPL Maintains Attractive Fundamental Outlook

Summary PPL’s transformation into a regulated electric utility and constant investments are key positives of the stock. PPL will have a better rate base growth in the years ahead. The company’s shareholders will continue to enjoy healthy dividend growth in the years ahead. I reaffirm my bullish stance on PPL Corporation (NYSE: PPL ); the company has been executing correct growth efforts and its financial performance remains satisfactory. PPL’s initiative of investing heavily in energy infrastructure development projects is well in-line with its long-term growth generating strategy. Moving ahead, the company’s growth investments will serve as an important source of generating healthy sales and cash flows with rate base growth in the long run. Moreover, PPL has transformed itself into a 100% regulated utility with the spin-off of its competitive energy operations, which will provide stability to its future cash flow base and highlights the security of its consistent dividend growth. Furthermore, the stock offers a potential upside of approximately 18%, based on my price target, as shown below. PPL Is an Attractive Buy In the past few years, U.S. utility companies have been investing heavily in infrastructure growth and development projects. Given the fact that the U.S. electricity demand graph is expected to grow consistently, as shown in the graph below, I believe that ongoing hefty infrastructural development and growth-related investments by U.S. utility companies will serve as an important driver of their future earnings and cash flow growth. (click to enlarge) Source: bv.com As far as PPL is concerned, the company has been spending aggressively on infrastructural growth projects, most importantly to develop its transmission business. During 2Q’15, PPL has completed one of its major transmission business-related investment projects, the 500-KV Susquehanna-Roseland transmission project. This upgraded Susquehanna-Roseland transmission line will act as a model for its future transmission projects, which are lined up to improve the company’s transmission operations. Also, it will make PPL’s electric services more reliable in the long run. Moreover, the company’s 640-MW Cane Run unit 7, the first combined cycle gas plant in Kentucky, is also operational now. The unit has replaced PPL’s 800MW coal-fired generation as part of its plan to reduce its reliance on coal and move to energy efficient gas-powered units. Moving ahead, as the company continues to invest in its infrastructural development-related projects, I believe PPL’s rate base will decently grow in the years ahead, which will ultimately better its top-line, cash flows and earnings base. In its efforts to gain regulated rate base growth, the company filed a rate increase request to Pennsylvania Utility Commission (PUC) in which it is seeking an increase of $167.5 million in annual base distribution revenue on 10.95% ROE and 51.6% equity ratio on a rate base of $3.2 billion. This rate case hike request is backed by the company’s ongoing investments in renewing, strengthening and modernization of its distribution network. If approved, the proposed rate hike will add to PPL’s future top-line, earnings and cash flow base growth. Meanwhile, the company’s recently approved rate case increase of $125 million for KU and $7 million for LG&E will positively affect its top-line numbers. In addition, PPL’s effective transformation into 100% regulated utility after the spin-off of its competitive business operations has improved its risk profile. During the 2Q’15 earnings conference call, while talking about the strong growth prospects of its company, PPL’s CEO s aid : “…all of our utilities are investing heavily in infrastructure, producing robust rate base growth for PPL. In fact, organic growth in our domestic utilities is among the strongest in the U.S. utility sector with 8% to 10% earnings growth expected through 2017. We expect our combined rate base in the U.S. alone to grow by 47% over the next five years. That’s the equivalent of adding another major utility to our portfolio.” Given PPL’s transformation into a 100% regulated utility and also due to constant growth investments made by the company, I believe that its management’s anticipation of attaining an annual earnings growth rate of 4% to 6% through 2017 is achievable. Investors Remain rewarded at PPL The company has been sharing its success with shareholders through dividends. PPL had recently announced quarterly dividend payments of $0.3375, increasing the annualized dividend by 1.3% to $1.51/share . The company offers a dividend yield of 4.82% and has a low payout ratio of 56.40% . Owing to the company’s transformation into a regulated utility, which will provide stability to its top-line numbers and cash flows, I believe dividends offered by the company will grow consistently in future, which will portend well for its stock price. Analysts are also expecting a consistent increase in the company’s book value and cash flows per share, as shown in the chart below. (click to enlarge) Source: 4-Traders.com Price Target I have calculated a price target of $37 for PPL, using a dividend discounting method. In my price target calculations, I used cost of equity of 8% and nominal growth rate of 3%. The stock offers a potential upside of approximately 18%, as per my calculated price target, as shown below. 