Tag Archives: seeking

The V20 Portfolio Week #6: Shift In Portfolio Weights

Summary The V20 Portfolio declined 7.3% against S&P 500’s decline of 3.6%. The biggest position has been trimmed. No purchases were made for Conn’s as the stock has rebounded from its previous lows. Dex Media could be nearing the final verdict. The V20 portfolio is an actively managed portfolio that seeks to achieve annualized return of 20% over the long term. If you are a long-term investor, then this portfolio may be for you. You can read more about how the portfolio works and the associated risks here . Always do your own research before making an investment. Read last week’s update here ! The market has become bearish again. This week was one of the worst weeks for the averages in months, with the S&P 500 slipping 3.6%. Unfortunately, the V20 Portfolio followed suit with a decline of 7.3%. However, due to the strong performance in the previous week, the V20 Portfolio is still positive for the month while the index is down 2.6%. Portfolio Update As I mentioned in last week’s update, this week the V20 Portfolio had to endure its biggest test. Our largest position, MagicJack (NASDAQ: CALL ), reported earnings on Monday. Although initial reactions were positive, the stock has since declined 10% to $10.30. I have been talking about trimming the MagicJack position for a couple of weeks now. Third quarter results were the push that I needed. You can read my analysis of MagicJack’s current situation here . The bottom line is that the company has transitioned into a growth stock. Although I don’t like to admit it, core operation has deteriorated (i.e. lower renewal revenue), and if the trend continues, a significant amount of value will have to come from growth. Because third quarter results were not a “smash hit,” there was no reason to maintain a large position in MagicJack. After Q3 earnings, 50% of the position was sold, lowering the portfolio’s exposure from 39% to 19%. Although I trimmed the position, the company is still around 50% cash, so relatively speaking, the downside is limited. Furthermore, new developments (Hoteligent, Movistar partnership) added significant option value to the stock. If executed well, both partnerships could be highly profitable as there is minimal capital requirement. For that reason, I believe that a 19% weight on MagicJack is justified. Moving on to our now largest position, Conn’s (NASDAQ: CONN ). While I would be happy to add to the position if the stock was trading around $19 (as was the case two weeks ago), the fact that Conn’s has rebounded from its lows means that the stock has now become more expensive than before. For that reason, I’ve decided to stay put for now and wait for a better entry point. Although it is my hope that Conn’s will decline in the near future so I can pick up more shares at a cheaper price, the management is currently executing a share repurchase program, exerting upward pressure on the stock. This is probably the reason why the stock didn’t move much in comparison to its typical volatility (only declined by 4% this week). Looking Forward With earnings season now over, there won’t be as many decisions that we have to make in relation to our holdings’ fundamentals. Nevertheless, the stock market will continue to gyrate in absence of any news, so I will continue to monitor the portfolio and seek opportunities to trim or add as I have done with MagicJack this week. There is one thing that we can look forward to however. I haven’t talked too much about Dex Media (NASDAQ: DXM ) since the position is so small (0.4%). You can find a brief overview of the company in the portfolio introduction. The initial investment rationale was that there was a chance that restructuring could provide a favorable outcome for shareholders (e.g. extending maturity). Currently, the sentiment is very negative. Although there were no official news, the stock was down 50% on Friday on rumor that the company will be pushed into bankruptcy. I invested in Dex Media with the knowledge that there was a high risk of bankruptcy, hence I sized the position carefully, so I am not too concerned. Given current prices, it is clear that the market believes that equity holders will be completely wiped out in the resulting restructuring. Of course, if equity holders do get a stake or if maturities are extended, shares could appreciate significantly. With official filing expected in December (according to the rumor), this is definitely something that we should look out for. Given the portfolio’s current weight on Dex Media, this is really a situation where it’s heads I win, tails I lose very little. 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.

AlphaClone Goes International With New Downside Hedged ETF

By DailyAlts Staff AlphaClone’s proprietary Clone Score methodology is used to power its popular AlphaClone Hedge Fund Downside Hedged Index and the related AlphaClone Alternative Alpha ETF (NYSEARCA: ALFA ), which was launched in 2012 and now has approximately $155 million in assets. On November 2, the firm launched a new index, the AlphaClone International Downside Hedged Index, that also uses the Clone Score methodology but is focused on American Depository Receipts (“ADRs”) – certificates that trade in the U.S. but represent shares of foreign stocks. As a follow on, AlphaClone launched a new ETF to track the new index, the AlphaClone International ETF (NYSEARCA: ALFI ). In Pursuit of Alpha “Pursuing the potential for alpha is even more important today for long-term investors, given the anemic growth forecasted for equities and bonds over the next several years,” said AlphaClone CEO Maz Jadallah, in a recent statement. “We’re delighted to introduce an international version of our index, further expanding the number of alpha-seeking index strategies available to global investors.” The new index will consist of at least 40 “high conviction” ADRs selected from the regulatory filings of select institutional investors. The proprietary Clone Score is used to continuously rate managers based on the “efficacy of following their disclosures,” and then aggregates the high conviction holdings from the managers with the highest scores. The index also features a “dynamic hedge” that introduces short-selling when the S&P 500 closes below its 200-day moving average at any month’s end. “Having seen success with our methodology inside separately managed accounts over the past five years, we’re excited to further expand access to our innovative investment methodology and are committed to helping long-term investors succeed,” Mr. Jadallah said. More detailed information about the index and its calculation methodology (see “Guidelines” document link) can be found here: AlphaClone International Downside Hedged Index . New International ETF AlphaClone’s new ETF, the AlphaClone International ETF, aims to track the new international index. As is the case with the index, the fund can hedge the long portfolio based on a trend following signal, and will use an MSCI EAFE Index based security to hedge the portfolio. The advisor to the fund is Alpha Clone Inc., while the sub-advisor is Vident Investment Advisory, LLC. Fees on the ETF are 0.95%, which is the same as the U.S. equity focused AlphaClone Alternative Alpha ETF. Earlier this year, AlphaClone announced its plan to launch four new ETFs based on the Clone Score methodology, including one that will be based on the new index. In addition, the firm announced in September that it had received a $2.25 million venture investment from Operative Capital , allowing it to expand its marketing and sales operations.

