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Correction Seems Over: Time For China ETFs?

Concerns over the Chinese economy had reached a delirious pitch in August. Issues like credit crunch, shadow banking activities, faltering manufacturing activity and a weak domestic market had first surfaced in 2012 and led to a hard landing for the economy. These concerns kept bothering the economy at regular intervals during the last three years. But recently these swelled up to take a gargantuan shape and tormented business globally. The economy’s GDP growth rate skidded to 24-year low in 2014. With no let-up in the downbeat data flows from the Chinese economy, investors have now started to doubt its ability to deliver the growth target for this year. Still the Chinese stocks performed phenomenally in the first half of 2015 with some of the ETFs having almost doubled. A series of rate cuts and easy policy measures made this possible. But this astounding run had to have a finishing line somewhere and thanks to this logic, the Chinese equities fell in the trap of a steep correction from June. A host of factors prompted this correction. Among these, overvaluation concerns after a steep ascent for about one year, small doses of economic stimulus failing to boost the struggling economy and the Chinese securities’ regulator’s repeated warnings about riskier trading as well as tightened rules for margin lending triggered the sell-off. Apart from this, to arrest the market crash, the Chinese government stopped new companies from selling shares to the public, introduced a fund to be used for purchasing shares earlier this month and banned investors with an over 5% stake from abandoning their shares for six months. In fact, the Chinese stock market underwent heavy panic-induced sell-offs several times in the last three months – August being the cruelest – mercilessly lashing the global markets. Behind the recent bloodbath was the Chinese policy makers’ devaluation of the country’s currency yuan by 2% in mid-August, apparently to shore up export competitiveness. This along with a six-and-a-half-year low Chinese manufacturing data for August went against the risk-on sentiment among investors. The Shanghai Composite Index has plunged about 39 % since June 12 and Chinese stocks lost over $5 trillion in the recent rout. In the last one month (as of September 8, 2015), db X-trackers Harvest CSI 500 China-A Shares Small Cap Fund (NYSEARCA: ASHS ) lost over 33% while large-cap China ETF iShares China Large-Cap ETF (NYSEARCA: FXI ) was off over 13%. Almost all ETFs erased their gigantic gains earned in the beginning of 2015. ASHS is off over 5%, while one of the top performing Chinese ETFs of the first half Market Vectors ChinaAMC SME-ChiNext ETF (NYSEARCA: CNXT ) is now left with just 4% return. Is the Correction Over? After this high drama, there was only one question in every mind. When will the correction be over? And to soothe investors’ nerves, PBOC which is known for too much interference in the stock market commented that the China market crash is ‘ almost over’ aided by government intervention. Yuan is also settling against the greenback after a topsy-turvy August. To add to this, China announced that it would eliminate personal income tax on dividends for long-term shareholders holding stocks for over a year and halve the tax for those who hold between a month and a year, per Reuters. The move was steered to bolster long-term investments, ward off short-term turbulence from the market and bring in stability over there. Not only this, China intends to launch “circuit breaker” on one of the country’s benchmark stock indexes to calm the market. Per the new norm, a 5% one-day gain or loss in the CSI 300 index (before 2:30 p.m.) would close trading in the country’s all equity indices for 30 minutes. Shifts of over 7% would result in a closed trade for the rest of the day. Though this decision is yet to be confirmed by the market participants, it hints at policymakers’ efforts to put off pointless volatility in the market. As per Goldman , Chinese government invested about $236 billion during the last three volatile months to cool down the stock market tantrum. Notably, China’s margin debts almost halved to about 1 trillion yuan. Rallying Chinese Equities Assisted by government measures, Chinese stocks started rallying from this week and also helped to drive other global markets. While almost all Chinese ETFs added smart gains on September 8, we highlight three beaten-down ETFs that presently carry a Zacks ETF Rank #2 (Buy) and might tide over heavy losses incurred in the recent upheaval. Notably, CNXT and ASHS returned investors around 13% on September 8, but both ETFs are still guilty of high valuation. On the other hand, the P/E (ttm) ratio of below-mentioned ETFs hovers in the range of 12 to 14 times versus CNXT’s P/E of 32 times and ASHS’s P/E of 35 times. This indicates that the trio trades at a cheaper valuation and can be good picks at the current level. db X-trackers Harvest CSI 300 China A-Shares Fund (NYSEARCA: ASHR ) The fund provides exposure to the large-cap segment of China A-share equity market by tracking the CSI 300 Index. The 305-stock portfolio has accumulated $480 million in AUM and sees solid trading volumes of about 4.6 million shares a day on average. The fund is heavy on financial stocks (38.4%) followed by industrials (17.7%) and consumer discretionary (10.74%) stocks. The product charges about 80 bps in fees per year from investors. The fund lost about 25.5% in the last one month while it added about 11.6% on September 8. KraneShares Bosera MSCI China A Share ETF (NYSEARCA: KBA ) This fund follows the MSCI China A International Index, holding about 300 securities in its basket. It is widely diversified across each component with none of these accounting for more than 2.275% share. However, the product is slightly skewed toward financials at about 34%. The ETF has accumulated $10.9 million while it trades in light volumes of around 25,000 shares per day. Expense ratio comes in at 0.85%. The fund was up about 11% on September 8 while it lost 24.2% in the last one month. Market Vectors China ETF (NYSEARCA: PEK ) This fund tracks the CSI 300 Index and holds a large basket of 465 stocks. The portfolio is well spread out across various securities with none holding more than 3.48% of assets. From a sector look, more than one-third of the portfolio is allotted to financials, followed by industrials (18.0%) and consumer discretionary (10.3%). The fund has amassed $80.5 million in its asset base and charges 72 bps per year. Volume is light as it exchanges about 150,000 shares per day on average. The fund was up 9.9% on September 8, while it retreated about 23% in the last one month. Original Post

