Tag Archives: seeking

Trounce The Market With Less Risk

Over a lifetime, stocks trounce bonds more than 800-fold. Contrary to conventional thinking, LESS risk taking can lead to HIGHER returns. Active investing can significantly outperform balanced, buy-and-hold strategies. Most of us tend to think of investing in terms of the experiences of our lifetime, and in fact, of that limited span during which we were vaguely aware of economic events in the world at all. (Nope, you can’t count those teenage years…) But it is important to view things in a greater historical perspective. The chart below does that. (click to enlarge) Source: Stocks, Bonds, Treasury Bills and Inflation 1926-2010 If you zoom in on the graph, you’ll quickly grasp one salient fact: over the long run, if you can stand a bit of risk, you’ll certainly be richly rewarded for that risk. From 1926 to today, an investment in the lowest risk strategy, short term government bonds, grew your money 19-fold, but barely outpaced inflation which eroded the value of the dollar 12-fold over that same period. In stark contrast, investing in small caps grew your money 16000-fold. Yes, you read that right! Put another way, a $1000 investment grew to just over $16 million. Here are a couple of other important observations: If time is on your side, you are seriously shortchanging yourself by not investing in the stock market. A small increment in your yearly return makes a huge difference over time. Look at how a 4 percent difference between large cap stocks and long term bonds increases returns by more than 40 times over that period. Thanks to the incredible magic of compounding, the earlier you start the better off you’ll be. The more you depend on your investments for income today, the less you can (safely) earn, ironically enough. (The corresponding corollary to that in the banking sector is that the more you need a loan, the less likely you will get one. Oh well…) It may take you 20 years to recover from a market break! If you invested in the market in late 1928, you were not back to square one until 1946 !!! (If you think we have that problem solved, just talk to some Japanese investors. Or view this article on my blog.) Even government treasuries can be a poor investment. See the period from 1965 to 1970, when treasuries dropped, yet inflation was raging. Faced with the complexities of investing, sticking your head in the sand and your money under your pillow just ain’t the way to go! Just look at that inflation line. It means your $1.00 invested in 1928 buys you about 8 cents in 2015 prices. So you cannot afford to be on the sidelines. In fact, if you are not investing, you have almost a complete certainty of seeing your assets shrink. So given all of these conclusions, how should you invest your hard-earned money for the best results? Or if you’re among the fortunate few born with a silver spoon in your mouth, how should you protect your leisurely-inherited millions? The short answer is: it depends… For those of you not quite happy with that decidedly hedged answer (Ever wonder what the word hedge funds really means?), please read on. I promise to give you a more concrete response. A traditional approach would be to spread your assets widely among several groups of investments. Take a look at the following graph showing how several different categories of exchange traded funds performed in the last big stock market crash in 2008. (click to enlarge) As the graph makes clear, while the stock market was plunging, other market sectors (mortgage-backed securities, short and long term treasuries, corporate bonds and government backed securities) were rising. So by mixing your asset classes, you can significantly smooth out the volatility of your portfolio. This is particularly important for retirees, since you can choose to withdraw only from areas that have risen in value, as opposed to selling at the worst possible moment, when asset values are at all time lows. A number of mutual funds and ETF’s already subscribe to this strategy. The chart below shows the performance of the Janus Balanced Fund, plotted against the SPDR S&P 500 ETF Trust ETF (NYSEARCA: SPY ), which is a proxy for the S&P 500 index. This has averaged a 9.85% return over 20 years, with fewer big drawdowns than the S&P itself. (click to enlarge) (click to enlarge) If you pay close attention to the percentage comparison, you will note that the balanced approach actually beat the S&P 500 in overall return with less volatility along the way! Some people mistakenly assume that this “spread your marbles out evenly” strategy argues against an actively managed approach. Nothing can be further from the truth. The next two graphs show an active approach that picks the best stocks in the US stocks universe (according to our proprietary formula), times the buys according to certain technical criteria related to momentum, and rebalances the portfolio on a weekly basis. Here is a relatively low-beta (low volatility) approach, that still wallops the results of the JANUS fund shown above, as well as the S&P. (click to enlarge) And for those of you willing to sit tight through a little more volatility, how does a 16 fold return on your money over a 12 year period grab you? But don’t complain about the 50% drawdown… (click to enlarge) Source: quantopian.com Strategy back-testing based on universe of 8000 plus US stocks from 1993-2015. Graphed results are NOT based on historical performance. Real results may differ significantly from back-tested results. 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. Additional disclosure: The author currently holds positions using some of these strategies. We do not currently hold position in the Janus fund. The active strategies mentioned require margin accounts and the ability to short stocks at certain times.