Northwestern Corporation: Great Business Fundamentals

Summary Montana has a healthy, stable population that pays its utility bills. Hydroelectric generation acquisition changed the company for the better. The acquisition did increase leverage. Debt is manageable, but free cash flow should go to paying down debt. NorthWestern Corporation (NYSE: NWE ) is an electricity and natural gas provider that serves the energy needs of hundreds of thousands of customers in Montana, South Dakota, and Nebraska. Unlike many utilities that have diversified into non-regulated activities, NorthWestern remains a pure-play regulated utility. Management has been wise, making strong moves to diversify away from coal-fired generation in a bid to lower regulatory risk. In turn, investors have rewarded this move, with shares returning roughly double the return of the broader utility index since the September 2013 announcement of the purchase. Will this long-term outperformance continue? Renewable Energy Diversification Those that have followed my work know that I have been especially critical of utilities that have not begun to meaningfully diversify away from coal, shifting power generation into cleaner plays such as natural gas and hydroelectric generation. Coal will continue to play an important, but shrinking, role for most utilities in providing stable energy generation for some time. We all know that sometimes the wind doesn’t blow or the water doesn’t run. But its days of dominance are numbered and utilities must position themselves for a future where coal is not the primary source of power generation, primarily due to continued pressure from environmental regulation. From what I’ve found, utilities in the Midwest have been especially guilty of ignoring renewables. NorthWestern Corporation, operating right next door to many of these slow-to-adapt utilities, has not been ignoring industry trends. The $900M acquisition of eleven hydroelectric facilities from PPL Montana was a game-changer for the company, shifting more than 50% of available base-load generation to renewable water and wind. Hydroelectric is a great source of power for utilities to meet light-load requirements on most operational days. There is no fuel cost to worry about, which reduces operational headaches, and the assets are obviously quite clean when it comes to greenhouse gas production and waste. Best of all, NorthWestern got these facilities for a steal of a price. Montana In Focus The vast majority of NorthWestern’s earnings comes from its Montana operations. When you think of Montana, you probably think of something like this: ‘ * Wildnatureimages.com This honestly isn’t too far from the case. Montana is a vast state, with low population density and a high concentration of people over the age of 65. However, this doesn’t make it a poor market for a utility. The unemployment rate has remained under the U.S. national average for many years (currently at an incredibly low 4.0%), and population growth remains stable. * NorthWestern Energy Investor Presentation Along with this, bad debt write-offs for NorthWestern are incredibly low, even during the recession where you would expect a jump in defaults. With more than 80% of Montana revenue coming from residential customers, low unemployment and bad debt write-offs creates a situation of high stability and predictability when it comes to company earnings. For utility owners, this should be far more important than chasing growth potential. Steady as she goes is the name of the game. Operating Results (click to enlarge) Electric operations revenue growth has accelerated, especially for full-year 2015, due to approval of increased rates related to the hydroelectric acquisitions that have come into effect. Gas operations revenue has fallen, but like with all natural gas utilities, this is a function of the underlying commodity price rather than a lack of demand. As natural gas prices have fallen, the cost of gas passed along to consumers as part of rider agreements falls as well, resulting in lower revenue. Investors should remember, however, that NorthWestern’s fixed margin per unit of gas sold remains the same. Lower gas prices mean higher gross and operating margins for the natural gas division, which we can see coming down in 2015’s estimated full-year results. (click to enlarge) As I usually do with utilities, I look to see that operational cash flow can cover capital expenditure requirements and dividend payments. If not, the utility is likely stuck in a cycle of taking on debt to cover its obligations. For NorthWestern, total cash flow from operations will grow greatly in 2015, eliminating some of the slightly larger deficits we saw in 2013 and 2014, likely a result of larger capex requirements for its new hydroelectric facilities. Overall, leverage for NorthWestern has gone up as a result of its hydroelectric and wind acquisitions, which cost a touch over $1B. Total long-term debt now stands at $1.8B, putting its net debt/EBITDA ratio at around 4.5x, which is on the high side but manageable for the time being. Management here has been traditionally cautious – all of NorthWestern’s debt is non-callable, long-term fixed rate debt. The company does have $455M of debt coming due by 2019 ($150M 2016, $55M 2018, $250M 2019), which it will have to refinance. I’d expect this to price around 4.5% on mid-term extensions (coming due in 2030) which will actually reduce the company’s interest expense somewhat given the 6%+ coupons these issuances have carried. Conclusion Overall, NorthWestern is a well-run utility. Management seems to be taking all the right steps and the 3.75% annual dividend yield is solid. 12.5x ttm EV/EBITDA is on the high side, but the company likely carries a premium given the strong growth performance and future earnings profile. I wouldn’t be a buyer at current prices, but I’m keeping the shares on my watchlist.