Tag Archives: seeking-alpha

This New Alternative Energy ETF Continues To Bleed

Renewable energy YieldCos continue to feel the pain. This investment vehicle was once conceptualized and launched for the sake of helping energy companies raise cheaper project financing while benefiting investors through higher distributions and yield. But now they continue to bear the brunt due to several reasons. First, the recent crash in crude oil prices to the $40 level is taking its toll on YieldCo stocks. Low oil prices reduce the demand for renewable energy and therefore YieldCos. Second, the slowdown in China, the world’s biggest producer of solar panels, doesn’t bode well for them. China is projected to grow by 6.8% in 2015, which would be the lowest in 25 years. Third, the brightened prospect of an interest rate hike by the Fed in December makes the high-yielding YieldCo stocks less appealing to investors. Further, a rising interest rate scenario is never desirable for them, as it raises their cost of project financing on which they are highly dependent. Finally, YieldCos need to issue shares (generally at higher prices than their IPOs) from time to time to raise capital for new investments as most of their cash flow gets wiped out by paying dividends. However, they are facing difficulties on this front due to depressed renewable energy stocks and an oversupply of YieldCos in the market, making investors reluctant to pay higher prices. Let us consider the performance of three new YieldCos, TerraForm Power, Inc. (NASDAQ: TERP ), TerraForm Global, Inc. (NASDAQ: GLBL ) and 8point3 Energy Partners LP (NASDAQ: CAFD ). Shares of TerraForm Power lost a significant 73.8% since its IPO was launched by SunEdison, Inc. (NYSE: SUNE ) last year. On the other hand, shares of TerraForm Global, also launched by SunEdison, cooled off 59.3% since its IPO this August. Meanwhile, shares of 8point3 Energy Partners shed 42.1% since its IPO launched by FirstSolar Inc. (NASDAQ: FSLR ) and SunPower Corp. (NASDAQ: SPWR ) in June this year. Notably, SunEdison YieldCos – TerraForm Power and TerraForm Global – posted dismal quarterly results at the beginning of this month. TerraForm Power reported a loss of 3 cents per share for the 2015 third quarter in sharp contrast to the Zacks Consensus Estimate of earnings of 28 cents. On the other hand, TerraForm Global reported a considerably wider-than-expected loss of 33 cents per share for the quarter compared with the Zacks Consensus Estimate of a loss of 14 cents. The oldest surviving YieldCo, Brookfield Renewable Energy Partners LP (NYSE: BEP ), formed by Brookfield Asset Management (NYSE: BAM ), also posted a wider-than-expected loss of 7 cents per share compared with the Zacks Consensus Estimate of a loss of 5 cents at the beginning of this month. The YieldCo had generated earnings in the three preceding quarters. These adverse developments have led Global X YieldCo ETF (NASDAQ: YLCO ) to tumble 32.2% since its launch in May this year by Global X (as of November 23, 2015). YLCO intends to diversify the risk of owning YieldCo stocks by tracking the Indxx Global YieldCo index. The ETF holds 20 securities with Brookfield Renewable Energy Partners, NextEra Energy Partners, LP (NYSE: NEP ) – a NextEra Energy, Inc. (NYSE: NEE ) YieldCo – and NRG Yield, Inc. (NYSE: NYLD ) – a NRG Energy, Inc. (NYSE: NRG ) YieldCo – taking up the first, second and third spots with 12.13%, 9.02% and 8.36% shares, respectively. The fund is highly concentrated in its top 10 holdings, which account for 68.74% of total assets. It has a global footprint with the U.S. occupying the top spot at 37%, followed by Canada (31%), U.K. (20%) and Spain (12%). YLCO has gathered a meager $3.5 million in assets and trades in a paltry volume of 4,000 shares. It charges 65 bps in annual fees from investors and has a dividend yield of 2.8% (as of November 23, 2015). Original Post