2015 2016 2017 Terminal value DPS (In-$) 1.47 1.53 2 41 Present Value of DPS (In-$) 1.36 1.31 1.59 33 Source: Equity Watch Calculations & Estimates Total Present Value of DPS = Price Target = $1.36 + $1.31 + $1.59 + $33 = $37/share Risks Given the fact that the U.S. government has become more concerned about limiting the effect of carbon dioxide emissions from electricity generation plants of utilities, the company continues to face increased risk of regulatory restrictions in the form of taxes and fines. Furthermore, unexpected political and environmental changes, irregular weather patterns and higher fuel costs are key risks that might hamper PPL’s future stock price performance. Also, I believe that any laxness exhibited by the management during the execution of its planned strategic growth plans, mentioned above, will result in the company’s failure to produce financial results, per the management’s estimates. Conclusion PPL has an attractive fundamental outlook. The company’s transformation into a 100% regulated electric utility and its constant investments to expand and improve the transmission business are key positives of this stock, which indicate that PPL will have a better rate base growth in the years ahead, which will portend well for its top-line and earnings base. Also, it will strengthen the company’s future cash flow trajectory. Owing to the improved outlook of PPL’s future cash flow base, I believe its shareholders will continue to enjoy healthy dividend growth in the years ahead. Moreover, based on my price target, the stock offers potential price appreciation of 18%. Due to the aforementioned factors, I am bullish on PPL. 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 Handle Market Crashes

While most investors think they are fully prepared for market crashes, this is easier said than done. Investors should always keep a part of their portfolio in cash and avoid the temptation of leverage. During market crashes many investors sell their stocks, usually the most profitable ones, even though their fundamentals have remained intact. This is a huge mistake. As Warren Buffett says, macro fears should never play a role in decisions to sell stocks. After 4 years of remarkably low volatility, the global markets crashed a few days ago, with S&P (NYSEARCA: SPY ) losing 200 points (about 10%) in just 4 sessions. The main reason was the increased concern that the Chinese economy might be decelerating from its current pace of about 7% annual growth. While most investors think they are fully prepared for such incidents, this is easier said than done and hence their mindset is really tested only when such events occur. In this article, I will provide a few guidelines for handling market crashes. First of all, investors should always keep a part of their portfolio in cash just for such incidents, which may be either widespread or specific for a single sector or stock. Investors normally prefer to be fully invested instead of keeping some cash because the latter results in underperformance during the good times of the market, as cash earns nothing. As the stock market does well most of the times (it rises slowly and falls steeply), it is only natural that investors tend to minimize their cash position. However, when a crash occurs, the resultant bargains are so great that they can provide exceptional profits in just a few days or weeks. Therefore, it pays to maintain a part of a portfolio in cash. For instance, Johnson & Johnson (NYSE: JNJ ), the popular dividend aristocrat that has raised its dividend for 53 years in a row, initially plunged 15% on Monday, August 24th, only to fully recover after 3 days. In a similar fashion, Gilead Sciences (NASDAQ: GILD ) initially plunged 18%, from $105 to $86, only to recover after 2 days. It is remarkable that its low of $86 corresponded to a forward P/E=7.4, extremely low for such an exceptionally managed, growing company. Similar trends were witnessed for other stalwarts as well, such as Visa (NYSE: V ), which initially plunged 16% on Monday, and MasterCard (NYSE: MA ), which initially plunged 19% on Monday. Both credit card companies fully retrieved their losses in 2 days. Instead of keeping some cash, some investors prefer to go to the other extreme and use some leverage in their portfolio. This is particularly enticing, as leverage helps them outperform the market during good times, i.e., most of the time. However, in the case of a crash, they will not have any spare money to take advantage of the rare opportunities that show up. Even worse, they may be forced to liquidate some positions at the most unfavorable moment. Therefore, not only do they miss the rare opportunities that emerge, but they also incur real, permanent losses due to the forced liquidation. In a mild market crash, like the one of last week, leveraged investors may lose profits of many months or years, depending on their degree of leverage. One might say that a 10% plunge can be tolerated even by high-leveraged investors but the truth is that no-one ever knows at what point the dive will end and hence high-leveraged investors are emotionally forced to liquidate positions even if they avoid a margin call. To put it simply, they prefer to cut their losses early, as a further decline of their stocks might be devastating for their portfolio. Apart from being fully invested, a common mistake during market crashes is to sell some stocks, particularly the most profitable ones. This is a huge mistake, which can prove to be very costly. If the fundamentals of a good stock have remained intact, the stock should not be sold during a market crash. Fears of an imminent recession or deceleration in the Far East or even the US do not count as fundamentals. If some investors are scared every time the media call for an imminent recession, these investors should never buy any stocks, as one thing is sure; a recession will show up in almost every country every few years. Therefore, selling solid stocks in a market sell-off is a recipe for failure. It is also a certainty that stocks with strong fundamentals will rebound quickly after the panic subsides and hence they will not be available near the prices recorded during the panic. To sum up, investors should keep a part of their portfolio in cash and avoid the temptation of leverage in order to take advantage of a market crash. Moreover, as long as the fundamentals of their stocks have remained intact, it will be a huge mistake to sell them. As Warren Buffett says, macro fears should never play a role in decisions to sell stocks. As the experience of all the previous market crashes (e.g. 1987, 2000, 2008, 2011) has shown, all the stocks with strong fundamentals soon retrieved their losses and most of them did so much faster than the market. 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.