Tag Archives: setpageviewname

Predicting The Future Is Difficult

Neils Bohr, a Nobel prize-winning Danish physicist who made foundational contributions to the understanding of atomic structure and quantum theory, is credited to have once said: “Prediction is very difficult, especially if it’s about the future.” While it sounds more like a ” Yogi-ism ,” the point made is interesting particularly as it relates to investing. I was reminded of this quote by a comment made on a recent post entitled “Bullish Or Bearish, What The Charts Say.” As I stated in that post: “I really don’t care much for the “bull/bear” debate that ensues on a daily basis as both camps are eventually wrong. When investing in the markets ‘it is, what it is’ and it is of very little use that some pundit or analyst was ‘right’ during the bull market if they never saw the bear market coming. The opposite is also true.” Predictions of the future are indeed very difficult, and yet individuals are challenged every day with doing precisely that. For traders, it is what the market, or a particular investment, will do in the next few minutes to days. For longer-term investors, those predictions move out to months or years. The problem is that humans generally suck at predicting the future, particularly when it comes to investing. This is clearly shown in Dalbar’s 2015 investor study in what they term the ” Guess Right Ratio .” To wit: “DALBAR continues to analyze the investor’s market timing successes and failures through their purchases and sales. This form of analysis, known as the Guess Right Ratio , examines fund inflows and outflows to determine how often investors correctly anticipate the direction of the market. Investors guess right when a net inflow is followed by a market gain, or a net outflow is followed by a decline. Unfortunately for the average mutual fund investor, they gained nothing from their prognostications. ” (click to enlarge) The inability of investors to correctly predict the future has had serious consequences for their portfolio both in the short and long term as shown by the two tables below. (click to enlarge) (click to enlarge) The massive underperformance over a 30-year span shows that investors, despite the best of intentions of being ” long term ” are saddled not only by poor predictions of the future, but also the ” emotional biases ” that drive accumulations and liquidations at the most inopportune times more commonly known as the “buy high/sell low” syndrome. Currently, it is ” predicted ” that the market will only rise from current levels as witnessed by a recent report from Brian Wesbury at First Trust: “Using a 4% 10-year discount rate gives us a ‘fair value’ calculation of 2,550 and it would take a 10-year yield north of 4.8% and no growth in corporate profits in Q2 for the model to suggest equities are fully valued.. .investors should be more tilted toward equities than they would normally be and we believe those that are should continue to enjoy attractive returns over at least the next couple of years. This bull has further to run .” However, Brian, like all humans, including me, are horrible predictors of future outcomes. As an example, this is what Brian predicted in July 2007 just before the largest financial crash since the ” Great Depression :” “The bottom line is that fears about the underlying health of the economy and financial markets are more about hypochondria than reality. The Fed is not tight, just less loose, the economy is strong, tax rates are low, and corporate earnings remain robust. Let’s not confuse indigestion and heartburn with the ‘big one. ‘” Or this in February of 2008 as the recession was in full swing: “None of this is an attempt to say that a recession is impossible. Recessions are always possible. But neither the policy pre-conditions, nor the data, suggest we are anywhere near a recession today. Current fears of a recession are premature .” Of course, it did turn out to be the “big one.” However, Brian, like all economists and analysts are using data to make future predictions that are highly subject to revisions in the future. This is the equivalent of trying to shoot a moving target while blindfolded riding a merry-go-round. While I am sure there is some trick shot artist that could nail such a feat on “America’s Got Talent,” for the mere mortal the odds of success are extremely low. The same problem that exists for individuals, also applies to ” professionals .” There are but a handful of investment managers that have consistently outperformed the ” market ” over long periods of time. But even that comment is a bit misleading as relative outperformance is of little consolation to investors when the market is down 30%, and the portfolio is down 29%. Did the manager outperform? Yes. Did the investor stick around? Probably not. But it is precisely this conversation that leads to a litany of articles promoting ” buy and hold ” investing. While ” buy and hold ” investing will indeed work over extremely long periods, investor success is primarily a function of time frames and valuation at the beginning of