Tag Archives: seeking-alpha

Growth Beating The Pants Off Of Value In 2015

2015 has been the year of the “FANGs.” Investors have fixated on just a handful of glamorous tech stocks – Facebook (NASDAQ: FB ), Amazon (NASDAQ: AMZN ), Netflix (NASDAQ: NFLX ) and Google ( GOOG , GOOGL ) (now Alphabet) – that have held the broader market afloat even while earnings this year for American stocks have been mostly disappointing and the “average” stock has actually been falling. For lack of anywhere else to go, the investing public is crowding into a very small handful of recognizable names and hoping for the best. Consider the relative performance of the growth and value segments of the S&P 500. (Standard & Poor’s breaks the S&P 500 into two roughly equal halves, based on valuation, momentum and other factors.) Year to date through November 12, the S&P 500 Growth index – which includes the FANG stocks – was up 3.9%. Its sister, the S&P 500 Value index, was actually down by 5.5%. This is a peculiar market in which cheap stocks are getting cheaper and a handful of extremely expensive names keep getting more expensive. As a case in point, look at the advance-decline line, a simple measure of market breadth. Starting in April, the advance-decline line started to trend downwards and, apart from a brief rally in October, really hasn’t stopped sagging since. This means that fewer and fewer individual stocks are still rising, even while the market grinds slowly higher. In a “healthy” bull market, the advance-decline like rises along with the major stock indexes. So when you see an “unhealthy” market like this, one of two things has to happen. Either investors start to spread their bets across a wider swath of the market and market breadth improves… or they finally throw in the towel and sell the few remaining leaders. So, how on earth are we supposed to invest in a market like this? You really have two options. The first is simply to ride the momentum of some of these glamor names while it lasts. Sure, the FANGs are expensive. But that doesn’t mean they can’t get a lot more expensive in the short term. So, riding the momentum is a perfectly viable strategy so long as you’re ready and willing to sell at the first sign of weakness. The second option – and the one I am following in my Dividend Growth model – is to look for deep values amidst the carnage, or stocks that are already so cheap, you don’t mind if they get cheaper. While the S&P 500 Value index is down only 5.5% this year, there are plenty of stocks that are down 30% or more. Several midstream oil and gas pipeline stocks are currently sitting at multi-year lows and are sporting cash distribution yields I never expected to see again. And of course, there is always the third option: Keep a larger percentage than usual of your nest egg out of the stock market altogether, and simply wait for better prices across the board. My recommendation? Try some combination of the three. Keep your long-term portfolio heavy in cash and deep-value opportunities, but set a portion of your portfolio aside for more aggressive short-term trading. This article first appeared on Sizemore Insights as Growth Beating the Pants off of Value in 2015 . Disclaimer: This article is for informational purposes only and should not be considered specific investment advice or as a solicitation to buy or sell any securities. Sizemore Capital personnel and clients will often have an interest in the securities mentioned. There is risk in any investment in traded securities, and all Sizemore Capital investment strategies have the possibility of loss. Past performance is no guarantee of future results. Original Post

Is Time Ripe For The Convertible Bond ETF?

The economy is on the threshold of an interest rate hike, a decade after a rock-bottom interest rate environment. Naturally, investors apprehend a sea of change and are looking for a safe and higher level of income with lower downside risk. After all, a December rate hike is now an extremely ripe prospect following a solid U.S. job report for October and the Fed’s perception that the U.S. economy is ‘ performing well ‘. Yields on the benchmark 10-year Treasury notes were at 2.32% on November 10, up from 2.05% recorded on October 27. Futures show a 68% chance of a lift-off by year-end compared with a 50% bet at October end. No wonder, investors have started to position their portfolio according to the looming lift-off and demand a high-yield but a harmless bet. For those investors, convertible bonds appear lucrative bets as these provide some of the benefits of bonds as well as stocks. What are Convertible Bonds? Convertible bonds are those that can be exchanged if the holder chooses to, for a specific number of preferred or common shares if the company’s share price climbs past a said conversion price during the bond’s tenure. Like traditional bonds, convertible bonds are issued on par, pay fixed coupons and have fixed maturities. The main difference is that convertible bonds offer investors the right to convert their bond holdings into a company’s shares at the holder’s discretion. This allows investors the potential to play both sides of a company – debt and equity – in a single security, offering a lower risk choice. The lack in this arrangement is that investors are compelled to accept a far lower coupon payment than traditional bonds of the same company. On the other hand, these bonds are less risky than equities. In case of bankruptcy, convertible bond holders get paid out ahead of equity holders. The price of these bonds generally moves in line with the underlying shares. However, unlike shares, the convertible bonds have some coverage against downside risks as investors can redeem these on par upon maturity, if the issuer is in business. All in all, these bonds are great instruments to tap a towering stock market, minimize risks and enjoy strong current income. ETF Impact Choices are very few in this corner of the ETF world. There is only one pure-play in the convertible bonds section – SPDR Barclays Capital Convertible Securities ETF (NYSEARCA: CWB ). Quite expectedly, the macro backdrop led to some decent trading in CWB in the recent past. CWB in Focus This popular ETF seeks to provide investment results that correspond generally to the price and yield performance of the Barclays Capital U.S. Convertible Bond > $500MM Index. This benchmark tracks United States convertible bonds with outstanding issue sizes greater than $500 million, giving the product a tilt toward the large cap securities. In terms of sector exposure, the product is skewed toward the tech industry (44.4%), while consumer staples and financial companies comprise about 16.6% and 12.4% of the portfolio. For credit quality, over 38% of the portfolio has a less than Baa rating, and over 35% of the basket is not rated followed by 19.2% having a Baa rating. The fund is also spread out in terms of maturities, with close to half of the bonds maturing in less than five years. This $2.73 billion-fund holds 104 securities. The top three holdings include Watson Pharmaceuticals 5.5 12/31/2049 (4.65%), Wells Fargo & Company (NYSE: WFC ) 7.5 12/31/2049 (4.27%) and Fiat Chrysler Automobile (NYSE: FCAU ) 787.5 12/15/2016 (3.24%). The fund was up 0.5% in the last one month (as of November 11, 2015) and yields about 4.61% as of the same date. Original Post