Duke Is Making All The Right Moves To Secure A Bright Future

Summary Company is taking correct strategic growth measures to ensure secure and sustainable earnings and cash flow growth. DUK can apply for strong rate cases in future due to its high growth investments. Long-term prospects of DUK seem bright due to accelerated growth investments. Company’s risk profile will improve given its measures to strengthen its regulated business. Duke Energy (NYSE: DUK ) is one of the leading electric utility companies in the U.S., which supplies energy to North America using an extensive portfolio of electricity generation assets. The company is regularly using a major portion of its growth investments on expanding its renewable regulated asset base by making regular acquisitions and by pursuing several appealing construction projects, under its attractive business strategy that focuses on having large regulated business mix. DUK’s ongoing capital expenditure will keep its rate base growing, above or in line with the management’s forecasted range, which will boost its long-term earnings and cash flow growth. Given the company’s on-track, strong long-term strategic growth measures, I think income-hunting investors should consider adding DUK to their dividend portfolios. Electricity consumption in the U.S. has been growing at a modest rate. The graph below reflects EIA projections for U.S. electricity consumption in 2016. Source: eia.gov To strengthen their electricity generation portfolio and to keep up with the changing environmental regulations, U.S. utility companies are trying to maximize opportunities of growth, while managing risk by intelligently shifting towards the regulated business side, which will provide stability to their cash flows and earnings. Speaking of DUK, the company has also followed industry norms by increasing its dependence on the regulated business side, which has been a very strong performer. DUK now expects regulated and commercial business to grow by 4%-6% . The company’s plan to have a larger regulated business mix through active acquisitions and through several construction-related projects, is working really well. DUK has built a strong portfolio of approximately 2000MW of owned and equity interest in both wind and solar projects. Speaking of the solar side of its renewable regulated business side, the company is systematically and strategically growing its solar energy-based electricity generation asset base. In North Carolina, where DUK already operates with 13 solar farms, the announcement for the construction of the biggest solar energy generation farm of 40MW , in collaboration with First Solar (NASDAQ: FSLR ), has been announced. Moreover, the company plans to complete the construction of 128MW utility-scaled solar operations in North Carolina. Additionally, DUK’s solar-based investments in South Carolina and Florida are advancing well with the plan. I think the company will benefit from its ongoing investments in the Carolinas by filing rate cases in upcoming years, which will bode well for its EPS and cash flow growth. The company is planning to make its renewable energy generation portfolio stronger, by agreeing on a $4.75 billion deal agreement with Piedmont Natural Gas (NYSE: PNY ). DUK’s management expects that the acquisition of PNY’s assets will be accretive to its earnings base in the first year, after the closure of the deal; the deal will add approximately 50bps to long-term EPS growth. The company is expecting benefit from robust rate base growth of around 9% from this acquisition, which will accelerate DUK’s sales and cash flow base and will ultimately increase its growth rate beyond the given guidance of 4%-to-6%. Moreover, the company has recently acquired a 50% stake in Mesquite Creek via Sumitomo joint venture, to acquire 211MW wind power project, upside of this deal rests in enhancing DUK’s energy generation capacity; also the deal has moved it a step towards achieving its goal of becoming carbon neutral by 2020. Taking another smart move towards achieving carbon neutrality goal, the company has announced the retirement of its Ashville coal plant in N.C. and its replacement with two 280MW CCGTs in 2020, with an expected investment of above $1 billion, the project might add as much as $0.05-to-$0.08 towards DUK’s EPS. Besides these acquisitions and constructions, there are a number of commercial wind and solar power projects planned by the company, which are likely to come in operation by the end of the year. In total, the company’s growth investments is expected to be $20 billion through 2019 and offer the base for strong earnings growth in the years ahead. Furthermore, DUK’s international business, which has been facing some challenges lately have stabilized in 2015. Given the fact that analysts are expecting lower market power crisis and higher energy demand from key international markets like Brazil, amid positive changes expected in the weather, I think the company’s international business will witness modest growth in 2016 and beyond. Furthermore, DUK has an attractive capital return plan, which is largely supported by its strong cash flows. The company has paid dividends for 89 consecutive years. Talking about DUK’s future dividend payments plans at the 3Q 2015 earnings conference call, its CEO said : We have made significant progress in advancing our strategic growth initiatives, both in our regulated and commercial businesses providing strong support for our long-term earnings growth objective. Our objective is to grow dividend annually at a rate consistent with our long-term’s earnings growth objectives. In the near term, our payout ratio will trend slightly above 70%. The company currently offers an attractive dividend yield of 4.85% . Moving ahead, as DUK’s strong growth prospect initiatives will positively affect its cash flows, I expect to see uninterrupted dividend payments for shareholders, which I believe will bode well for the stock valuation, as investor confidence will increase. Summation The company is taking the correct strategic growth measures to ensure secure and sustainable earnings and cash flow growth. DUK has won the ability to apply for strong rate cases in future due to its high growth investments to get an extended portfolio of regulated renewable energy generation asset base, which will have positive impact on its future financial performance and on the stock valuation. Given the accelerated growth investments, the long-term prospect of DUK seems bright. Also, the company’s risk profile will improve given its measures to strengthen its regulated business. Therefore, I think DUK is an attractive investment prospect for income-hunting investors.

