Tag Archives: seeking-alpha

The Natural Gas Market Isn’t Heating Up

Natural gas prices remain low. The storage buildup was 49 Bcf – higher than normal for the season. Extraction season should start in the coming weeks. The rise in production efficiency more than offsets the drop in rigs. Even though the natural gas market is getting closer towards moving from injection to extraction season, the price of natural gas remains low. This upcoming winter is still expected to be warmer than normal. And the rise in efficiency in producing natural gas more than offsets the decline in operating rigs. This trend will keep production higher than last year, which could keep pressuring down the price of natural gas. The recent EIA storage report showed another buildup of 49 Bcf; it wasn’t far off market estimates but was still higher than normal. When it comes to the futures markets, a lot has also changed there, as you can see in the following chart of the differences among prices of near term (next month) and future months. (click to enlarge) Source: EIA Right before the end of October, the contango in the futures markets picked up – an indication for a rise in expected future price of natural gas in the coming months. Since then, however, the contango has contracted and the prices have converged to a narrow spread. This could suggest the market doesn’t anticipate the price of natural gas to sharply rise anytime soon. For holders of the United States Natural Gas ETF (NYSEARCA: UNG ), this could result in a more modest adverse impact from the contango on its pricing with respect to the spot price due to lower roll decay. Looking forward, the market still projects the EIA will report additional buildup in storage next week albeit at a much slower pace; the storage depletion will be reported the following week – at a lower rate than the 5-year average. The EIA, in its recent monthly outlook , expects the U.S. storage will drop to 1,862 Bcf by the end of March – the end of depletion season; this will reflect a modestly lower than average withdrawal from storage due to warmer than normal winter. The EIA projects the overall demand for natural gas will only slightly rise in 2016 compared to 2015 – most of this gain will come in the industrial sector that will offset the decline in power and residential/commercial sectors. But if natural gas prices were to remain this low for a while longer, this may push even further up the demand for natural gas in the power sector, which already is expected to experience a sharp gain in consumption in 2015 of nearly 17%, year on year. These projections don’t vote well for natural gas producers, which have already suffered this year from low oil prices. In terms of rigs, according to the latest update from Baker Hughes , the natural gas rotary rig count fell again by 6 rigs to 193 – nearly 45% lower than the levels recorded last year. Although production has recently declined – as of last week, U.S. natural gas production slipped by 0.5% week over week and is only up by 0.8% for the year – the EIA still estimates production will be up by 6.3% for the year and 2% next year. The higher efficiency of gas producers will more than offset the drop in rig activity. But if prices were to remain this low, this may eventually lead to a slower growth in output as producers scale back on projects and cut capital spending. The natural gas market is likely to remain soft in the near term even as it turns into the extraction season. Unless the winter outlook changes or the number of operating rigs start to tumble down again, prices aren’t expected to rise much higher than their current levels in the near term. For more see: Natural Gas is Still Floating… Barely

The Forensic Accounting ETF: Where The Bodies Are Buried

Forensic accountant John Del Vecchio likes to joke that he knows “where the bodies are buried” in the financial statements. In his line of work, you have to. John is a professional short seller and the author of What’s Behind the Numbers , an excellent primer on short selling I reviewed two years ago. I call Del Vecchio the Horatio Caine of Wall Street. With single-minded purpose, he looks for the bad guys that are cooking the books and then brings their misdeeds to the light of day. Or more accurately, he looks for companies that are using aggressive accounting techniques to mask poor operating performance and then shorts them. Eventually, management runs out of ways to hide slowing performance, and when they do, the jig is up and the stock takes a tumble. This is where it gets interesting. If Del Vecchio’s sleuthing can effectively catch earnings manipulators in the act, then it only stands to reason that it can also be used to identify good companies with high quality earnings and conservative accounting. And that brings me to the WeatherStorm Forensic Account Long-Short ETF (NYSEARCA: FLAG ) , which has been recently revamped and is now based on a new proprietary index developed by Del Vecchio. “FLAG” is exactly what it sounds like. It’s an ETF that looks for accounting red flags, such as accelerated revenue recognition and manipulation of inventory and receivables numbers. But that’s only part of the story. FLAG’s strategy combines six distinct forensic accounting and valuation factors for scoring and ranking stocks. These factors cover: cash flow quality, revenue recognition, earnings quality, shareholder yield, earnings surprise and valuation. The FLAG ETF runs a 130/30 long/short portfolio, investing 130% of its capital in stocks that rate high for earnings quality based on Del Vecchio’s metrics and maintaining a 30% short position in stocks with low ratings. The net result is that you’re buying the highest-quality companies at reasonable prices… and you’re shorting the expensive junk. While still rare in mutual funds and ETFs designed for regular investors, long/short strategies have long been used by hedge fund managers. So in FLAG, you’re essentially getting a hedge-fund strategy in an ETF wrapper. Let’s take a look at FLAG’s portfolio. As of 9/30/2015, FLAG was long 132 companies and short 41. The average P/E and P/S ratios on the long positions were 15.62 and 0.79, respectively. The averages on the short portfolio were a much higher 27.61 and 1.85. So, FLAG is clearly practicing what it preaches by owning relatively cheap stocks and shorting expensive stocks. Breaking it down by sector, technology stocks make up the largest net long position at 19.0% of the portfolio. 23.7% of the long portfolio is invested in tech and -4.7% of the short portfolio. Financials also make up a large chunk of the portfolio with a net long position of 16.1% (19.1% long and -3.0% short). In looking at individual stocks, we see some household names. AT&T (NYSE: T ) , Molson Coors Brewing (NYSE: TAP ) , Coca-Cola Enterprises (NYSE: CCE ) and Intel (NASDAQ: INTC ) all make the top 10 long holdings. And on the other side, some of the largest short positions include Constellation Brands (NYSE: STZ ) , The Priceline Group (NASDAQ: PCLN ) , Chipotle Mexican Grill (NYSE: CMG ) and Netflix (NASDAQ: NFLX ) . FLAG doesn’t have a long enough trading history to draw firm conclusions about performance. But given its focus on quality and value, I would expect it to significantly outpace the long-only S&P 500 over time. 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. Link to the original post here .