Seeking Diversification – Top 3 ETFs

Summary Most efficient diversifiers tend to have a ‘spin’ to traditional funds. They also demonstrate low correlation and beta with S&P 500. Volatility can be a positive factor in portfolio diversification context. In 1952 Noble Prize winner Harry Markowitz described diversification as the only ‘free lunch’ when seeking investment returns. Most investors are well familiar with the concept of diversification but it is not always easy to find securities that would fit your portfolio well from the risk perspective. Ever since I launched a freely available investor tool InvestSpy almost a couple of years ago, I have tested countless portfolios and individual securities searching for efficient diversifiers. In this article I would like to share top 3 equity ETFs that make the most frequent appearances on my results table. No. 3 – ALPS Alerian MLP ETF (NYSEARCA: AMLP ) AMLP provides exposure to the overall performance of the U.S. energy infrastructure Master Limited Partnership (MLP) asset class. MLPs are publicly traded partnerships engaged in pipeline transportation, storage and processing of energy commodities. Other closely related products: JPMorgan Alerian MLP Index ETN (NYSEARCA: AMJ ), UBS ETRACS Alerian MLP Infrastructure Index ETN (NYSEARCA: MLPI ) No. 2 – PowerShares Preferred Portfolio ETF (NYSEARCA: PGX ) PGX invests in fixed rate preferred stocks issued in the U.S. domestic market. Preferred stockholders are generally entitled to a fixed dividend rate that is subordinate to debt but senior to dividends on common stock. Other closely related products: iShares U.S. Preferred Stock ETF (NYSEARCA: PFF ), PowerShares Financial Preferred Portfolio ETF (NYSEARCA: PGF ) No. 1 – Market Vectors Gold Miners ETF (NYSEARCA: GDX ) GDX offers exposure to publicly traded companies worldwide involved primarily in gold mining, representing a diversified blend of small-, mid- and large- capitalization stocks. Other closely related products: Market Vectors Junior Gold Miners ETF (NYSEARCA: GDXJ ) It is important to note that all of these three funds have a ‘spin’ to more traditional equity ETFs. GDX acts a combination of stocks and gold, PGX sits somewhere between stocks and bonds, whilst AMLP is linked to all three major asset classes. Two common risk characteristics that all three above-mentioned funds share are low correlation and low beta vs S&P 500. Coefficient values are amongst the lowest of all available equity ETFs and can be compared here . Therefore, GDX, PGX and AMLP will almost certainly have risk contribution below their dollar weighting given that most traditional portfolios are dominated by the risk arising from the equities component as outlined in one of my previous articles . Although GDX is clear leader in terms of correlation and beta, this is not the only reason that takes it to the No. 1 spot. Whilst AMLP and PGX demonstrate relatively subdued volatility, GDX is a beast in this respect. And volatility can be a good thing in this context as demonstrated by Salient Partners in the whitepaper where they argue that higher volatility diversifiers are amongst the most powerful tools an investor has. By no means am I saying that an investor should blindfoldedly invest in these ETFs purely because they look attractive from the portfolio diversification standpoint – after all, GDX and AMLP are currently both on a terrible run. The investment decision should be made in conjunction with other factors that are part of your analytical process, for instance incorporating trend following indicators or fundamental ratios. However, these are definitely the funds that one should at least keep an eye on. If risk can be reduced without sacrificing return, this is what free lunch in the markets is. Bon appetite! Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in PFF over 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.

