Tag Archives: setpageviewname

NRG Could Be The Green Victim Of Green Energy

NRG stock is down by one-third in the last year despite its green energy gloss. The company’s problem is that it produces and sells solar and wind but does not own utilities. Next Era Energy has a better economic model. NRG (NYSE: NRG ) CEO David Crane has the reputation of being one of the smartest guys in the energy industry, certainly the smartest in the utility business. He talks big about ruling and overthrowing the utility industry, with a big boost from renewable energy. But over the last year he, and his shareholders, have been getting their comeuppance. NRG shares are down by one-third over that time. Profits have been down for three consecutive quarters, and the March quarter saw the company make a $120 million, 37 cent per share loss. The company raised the dividend a penny in defiance of this, to 15 cents, but the company’s yield of 2.33% is still not awesome compared with its peers, and it looks a lot more threatened. What went wrong? Some might argue the problem lies in its business model. NRG makes most of its money as a “standby” energy producer. It doesn’t control customer accounts. It builds and holds energy production, and makes money on the production cost. When investors look at it, however, they see things like Green Mountain Energy , which works to get consumers using “green” energy and lower their costs at the same time. But NRG is not a utility. It does not control the delivery of the energy it sells. Green Mountain is often confused with Green Mountain Power , a Vermont utility that does do business with NRG but is actually owned by Gaz Metro , a company which, through a web of holding companies and partnerships , is connected to Quebec’s public pension funds and Enbridge (NYSE: ENB ), a pipeline company whose Alberta Clipper pipeline serves the region’s oil sands. Contrast it with NextEra Energy (NYSE: NEE ), the parent of Florida Power & Light, which recently announced a deal to buy Hawaii’s Hawaiian Electric (NYSE: HE ). Th at deal has some in a bad odor but the idea is to run Hawaiian Electric, where renewable energy is abundant, more like Green Mountain Power. That is, the company can make money by financing energy savings for consumers and sharing in the proceeds, as described this week at The New Yorker . When the company delivering energy savings to a consumer is also the consumer’s electric utility, it can be creating multiple routes to profit. It’s selling and financing something other than power generation. It’s actually creating a financial benefit for itself out of lower power use. It’s also gaining control of an account that can help it deal with the costs of solar and wind energy, including its intermittent nature. Utilities don’t have to be opponents of green energy, the story goes, they can make money from being its advocates. If what Green Mountain Power did in Vermont works in Hawaii, it’s a huge win for NextEra Energy. Trouble is, that lower power demand also becomes a huge loss for companies like NRG, whose business depends on selling power, and whose profits depend on maintaining a high price for that power. Perhaps that is the reason that NEE stock has been stable over the last year, and it has nearly double the net income, $1.45/share, it needs to pay the dividend of 77 cents per share, up a nickel from last year’s 72 cents. The dividend means a yield of 3.04% that is quite sustainable, and it has profit opportunities that NRG can only dream of. 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.