the period. Considering that most investors have about a 20-year time horizon until they reach retirement, the “when” becomes a critical component of future success. (click to enlarge) Of course, ” buy and hold ” commentary is mostly seen near fully mature “bull markets” as the previous bear market fades into distant memory. Eventually, despite the best of intentions, the markets will complete their full-market cycle and investors will head for the exits perpetuating the ” buy high/sell low ” syndrome. It is here that we find the VERY BEST predictor of future outcomes – past behavior. Psychology Today had a very interesting piece on this particular issue as it relates to violent crimes. But when it comes to investing, most individuals fit the requirements necessary to fulfill how they will behave in the future. Habitual behavior – (buy high/sell low) Short time intervals – (months or years, not decades) Anticipated situation aligns with the past situation that activated behavior. (bull vs. bear market) Behavior not extinguished by negative impact. (loss not great enough to deter future action) Person remains essentially unchanged. (speculator vs. saver) Person is fairly consistent (willingness to accept risk/avoid loss) Certainly, past behavior may not accurately predict the future behavior of a single individual. However, when it comes to the financial markets which is representative of the ” herd mentality ,” past behaviors are likely good indicators of future outcomes. Despite an ongoing litany of bullishly biased reports as markets push towards new highs, it should be remembered that markets only attain new highs about 5% of the time historically speaking. The other 95% of the time is recouping previous losses. (click to enlarge) Does this mean that you should sell everything and go to “cash?” Of course not. However, it does mean that as an investor you should critically analyze your past personal behavior during market advances AND declines. If you are like MOST investors , it is likely that you did exactly the opposite of what you should have. If that is the case, does it not make some sense to begin thinking about doing something different?

Brookfield Infrastructure Partners: World Class Infrastructure Assets And Undervalued With Solid Growth Prospects

Summary Brookfield Infrastructure Partners is fundamentally undervalued by the market. The market is not fully appreciating its growth prospects and is baking in a higher degree of risk than necessary for its short track record. It has set out on an investment phase with it targeting distressed and undervalued assets that can only accrue in value and ultimately boost cash flow and bottom-line growth. The defensive and/or regulated nature of its geographically diversified asset base reduces volatility. While not risk free the risk/reward equation is skewed in favor of the investor at this time. It is not every day that you find a defensive stock that is undervalued by the market particularly when it is paying a distribution that is yielding almost 5% but this is the case for Brookfield Infrastructure Partners (NYSE: BIP ). The market appears to be taking a conservative view of the partnership’s prospects because of its relatively short track record and less than stellar rack record with the shares up by only 9% over the last year. There are also fears about the overall health and outlook for the global economy which is applying pressure to companies like Brookfield Infrastructure that have global assets and operations in more vulnerable European and emerging markets. Despite this, I believe that Brookfield Infrastructure offers investors a tantalizing mixture of yield coupled with a solid defensive asset base and strong growth prospects. The strengths of its existing operations combined with its growth strategy focused on acquiring high quality assets at reasonable prices and the fact it is undervalued see it offering investors considerable upside at this time. Overview of the investment case Brookfield Infrastructure Partners operates a portfolio of geographically diversified high quality, long-life infrastructure and utilities assets. These assets span four continents and are located both in developed and emerging economies which helps to offset economic risk. They include utilities, energy, transport and communications infrastructure, all of which are highly regulated industries with steep barriers to entry that endows them with a wide economic moat. (click to enlarge) Source: Brookfield Infrastructure Partners. These assets provide essential products and services to the global economy, with the demand for those services being relatively inelastic because they are key components of modern economic activity. Demand for these assets and their utilization rates can only grow as the population grows and when the global economy is expanding. As a result, each of these factors protects Brookfield Infrastructure’s competitive advantage while allowing it to generate stable and growing cash flow while protecting its earnings. It isn’t hard to see how these characteristics have allowed