El Paso Electric: The Best Of Both Worlds

El Paso Electric Company has grown its renewable energy portfolio to a well-crafted portfolio aligned with EPA expectations. A high dividend yield with the potential for even higher yields later on give investors a fat dividend check to look forward to. Investors should consider El Paso Electric Company for a two-pronged investment in capital appreciation and capital preservation. After the recent poor performances in the overall stock market, investors are pining for higher returns. But before they run away from the stock market and look for higher returns, they should consider investing in small cap companies in the stock market. As a whole, small cap companies have generated higher returns than mid cap companies or large cap companies, and they have also outmatched various passive indices in return on investment generation as well. This is simply due to the fact that small cap companies have more room for growth than mid or large cap companies, and therefore this extra growth can generate higher returns for investors. Of course, this growth comes with its risks as well. Small cap companies are more likely to go belly up, which is why investors need some method of mitigating the risk involved with investing in small cap companies. One way investors can reduce the risk of investing in small cap companies is through the investing in small cap companies in stable industries. These industries can include industries such as utilities or industrials, given the inelastic demand and high diversification of these industries. The stability of these industries combine with the growth of small cap companies to yield a unique blend of risk and reward. Both capital preservation and capital appreciation are given by this mix, not to mention the steady quarterly paycheck that comes from dividend payouts. One such firms that offers this unique blend is the El Paso Electric Company (NYSE: EE ), a small cap utilities firm engaged in the generation, transmission, and distribution of electricity to a variety of customers in Texas and New Mexico. The Company owns several generation facilities, and it primarily distributes electricity to retail customers. The Company’s ownership interests in these generation facilities provide the Company with a unique blend of investments in various submarkets within the utilities industry, such as nuclear power, natural gas, and other areas of energy. Thus, the Company is well-diversified, providing investors with additional stability. Investors certainly should be pleased with how the Company has done over the years. Capital invested at the onset of calendar year 2011 would have generated a return on investment of about 70% over the course of five years. Although the overall rate of growth is a little slow, the Company’s stock has done nothing but grow steadily over this time period, essentially exchanging rapid, volatile growth for stable growth. Recently, the Company’s shares have begun to trade somewhat sideways as a result of macro instability in the emerging markets, which has affected not just the Company but the overall stock market as well; thus, this stagnation is not Company-specific. From a technical perspective, the 50-day moving average has danced around the 200-day moving average, but both indicators have moved in the positive direction for the past five years in a general manner. Most recently, the 50-day moving average has risen above the 200-day moving average, which could indicate near-term upside as the spread between these two indicators continues to rise. (click to enlarge) Source: Stockcharts.com But it’s not just the technicals that are painting a pretty picture. The Company’s fundamentals are fairly outstanding as well. With a dividend yield of about 3.2%, investors are having the opportunity of substantial capital appreciation (because the Company is a small cap company) as well as the opportunity for a stable, fat dividend check. In fact, the Company plans on growing this dividend yield to about 4 – 6% in the long-term, so investors could see their dividend checks swell even more. Besides this enormous dividend yield (given the Company’s size) and the opportunity for further dividend yield expansion, the Company also has fundamentals that indicate future long-term growth for the Company. In particular, the Company’s energy portfolio will consist of nuclear power, natural gas, and other renewable energy sources. As a result, the Company’s energy portfolio aligns with the interests of the EPA Clean Power Plan (CPP), which could benefit the Company in the long-term if it decides to either keep or grow this particular part of its energy portfolio. Furthermore, while top-line growth and margins have been relatively stagnant, what’s important to keep in mind is the Company’s retained earnings balance, which has steadily risen over the past several fiscal years. The rising retained earnings balance will help buffer dividend payouts, and it will help management reach its goal of a 4 – 6% dividend yield. Overall, we have a small cap utilities company with an extremely high dividend yield and an energy portfolio in-line with what the EPA wants. Investors should consider El Paso Electric Company for a two-pronged investment in capital appreciation and capital preservation.