Building The Core With Vanguard: Foreign Stocks

Summary Every ETF investor needs to consider what holdings will form the very core of their portfolio. For the portion relating to foreign stocks, the Vanguard FTSE All-World ex-US ETF is a compelling choice. Also discussed are reasons every investor should consider holding foreign stocks in their portfolio, along with links to additional background reading for those who desire such. For my first articles for Seeking Alpha, I decided to start simple: tackling the question of building a solid core portfolio using ETFs offered by Vanguard Funds. I started with domestic stocks featuring the Vanguard Total Stock Market ETF (NYSEARCA: VTI ), followed by domestic bonds featuring the Vanguard Total Bond Market ETF (NYSEARCA: BND ). As can quickly be discerned, however, both of the above options relate to U.S.-centric investments. For their portfolio to be complete, investors should also seriously consider going beyond the borders of the U.S. and into the world of foreign equities. For your first venture into this brave world, the Vanguard FTSE All-World ex-US ETF (NYSEARCA: VEU ) makes an excellent choice. Why Foreign? Why Now? For an overview of the risks and benefits of investing in foreign stocks, I offer this article from my personal blog. It offers a relatively brief, yet comprehensive overview, supported by links to further reading if desired. Essentially, what you will read there is that foreign stocks offer two potential benefits, growth and diversification . Hopefully, this material will answer that first question, Why Foreign? But what about that second question, Why Now? I hope to write about the concept of rebalancing one’s portfolio in a future article. But for now, let me just say that a key to good portfolio management is to “sell high and buy low;” in other words, to take a certain portion of your investments out of asset classes that have outperformed and put them to work in asset classes that have underperformed. With that in mind, have a look at the graph below. It compares Vanguard’s VTI (Domestic Stocks) with the ETF featured in this article, VEU, since VEU’s inception on March 2, 2007: VEU data by YCharts Do you notice anything interesting about that chart? I thought you might. After a period of relatively similar performance between roughly 2007 and 2012, U.S. stocks have outperformed their foreign brethren by a fairly significant margin. Further, foreign stocks have been roughly flat over the roughly 8-year span covered by the chart, while U.S. stocks have risen almost 60%. Let me be clear, there have doubtless been good reasons for this. While the U.S. economy has struggled, in particular since 2008, other countries have done even worse. Further, I am in no way predicting that foreign stocks will outperform their U.S. brethren moving forward. I don’t have a crystal ball. However, based on an analysis similar to this that I performed approximately two months ago, I decided to lower my personal weighting in U.S. stocks by 2.5% and shift those funds to foreign stocks. Certainly, this is no dramatic move. I simply decided that I wished to take a little from the asset class that had experienced significant gains and move it to the class that had been flat. With that big picture background, let’s now turn to the composition of VEU, as well as the expense ratio. Composition VEU is named well (Vanguard FTSE All-World ex-US ) because, as it happens, that is the name of the index it tracks. As such, VEU offers incredibly broad and diversified foreign exposure. As of the latest factsheet , we find that VEU actually contains a slightly greater number of securities than the index, 2,492 vs. 2,377. Let’s look a little closer. First, here is the fund’s geographic allocation: As you can see, the fund leans heavily toward developed markets such as Europe and the Pacific (Asia). At the same time, it offers reasonable exposure to emerging markets; those whose economies are not as fully developed and therefore offer greater potential for growth, albeit with a greater level of risk. If you back out the 18.8% in emerging markets, you quickly realize that 81.2% of the fund is invested in what are generally considered developed markets. Diving in a little more specifically, here are the Top 10 countries represented in the fund. If you add up the numbers, you will see that these countries comprise 73.4% of the total. Of these, China is the only country included in the Vanguard FTSE Emerging Markets ETF (NYSEARCA: VWO ). Let’s now take a look at one last perspective, the Top 10 holdings: To give you some small sense of the sorts of companies that constitute the largest portions of the fund, here are extremely brief synopses of the Top two; Nestle SA ( OTCPK:NSRGY ) and Novartis AG (NYSE: NVS ): Nestle SA – Nestle is the largest food company in the world , measured by revenues. Encompassing baby food, bottled water, coffee & tea, dairy products, frozen food, pet food, snacks and more. The list of brands is made up of legendary names that you will instantly recognize, and Wikipedia states that 29 of these brands each have annual sales of over $1 billion. The company operates in 197 countries, with factories in 86 countries. Novartis AG – Novartis is the largest pharmaceutical company in the world , measured by revenues. According to its latest annual report , Novartis’ products are available in more than 180 countries worldwide. Its pharmaceuticals arm has 135 projects in development, its subsidiary Alcon is the #1 eye care company worldwide, and its subsidiary Sandoz is the #2 global provider of generic medicines. Looked at from any of these vantage points, I submit that VEU is a wonderful core holding for the foreign, or international, component of your portfolio. Costs and Expenses At 0.14%, VEU’s expense ratio is somewhat higher than that of either VTI or BND, the other two ETFs I have featured. And yet, it too is one of the lowest in the industry. Bear in mind, this is an ETF that is dealing with assets all over the world, across different stock exchanges and the like. To that, of course, you have to add your trading commissions. Vanguard offers its own ETFs commission-free, and TD Ameritrade offers a decent selection of commission-free Vanguard ETFs. Suitability As a core holding, VEU is suitable for all portfolios. While I do believe that all investors should hold at least some portion of their portfolio in foreign stocks, I understand that you must do so at a level at which you are comfortable. Alternatives Another ETF worth considering, particularly if your brokerage offers it commission-free, is the iShares Core MCSI Total International Stock ETF (NYSEARCA: IXUS ). It too sports a very competitive 0.14% expense ratio, and covers basically the same range of countries, including emerging markets, as does VEU. The ETF’s size, as well as its average trading volume, is substantially smaller than VEU, but I do not believe this should be any impediment. As a Fidelity client, I use VEU for my core position and IXUS, which I can trade commission-free, for small incremental investments and/or to adjust portfolio weightings. 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 BND, IXUS, VEU, VTI, VWO. (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: I am not a registered investment advisor or broker/dealer. Readers are advised that the material contained herein should be used solely for informational purposes, and to consult with their personal tax or financial advisors as to its applicability to their circumstances. Investing involves risk, including the loss of principal.

Whats Wrong With Emerging Markets ETFs?