An Alternative To Buying Glamour Stocks

Summary Investors tend to overreact to the glamorous growth companies, and expectation can lead to disappointments. Return and value exists where nobody is looking. Micro capitalization, and value companies are common places where excess returns exist. My Investment Philosophy The road to successful investing often contradicts with our tendency to act in a collective manner. Ever since the beginning of my investing career, I have always avoided the glamour stocks, the public’s picks, and the ones that your neighbor is buying. In the short run, the market is a voting machine but in the long run, it is a weighing machine. -Ben Graham Like Ben Graham said, winning in the stock market isn’t like winning the election. Popularity will be weighed out in the long run by actual performance of the company. Large Cap Growth Stocks Tesla (NASDAQ: TSLA ): (click to enlarge) Netflix (NASDAQ: NFLX ) Source: Google Finance As TSLA and NFLX illustrate, large cap growth stocks have generated tremendous returns for their shareholders in the past few years. This Time is Different These words are often uttered before the collapse of the bull market. Investors use these words to justify elevated valuations and unsustainable growth trends. The legendary investor John Templeton once said “this time is different” are the four most dangerous words in finance. I would like to bring up an example that Warren Buffett used in his 1999 presentation before the collapse of the Dot-Com bubble: Well, I thought it would be instructive to go back and look at a couple of industries that transformed this country much earlier in this century: automobiles and aviation. Take automobiles first: I have here one page, out of 70 in total, of car and truck manufacturers that have operated in this country. At one time, there was a Berkshire car and an Omaha car. Naturally I noticed those. But there was also a telephone book of others. All told, there appear to have been at least 2,000 car makes, in an industry that had an incredible impact on people’s lives. If you had foreseen in the early days of cars how this industry would develop, you would have said, “Here is the road to riches.” So what did we progress to by the 1990s? After corporate carnage that never let up, we came down to three U.S. car companies–themselves no lollapaloozas for investors. So here is an industry that had an enormous impact on America–and also an enormous impact, though not the anticipated one, on investors. It is critically important for us as investors to realize that a revolutionary company might not be an economical one, and a great company might not be a good investment. Popular stocks are often overvalued and dangerous because of their nature to invoke high expectations. As NASDAQ is heading toward all-time highs again with these companies leading the charge, maybe it is time for us to take a step back and think independently about the intrinsic value of these companies before blindly following the herd. Micro-Cap Value Stocks On the other end of the spectrum, we have micro-cap stocks, which have under-performed the market since 2012. PowerShares Zacks Micro Cap ETF (NYSEARCA: PZI ) (click to enlarge) Source: Google Finance Empirical Proof In the study done by Ibbotson Associates, they divided stocks into different sizes and styles and measured their returns from 1969 to 2002. The research showed that the small caps outperformed the big caps and value stocks outperformed growth stocks during the same period. Geometric Arithmetic Standard Sharpe Mean (%) Mean (%) Deviation (%) Ratio All Growth 8.79 10.72 20.25 0.21 All Value 10.99 12.31 17.08 0.34 Large-Cap Growth 8.9 10.91 20.75 0.21 Large-Cap Value 10.43 11.75 17 0.31 Mid-Cap Growth 8.88 11.09 21.88 0.21 Mid-Cap Value 13.03 14.66 19.37 0.42 Small-Cap Growth 8.2 11.04 24.77 0.18 Small-Cap Value 14.35 16.41 21.69 0.46 Micro-Cap Growth 6.47 10.2 28.66 0.13 Micro-Cap Value 14.66 17.44 24.69 0.44 The statistics show that the micro-cap value stocks outperformed the large cap growth by a stunning 5.76% a year. But why do these market segments have by far the highest returns? Reasons for out-performance These micro-cap value companies tend to have the least coverage by analysts and the least institutional ownership. They are usually companies that are very small and no one has ever heard of. Institutions and analysts do not have incentives to research the companies, and because of their hidden nature, their values are buried with their size. Moreover, most institutions are not allowed to own these small to micro caps, and if they happen to own these companies due to a spin-off, they are forced to sell the position. Another reason why these stocks tend to out perform growth stocks is that investors overreact to growth, while not paying enough attention to the boring and less liquid companies. These asset classes are a great place to start looking for enterprise investors seeking to beat the market over the long term. Source: Fama and French Research portfolios If you are not comfortable picking stocks on your own, buying a small-to-micro capitalization value ETF will enhance your returns over the long run. For example, in the past 30 years, a 10% asset allocation to small caps will increase your return of over 1%, while having a lower standard deviation. Here are some ETFs tracking other small cap value equities: iShares Russell 2000 Value ETF (NYSEARCA: IWN ) , Small-Cap Value ETF (NYSEARCA: VBR ), iShares S&P Small-Cap 600 Value ETF (NYSEARCA: IJS ). (click to enlarge) Source: Money Chimp Conclusion I am not a market timer, nor do I suggest it is currently a good time to switch from popular growth stocks to micro-cap value stocks or that there is currently a bubble in the above companies. My point is that investing is a long-term game of discovering hidden gems, as opposed to following the herd. Micro-cap value stocks have outperformed the markets in the past for a reason; allocating a portion of the portfolio to these companies may be wiser than buying popular household names during the present-day lofty valuation era.