The GreenHunter Resources Preferred Stock Roller Coaster

Summary Wild recent price swings in GRH-PC. Preferred dividend was deferred in July, but company expects to restore dividend before the end of the year. Analysis of the Q2 report, conference call and preferred stock covenants. Gary Evans is well known to energy investors as the founder of Magnum Hunter Resources (NYSE: MHR ). Gary Evans also founded and controls the much smaller GreenHunter Resources (NYSEMKT: GRH ). GRH is focused on waste water disposal. They primarily handle waste water produced from natural gas wells in the Appalachian region. In addition to sharing the same CEO, MHR is also GRH’s largest customer. MHR has had more than its share of drama lately. The stock has had huge moves due to volatile commodity prices, debt covenant changes and speculation on asset sales. The speculative GRH-PC preferred stock has become almost as volatile lately. No one will ever accuse Gary Evans of running a dull company. GRH-PC is a par $25 cumulative preferred issue with a 10% coupon. See prospectus for additional details. At a recent price of $9.85, GRH-PC is trading at under 40 cents on the dollar. Preferred stocks are often far less volatile than common stock issues, but this has not been the case for GRH-PC. Over the past month GRH-PC has plunged from over $19 to a low of $7.50. It then bounced back to $15.50 before drifting back down below $10. GRH-PC seemed to be on track back in early July when I wrote this article . The company had just successfully closed a new secured credit line to fully fund capital projects. They were operating at 100% of capacity and turning away potential customers. Margins were increasing and badly needed new disposal well capacity would enable them to quickly ramp up revenues and cash flow. What went wrong?” The licensing of 2 new disposal wells took longer than expected due to regulatory delays. The new disposal wells are now online and have increased waste water disposal capacity by approximately 50% (see Q2 conference call discussion). With additional disposal wells coming online over the next few months, GRH will have doubled its disposal capacity as compared to Q2 2015 levels. Revenues and cash flow are headed higher over the next few quarters. Unfortunately, regulatory delays caused EBIDTA to ramp up more slowly than expected. This caused a covenant violation on the company’s new secured credit line. The covenant violation prevented the monthly preferred stock dividend from being paid in July. This led to the crash in GRH-PC. So how long will the GRH-PC dividend remain deferred? As per the Q2 conference call comments by Gary Evans, the company hopes to end the deferral “sometime before the end of the year”. Note that since GRH-PC is a cumulative preferred issue, the company would be required to eventually make up any missed dividends. Here’s a key excerpt from the Seeking Alpha conference call transcript: Unidentified Analyst Okay, alright. And then I suspect that the lender for the $13 million is — you are not paying any cash out so I make sure you’re paying me, do you have to get back to that $1 million of EBITDA, before on a LTM basis, before they would let you do this seriously? Gary Evans – Chairman and CEO No, we have an amendment that’s been executed this morning that gives us flexibility and yours truly will probably be the one putting some more capital in to get back to paying the dividend. So, our goal is to get back to paying those dividends sometime before the end of the year. Unidentified Analyst Okay. And how quickly can you catch up on the accumulated part? Gary Evans – Chairman and CEO We can do it tomorrow, if we wanted to. Gary Evans owns a majority stake in GRH (see proxy statement ) and is committed to the company’s success. As per the conference call excerpt above “yours truly will probably be the one putting some more capital in to get back to paying the dividend”. GRH-PC is senior to the common stock owned by Gary Evans. It’s very comforting to see a CEO stepping up personally to help out when a company runs into trouble. Of course there is no guarantee that GRH will be able to able to successfully restore the preferred stock dividend this year. The favorable protective covenants of GRH-PC become more critical if the deferral lasts longer than expected. Some of these covenants are detailed on page 72 of the prospectus: Failure to Make Dividend Payments If we have committed a dividend default by failing to pay the accrued cash dividends on the outstanding Series C Preferred Stock in full for any monthly dividend period within a quarterly period for a total of four consecutive or non-consecutive quarterly periods, then until we have paid all accrued dividends on the shares of our Series C Preferred Stock for all dividend periods up to and including the dividend payment date on which the accumulated and unpaid dividends are paid in full: (NYSE: I ) the annual dividend rate on the Series C Preferred Stock will be increased to 12% per annum, which we refer to as the Penalty Rate, commencing on the first day after the dividend payment date on which such dividend default occurs; (ii) if we do not pay dividends in cash, dividends on the Series C Preferred Stock, including all accrued but unpaid dividends, will be paid either if our common stock is then listed or quoted on the New York Stock Exchange, the NYSE Amex or The NASDAQ Global, Global Select or Capital Market, or a comparable national exchange (each a “national exchange”), in the form of our fully-tradable registered common stock (based on the weighted average daily trading price for the ten business day period ending on the business day immediately preceding the payment) and cash in lieu of any fractional share As noted above, the GRH-PC coupon would be increased from 10% to the 12% penalty rate in the unlikely event that the deferral is not ended within 1 year. Preferred holders have another ace up their sleeve. After 1 year of deferral, dividends “will be paid” in common stock. Unlike a cash dividend payment, dividends paid in GRH shares would not violate credit line covenants since they are not a cash cost. Gary Evans may be working so diligently to get the preferred dividend restored ASAP in order to avoid having his equity stake diluted. MHR is GRH’s largest customer and their fortunes could help determine how fast the GRH-PC dividend is restored. As discussed on the conference call, MHR is now finalizing a joint venture agreement with a private equity partner. This could lead to a substantial increase in natural gas drilling. Additional drilling would increase demand for GRH’s waste water disposal services. There is also a downside to the MHR relationship. The Q2 report shows that the “related party accounts receivable” has doubled since December. Expected improvements in MHR’s liquidity from the JV or expected sale of midstream assets would also improve liquidity at GRH. Aggressive yield investors should consider the deferred dividend GRH-PC as a speculative play at 40 cents on the dollar. The heavy insider ownership of the GRH common stock, improving business fundamentals and strong protective covenants are very positive. This wild GRH-PC roller coaster ride may soon be headed higher. Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks. Disclosure: I am/we are long GRH-PC. (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: The author is the publisher of the Panick Value Research Report. The Panick Report is focused on high yield preferred stocks, mrpanick@yahoo.com for the 2 week free trial.