TECO Energy: What A Difference A Day Makes

Over the past decade or so TECO Energy has shown stagnant growth and average investment results. Recently the company received a bid to be acquired at a much higher share price. This article shows the difference that just a single day can have on an investment. Over the past decade or so, Tampa, FL-based TECO Energy (NYSE: TE ) has been what I would classify as an “average” investment. You have a slow growing business that just sort of plugs along and pays out a large percent of its earnings in the form of dividends. It’s the classic utility model. I’ll show you what I mean. Here’s a look at the company’s history from the end of 2005 through the end of 2014: TE Revenue Growth -1.8% Start Profit Margin 7.0% End Profit Margin 8.3% Earnings Growth 0.1% Yearly Share Count 1.3% EPS Growth -0.6% Start P/E 17 End P/E 22 Share Price Growth 2.0% % Of Divs Collected 43% Start Payout % 76% End Payout % 93% Dividend Growth 1.6% Total Returns 5.6% TECO began the period with a little over $3 billion in revenue and ended with a bit less than $2.6 billion, or a compound growth rate of -1.8% per annum. Granted certain operations have been sold or discontinued, but it remains that the company as a whole was not growing on the top line. Based on the $3 billion in revenues, TECO earned about $211 million – representing a profit margin of about 7%. By 2014 the margin had expanded to 8.3%, resulting in a net profit of $213 million. In other words, despite the revenue decline, the overall company profitability increased ever so slightly. Yet this slight advantage did not remain for shareholders. At the beginning of the period the company started out with roughly 208 million shares outstanding. By the end of the period this number had grown to 235 million. As such, the earnings-per-share growth also was negative – coming in at -0.6% annually. At the end of 2005 shares of TECO were exchanging hands around $17, resulting in a trailing multiple of about 17. By the end of 2014 the share price had climbed to $20.50, indicating a multiple closer to 22. This is why it’s important to allow for a wide range of possibilities. During this same time frame a company like Union Pacific (NYSE: UNP ) was providing 20% EPS growth, yet it saw P/E compression . On the other hand, TECO was providing negative EPS growth yet saw a higher multiple. When you suggest anything is possible, it’s not just a coverall – strange things happen in the investment world. Due to this multiple expansion, shareholders saw the share price increase by about 2% annually. This is nothing to text home about – especially over a decade period – but still something considering the growth headwind. The real story for TECO has been its dividend. The company, like many utilities, has committed to paying out a large portion of earnings in the form of dividends. Although this payout did not grow much, it did allow for a solid and consistent cash flow. Over the period an investor would have collected about $7.50 per share in dividend payments against capital appreciation of just $3.50. In total this equates to total annual returns of about 5.6% per year. Hence the beginning reference to “average.” Actually it’s slightly impressive given the lack of growth, but basically investors received the dividend payment along the way and not much more. Had you owned a couple thousand shares it could have paid for your electric bill, but there were certainly better wealth providers during this time. Both the business and investment performance of the company wasn’t especially inspiring. Yet this changed a bit due to a recent announcement. On September 4, 2015, TECO announced that Canadian-based Emera Inc. ( OTCPK:EMRAF ) would acquire TECO Energy for $27.55 per share, representing a 48% premium to the July 15th price and roughly 31% higher than the previous close. As a result, shares opened the next trading day over 20% higher, moving to about $26 per share. This is the sort of thing that transforms an investment. During the past decade, shares of TECO Energy have provided about 5.4% annualized returns (quite similar to the exercise above, but moving away from the 2005 and 2014 year-ends.) As a result of the buyout offer, shareholders suddenly have a 7% annualized gain. Over the past five years shares have provided 8.5% annualized returns (incidentally, demonstrating what a move from a low to high earnings multiple can do in the face on a stagnant business.) As a result of the higher price on September 8th, this 8.5% annualized return is suddenly a 12.5% annualized gain. Naturally you can’t predict whether or not a buyout offer will come. Yet the above result is instructive. For one, it shows that business performance and investment performance can vary. The typical investor over the last decade or so actually saw their underlying earnings claim decrease. Had you owned the entire business you would have had a slightly greater claim, but due to share issuance common stockholders were diluted. Still, even though the growth rate was negative, overall returns were still positive. This happened for two reasons. First, investors were willing to pay more for less earnings power. Strange things happen in the investment world, so you can never count out multiple expansion (or contraction). Investor sentiment waxes and wanes as the business results tend to be a bit steadier. Yet even if the multiple had remained steady, thus resulting in negative share price appreciation, your overall returns would not have been negative. Due to a solid and slow growing dividend, you were able to accumulate cash payouts along the way. There’s a lot to be said for collecting dividends while you wait for something good to happen. Of course these payouts can’t always “protect” you, but they can still provide a nice return buffer. You won’t shout in joy over 4% returns, but it’s not an awful consolidation prize. Further, you can reinvest these payments to increase your income. In a more abstract sense, this example demonstrates why it can pay to remain patient. Had you purchased shares a few years ago with an earnings multiple below 15 (or higher), the subsequent decline in earnings and rise in share price resulted in a multiple over 20. You could have then elected to sell, but naturally that would have concluded in missing out in a 20%-plus higher price today. Of course you can’t predict this, but the idea is to be ready for the outcome. If that sort of “missing out” would bother you, then perchance there are worst things in the world than collecting a solid dividend payment while a company regains its footing. 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.