Summary Major Emerging Markets ETFs (EEM & VWO) are investing in the “legacy economy” and not in the “new economy”. Government owned Chinese banks, Brazilian oil companies and Russian resource companies dominate major ETFs. BABA, BIDU, MELI, YNDX and other US listed EM E-commerce companies are NOT in EEM & VWO. What’s wrong with Emerging Markets ETFs? After years of poor relative returns investors have become disinterested and disenchanted with the leading Emerging Markets ETFs ( EEM , VWO ). While the U.S. stock market has made new highs and posted double digit returns, Emerging Markets haven’t done much, leading many investors to question the value of their Emerging Markets allocations. Adding to the woes are headline risks that are really in the headlines as revolution, war, fraud and corruption have either happened in the recent past or are happening right now. But maybe there is a bigger problem. In spite of all the turmoil and risk, Emerging Markets are growing. In fact they are growing at twice the pace of the U.S. and the rest of the developing world. And some countries and sectors within Emerging Markets are growing at quite spectacular rates. But why then aren’t the indexes and ETFs that track Emerging Markets performing better? A closer look at the indexes reveals some major flaws in the largest Emerging Markets ETFs. SOEs are Not Seeking Alpha Weighing most heavily on the indexes is their enormous allocation to state-owned enterprises (SOEs) which account for nearly 30% of the weight of the largest Emerging Markets ETFs. These companies represent the past of Emerging Markets, but not the future. The largest of these SOEs are Chinese, Brazilian and Russian state owned banks and oil companies. Many adjectives describe SOEs including, monolithic, inefficient, conflicted and corrupt. You don’t need not look far to see the problems with investing in SOEs. Recent news has been filled with reports of the investigation of top Brazilian government officials suspected of plundering state-owned oil giant PetroBras of over $1 billion in kickbacks and bribes. The Chinese government has launched a campaign to return 150 “economic fugitives” living in the U.S. who have fled China after allegedly looting or defrauding state owned businesses. And in Russia, where do you even start? Is South Korea Twice as Big as India? Less widely recognized are some of the other factors that can distort the indexes. Traditional index construction methodology uses market capitalization to determine weightings, an approach that in Emerging Markets tends to overweight countries with large banks and financial companies and small populations. As a result, countries like South Korea and Taiwan end up with about twice the weight of India in the major Emerging Markets despite the fact that India has 25 times the population of Korea and 50 times that of Taiwan. Does that make sense? (click to enlarge) Source: Big Tree Capital LLC (click to enlarge) Source: Big Tree Capital LLC How are 3.4 million Rich People 26% of “the Next Emerging Markets”? Things get even worse in so-called Frontier Markets indexes and ETFs. While often dubbed as “the next Emerging Markets” by the fund companies, Kuwait, with a population of only 3.4 million and per capita GDP on par with the U.S. comprises 26% of the largest Frontier Markets ETF (NYSEARCA: FM ). How much room for growth is there with 3.4 million rich people? Meanwhile, Nigeria, with a population of 173 million gets only a 10% weighting. (click to enlarge) Source: Big Tree Capital LLC (click to enlarge) Source: Big Tree Capital LLC Where the Growth is in Emerging Markets Most Emerging Markets investors know that the real growth opportunity in Emerging Markets is the growth of the consumer class. There are dozens of studies and reports published by investment banks, consulting firms and fund companies describing how billions of humans are moving from subsistence income levels to levels where they begin to consume more and better food, clothing, appliances, cars, etc. It’s a very good story. It’s a big story. In a report titled “Going for Gold in Emerging Markets” McKinsey & Co concludes that the growth of consumption in Emerging Markets is “the biggest growth opportunity in the history of capitalism.” Yet, in the major Emerging Markets ETFs, the consumer sector gets a meager 16% weighting. EEM & VWO are Missing the Best Part Finally and importantly, the major indexes and ETFs are largely missing out on something big that is just starting. As the Emerging Markets consumer wave hits, another wave has formed and is gathering momentum. All over the developing world, consumers are getting internet access via wifi and mobile broadband. At the same time, a new breed of manufacturers is offering smartphones for as low as $40. And prices are going to keep dropping. Consider the case of Xiaomi – a Chinese manufacturer of entry level smartphones. The company – which is less than five years old – will sell about 100 mm smartphones this year, up from 60 million units sold in 2014. In the next 5 years a billion consumers will emerge with a $40 smartphone in their hands. The result of this trend is significant revenue growth and value creation. Estimates are that Ecommerce in Emerging Markets has grown at an average of 41.5% for the past five years. And, while this rate is sure to slow, it still clocked an impressive 39.9% growth in 2014. (click to enlarge) Source: EMQQ Index Yet, Alibaba (NYSE: BABA ), MercadoLibre (NASDAQ: MELI ), Baidu (NASDAQ: BIDU ), JD.com (NASDAQ: JD ), Yandex (NASDAQ: YNDX ), 58.com (NYSE: WUBA ) and most of the 50+ publicly traded Emerging Markets Ecommerce companies benefiting from this growth are not in EEM or VWO because they choose to list on U.S. exchanges. The companies are essentially being “punished” from an indexing perspective for listing on the exchanges that will give investors greater liquidity and transparency than their “home” markets. In short, the major ETFs and indexes are leaving out the future. Investors Should Move On Investors using ETFs to gain exposure to Emerging Markets should re-evaluate their allocations. Using legacy indexes and ETFs that provide exposure to the entire universe of Emerging Markets companies may not be the best way to benefit from the growth of Emerging Markets. Investors should concentrate on identifying the Emerging Markets ETFs that provide them with targeted exposure to sectors and companies that are both growing and seeking to maximize shareholder value. Disclosure: I am/we are long EMQQ, BABA, BIDU, YNDX, WUBA, JD, MELI. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: I have created an Emerging Markets Internet & Ecommerce Index. The index has been licensed as the basis for EMQQ The Emerging Markets Internet & Ecommerce ETF (NYSE:EMQQ). I receive a licensing fee from the ETF.