Brookfield Infrastructure to deliver some solid financial results and growth since it was spun off from Brookfield Asset Management (NYSE: BAM ) in 2008. Source: Company filings. As you can see revenue has grown at a healthy clip with an impressive five year compound annual growth rate of 47%, while more importantly funds flow from operations has a five year CAGR of 14%. The value of Brookfield Infrastructure’s assets have also grown over that period with net-tangible-assets having a five year CAGR of 13%. This points to the solid future growth prospects of Brookfield Infrastructure particularly when we examine its growth prospects. Solid growth prospects targeting undervalued and or distressed assets Brookfield Infrastructure is seeking to position itself as a buyer of high quality assets with reliable cash flow while possessing a low cost of capital. To date this strategy is working well for the partnership with it able to leverage off its relationship with Brookfield Asset Management. In late 2014 it lead a consortium that acquired a 50% interest in France’s largest telecommunications tower business TDF for $2.2 billion, with $500 million being its share of the investment. This investment is expected to have a FFO yield of 12% to 15% and has diversified its business into telecommunications infrastructure, which can only support bottom-line growth. Particularly as the Eurozone’s economic recovery picks up steam thanks to the ECB’s stimulus package. It has built a considerable war chest for making further acquisitions and at the end of April 2015 had $3 billion in liquidity. Now with many emerging market governments and companies feeling considerable credit stress, Brookfield Infrastructure is well positioned to fill the gap left in those economies for the development, operations and maintenance of much needed infrastructure. This is one of the prime reasons that Brookfield Infrastructure has developed a solid portfolio of infrastructure, and in particular transportation, assets in South America. It is continuing to target South America as a key growth market, with it eyeing off further acquisitions in Brazil. Now with Brazil caught in an economic crisis and the government feeling the pressures associated with needing to kick start the economy and invest up to another $200 billion in infrastructure there are considerable opportunities for Brookfield Infrastructure. This includes the ability to use its war chest to acquire further distressed or undervalued assets from Brazilian companies that are struggling with significant debt burdens acquired from when they gorged themselves on debt during the boom years. These factors have seen it flag that it is targeting further acquisitions in Brazil with it set to deploy up to $450 million into two investments. This includes investing $200 million into a Brazilian toll road subsidiary and $250 million to purchase Brazilian construction company OAS’ stake in Invepar a Brazilian operator of toll roads and airports. Brookfield Infrastructure’s habit of picking up distressed or struggling assets for bargain prices can be seen with its latest acquisition, where it has acquired Niska Gas Storage Partners (NYSE: NKA ) for $919 million. Natural gas storage is an industry that has fallen upon hard times with many operators struggling to remain profitable as they feel the pain of low natural gas prices and thin storage spreads. It wasn’t all that long ago when Niska was worth over $2 billion and the company’s assets are located in a range of key North American natural gas markets with 250 billion cubic feet of total natural gas storage capacity. Brookfield Infrastructure has the deep pockets necessary to restructure this business in order to make it more profitable and wait for a rebound in natural gas demand which will drive higher earnings. This acquisition program coupled with growing demand for infrastructure over the long term as the global economy starts to recover will boost Brookfield Infrastructure’s growth prospects. What investors need to be conscious of is that these types of assets that Brookfield Infrastructure invests in don’t create rapid short term growth. Instead for the reasons discussed they generate stable cash flows and long term inflation controlled growth, in other words “slow and steady wins the race”. Valuing Brookfield Infrastructure Partners Valuing a business such as Brookfield Infrastructure is never easy with it possessing a lot of moving parts across a range of economies. In order to get a grip on what Brookfield Infrastructure’s indicate fair value is I have used a discounted cash flow valuation with the following assumptions: Despite it targeting revenue growth of 10% annually I have dialed that down to between 6% to 7.5% over the next three years to take into account the uncertainty surrounding the global economy. I have assigned a terminal growth rate of 2% which is below the long-term global GDP growth rate of 2.4% to represent the uncertainty of the global economy. I have used a cost of equity of 10% calculated using the CAPM model and taking into account the risk associated