Are EM Stocks Finally Emerging?

It seems as if in every client meeting lately, I’m getting questions about emerging market (EM) stocks. Many investors are looking for that magic bottom and are wondering if it’s time to step back in, while others are wondering if we’ll see further declines due to commodity weakness and eventual Federal Reserve (Fed) tightening. These questions come as EM stocks have had a rollercoaster year , with valuations beaten up by concerns about China’s economy , slowing global growth and lower commodity prices , just to name a few of the headwinds facing developing markets. According to Bloomberg data, by the end of the third quarter, the MSCI Emerging Markets Index was down 15 percent year to date. However, since then, emerging markets have reversed course , with the index gaining roughly 5 percent since the last day of the third quarter, according to Bloomberg data as of November 9. Of course, this ride has been rocky as well, with the index rallying following news implying a Fed delay, like the weak September jobs report, and then losing steam in early November after upbeat October jobs data increased expectations of a December hike. So, is this the beginning of an EM rally? Or are the gains since the third quarter just a temporary bounce? I believe it’s too early to call a recovery. A look at what has caused the volatile advance helps to explain why. First, a little primer on what typically happens to EM investments when a Fed rate rise is imminent. When markets believe the Fed will raise rates in the short term, investors generally add exposure to U.S. assets as they search for higher returns and potentially stronger currencies, rather than explore EM investments and their generally higher risk. In contrast, when Fed action is delayed, as has been the case this fall, flows have generally gone in the opposite direction, based on Bloomberg data. Investors increase risk exposure for potential return, adding exposure to EM equities and other risky assets. This is what seems to be the catalyst for the fourth-quarter EM rally. Unfortunately, as EM data accessible via Bloomberg testify, it hasn’t been driven by signs of economic improvement, firming inflation or rising earnings. Rather, it’s been primarily a reaction to the Fed’s delay in September, and the belief that the Fed would not raise rates until 2016. But when investors believe the Fed will, in fact, raise rates sooner than that, they may very well reduce their EM exposure. We saw this in early November, when a positive labor market report caused investors’ expectations of the probability of a Fed hike in December to rise from 56 percent on November 5 to roughly 70 percent the following day as measured by the pricing of federal funds futures, according to Bloomberg. EM stocks sold off on the news, with the index down roughly 4 percent since November 5, based on Bloomberg data as of November 9. Whether a Fed rate rise comes before December 31 or not, it’s likely to come eventually. In addition, many EMs are forecasted to continue to experience weak economic growth and geopolitical issues. So while EM valuations are relatively cheap, they may remain cheap for some time, and could even get cheaper from here. So what does this mean for portfolios? With valuations cheaper than they have been in over a decade, patient long-term investors may want to consider slowly building back benchmark buy-and-hold positions . But while broad exposure to the asset class can help diversify risk, it’s also important to remember that EM stocks aren’t a homogenous asset class. In our latest Investment Directions monthly market commentary , my investment strategist colleagues and I highlight select EM countries where we see potential opportunities right now, including South Korea. Exchange traded funds such as the iShares core MSCI Emerging Markets ETF (NYSEARCA: IEMG ) and the iShares MSCI Emerging Markets Minimum Volatility ETF (NYSEARCA: EEMV ) can provide exposure to broad emerging markets, while exchange traded funds such as the iShares MSCI South Korea Capped ETF (NYSEARCA: EWY ) can provide access to South Korea. This post originally appeared on the BlackRock Blog.