Safe 11% Annual Return With TECO Energy

Summary Emera is buying TECO Energy. The deal will probably close by mid-year 2016. The $2.43 net spread offers a 11% annual return. Deal Target Description TECO Energy (NYSE: TE ) provides electricity and natural gas. Deal Terms On September 4, 2015, Emera ( OTCPK:EMRAF ) and TE announced a definitive deal for Emera to acquire TE for US$27.55 per share in cash. Deal Financing The deal is not conditioned on financing. The buyer is working with JPMorgan (NYSE: JPM ), and the target is working with both Moelis (NYSE: MC ) and Morgan Stanley (NYSE: MS ). Deal Conditions The deal’s closing is subject to TE shareholder approval and standard regulatory approvals, including approval by the New Mexico Public Regulation Commission, the Federal Energy Regulatory Commission/FERC, US antitrust clearance, and the satisfaction of customary closing conditions. Deal Price The deal is priced at a 48% premium to TE’s market price before the news came out on the deal. It is at 11.6x trailing twelve months EBITDA. Deal History In mid-July, TE discussed a sale with potential strategic buyers including Duke (NYSE: DUK ), Entergy (NYSE: ETR ), NextEra (NYSE: NEE ), Southern (NYSE: SO ), Fortis ( OTCPK:FRTSF ), CenterPoint (NYSE: CNP ), Dominion (NYSE: D ), and Iberdrola ( OTCPK:IBDRY ). The TE board and management wanted a price of at least $25 per share. Given the strong price that the company ultimately secured, it is reasonable to assume that there were multiple bidders. Equity Options This is probably best exploited with common stock. However, one alternative is to write February 19, 2016, $25 TE puts which last traded for $0.50 with a bid of $0.40 and an ask of $0.65. These are okay, but not great. If the stock price declines or the volatility increases much from here, these could get increasingly interesting. Conclusion TE offers a reasonable return relative to its risks. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks. Disclosure: I am/we are long TE. (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. Additional disclosure: Chris DeMuth Jr is a portfolio manager at Rangeley Capital. Rangeley invests with a margin of safety by buying securities at deep discounts to their intrinsic value and unlocking that value through corporate events. In order to maximize total returns for our investors, we reserve the right to make investment decisions regarding any security without further notification except where such notification is required by law.