with operating in emerging markets. I have used the 10 year treasury yield as the risk free rate. The weighted average cost of capital (WACC) used its 9% and this has been applied as the discount rate in accordance with DCF methodology. The end result is that I have arrived at an indicative fair value of $52 per share as the table setting out the key calculations and assumptions below shows. This represents a 16% premium over its current trading price and while this may be a relatively small premium it was calculated using a conservative valuation methodology for a business operating in heavily regulated and/or monopolistic markets with a wide economic moat. Investors should also not forget about that handy distribution which will continue to reward them with an almost 5% yield as they patiently wait for Brookfield Infrastructures share price to appreciate. This distribution also appears sustainable when is strong growth in funds flow from operations is considered in conjunction with a targeted 60% to 70% payout ratio. Bottom-line I don’t expect Brookfield Infrastructure to “blow out the lights” but it certainly shapes up as an investment with considerable potential for all the right reasons. It has a history of targeting growth through the acquisition of distressed or undervalued assets that a ripe to be restructured in industries that are protected by wide economic moats. There is also significant growing demand for these assets as the global economy continues to expand while the downside risk is mitigated by the diversification of its portfolio across different markets, industries and sectors. This effectively guarantees both earnings growth and rising asset values. While it is not risk free the long term potential reward far outweighs the risks for investors with it clearly undervalued offering investors potential upside of 16% along with a sustainable distribution yielding almost 5% that will continue to reward patient investors as they wait for its shares to appreciate in value. Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in BIP 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.

GREK ETF Surging On Hopes Of A Deal

The latest proposals by the Greek government have raised hopes that a deal might be struck soon with the country’s creditors to stop Greece from defaulting on its debt. Greece’s Prime Minister Alexi Tsipras is expected to meet Christine Lagarde, the head of the International Monetary Fund, Mario Draghi, the president of the European Central Bank, and the Dutch finance minister today to finalize the proposals in the agreement. The Greek government has come out with a slew of measures that will focus on fiscal consolidation and tax increases to attain a surplus of 1% this year, followed by 2% and 3% surpluses over the next two years. According to the new proposal, there will be some changes in the VAT structure and the main rate would be fixed at 23%. Also, the corporate tax rate would be increased from 26% to 29% in 2016 and companies will have to pay a surcharge of 12% on profits over €500,000. Additionally, the retirement age would be slowly raised, which is expected to result in savings of €60 million this year. Moreover, workers’ and employers’ contributions to the pension system would also be hiked. The recent euphoria about the deal has led to a rally in Greece stocks and its related ETF. The Greek ETF – Global X FTSE Greece 20 ETF (NYSEARCA: GREK ) – has gained roughly 15% in the past one week. The rally might continue if the deal is indeed sealed and Greece manages to avert its default. Below, we have highlighted the GREK ETF in detail for investors keen on enjoying the Grecian ride. GREK ETF in Focus The ETF tracks the FTSE/ATHEX Custom Capped Index that is designed to reflect the performance of the 20 largest securities listed on the Athens Stock Exchange. The product holds 22 stocks in the basket and is heavily concentrated in the top 5 holdings that make up for a combined 48% of assets. Coca-Cola (NYSE: KO ), Hellenic Telecommunications ( OTCPK:HLTOY ) and National Bank of Greece (NYSE: NBG ) are the top three holdings. Financials dominates the fund with one-fourth assets, followed by Consumer Discretionary with 17.6% and Consumer Staples with 16.6%. The ETF has around $327.1 million in its asset base and sees a moderate trading volume of more than 800,000. The fund charges 55 bps in annual fees from investors and has a dividend yield of 1.17%. GREK currently has a Zacks Rank #4 (Sell) with a High-risk outlook. Bottom Line The condition of Greek banks is worsening by the day and it is almost on the brink of a collapse as savers have lost all confidence and continue to pull out money. In fact, the European Central Bank has sanctioned a release of more than €900 million to Greek banks on Tuesday so as to enable them to remain open. Some economists fear that these austerity measures are not feasible and it might worsen the recession that Greece re-entered last quarter. Lagarde also believes the measures are only a stopgap solution and are inadequate to bring Greece out of the crisis. Original Post