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Spinoffs: Looking For Value

Investing in and around spinoffs has been an extremely lucrative endeavor over the past decade, according to the Nov. 30 issue of Value Investor Insight. Indeed, since the end of 2002, Bloomberg has maintained a U.S. Spin-Off Index, which tracks the share prices of newly spun-off companies with market capitalizations of more than $1 billion for three years after they begin trading. Over the near 13-year period tracked, Bloomberg’s U.S. Spin-Off Index has risen 557%, compared to a return of 137% for the S&P 500. Moreover, spinoff activity is close to an all-time high as companies, spurred on by activists, try to unlock value for shareholders by splitting up their businesses. This year’s total number of spinoffs is expected to be 49, the fourth-highest level on record. However, more often than not, due to a number of factors, spinoffs are mispriced by the market, which can lead to some very attractive opportunities for value investors. In this month’s issue of Value Investor Insight , four spinoff experts – Murray Stahl of Horizon Kinetics, Joe Cornell of Spin-Off Advisors, The London Company’s Jeff Markunas and Jim Roumell of Roumell Asset Management – discuss the key factors that lead to spinoff mispricing and where they’re looking for opportunity today. (click to enlarge) Spinoffs: Four key factors There are four key structural factors that can lead to spinoffs being mispriced : Limited information – The documentation filed with the SEC when companies split can be quite complex, and the pro-forma financials can be difficult to analyze. Moreover, analyst coverage tends to be limited, and investors, rather than do the legwork themselves, would rather look elsewhere. Forced selling – A spinoff may see a parent company force a SpinCo onto a shareholder that doesn’t want, or legally can’t hold the shares, which will lead to selling. An S&P 500 Index fund can’t own a spinoff company outside the index, for example. Sandbagging – SpinCo managements usually receive significant financial incentives to underperform and over-deliver. Top managers’ incentive stock plans are typically based on average share prices of the spinoff company for the first 20 or so days of trading after the spinoff, which can lead to sandbagging of the highest order before those prices are locked in. ” Capitalism works ” – According to Value Investors Insight , when a SpinCo leaves its parent, “pent-up entrepreneurial forces are unleashed” as “the combination of accountability, responsibility, and more direct incentives take their natural course.” In other words, without the parent, the newly independent company can take advantage of capitalist forces to improve performance. Spinoffs: Looking for value So what do the experts look for in a good spinoff? According to Murray Stahl of Horizon Kinetics, there are four key characteristics to look for when a company spins off an unwanted subsidiary or division. First, a higher-margin business is spinning off a lower-margin business. Second, CEO movements. If the CEO of the larger company decides the best place to be is with the spinoff it’s, “a message to heed.” There’s also the capital structure of the SpinCo to consider. Too much debt dumped on the SpinCo from the parent can be a burden that haunts the company and strangles growth. That said, if figures show that the debt can be paid down over time, this creates an opportunity, like a publicly-traded leveraged buyout, according to Murray Stahl. And the last spinoff situation that creates an opportunity for profit is the very small spinoff that those engaged in industrial-scale money management are unable or unwilling to own (market cap

Fight Global Warming With These ETFs

Establishing a terror-free world may be the foremost agenda at the international level now, but the global warming issue is equally heated. While so long it was presumed that global warming leads to climate change, causing rising sea levels, drought in one region and flood in other, the latest theory is that this monster can ” cause job losses, recessions and even a tumbling stock market”, according to economists. So, one can easily understand the urgency of controlling pollution and cooling down the globe. In that vein, global leaders assembled in Paris at the COP 21 meet – which is the 21st annual conference of parties – to chalk out an elaborate and comprehensive plan for lowering carbon emissions and moderating the warming of the planet. Efforts to arrest global warming have been constant across individual countries. Now, not only developed economies, but the emerging ones too are pushing themselves to attain this goal. China intends to build a pollution-free environment. As part of this mission, the president of China and U.S. president Barack Obama have recently struck a deal to lessen carbon emissions. The agreement calls for carbon emission reductions by 26% to 28% in the U.S. by 2025. It also includes the first-ever commitment by China to stop emissions from growing by 2030. Notably, China and America are two largest emitters of greenhouse gases . President Obama has always been active in the cause of cleaning up carbon pollution. A proposed Environmental Protection Agency rule seeks to reduce 30% carbon emission from power plants by 2030 from the levels emitted in 2005. At the conference, the Russian president noted that his country has not only averted the rise of greenhouse emissions, but has actually slowed it. Russia targets to curb 70% of greenhouse emissions by 2030 from the levels seen in 1990. At the Paris meet that is under way, global superpowers will also decide on supporting underprivileged countries like Bangladesh and Indonesia to finance the needed reforms they can’t pay for. Investors can also make outsized profits from this awareness on global warming. Several clean energy and low-carbon ETFs have been rolled out to capitalize on the growing need for environment protection and reduce greenhouse gas emissions. Below, we highlight a few ETF options that investors can go “green” with. SPDR MSCI ACWI Low Carbon Target ETF (NYSEARCA: LOWC ) This has become an $87.6 million ETF within just a year of its launch. The 1,277-stock ETF looks to track the stocks from developed and emerging markets that discharge lower carbons. The fund charges only 20 bps in fees. Here too, Apple (NASDAQ: AAPL ) (1.9%) takes the top spot, followed by Microsoft (NASDAQ: MSFT ) (1.17%) and General Electric (NYSE: GE ) (0.85%). The fund is heavy on the U.S., which has half of its total exposure, while Japan (7.9%) and the U.K. (7.1%) take the next two spots. LOWC is down about 0.9% so far this year (as of November 30, 2015). iShares MSCI ACWI Low Carbon Target ETF (NYSEARCA: CRBN ) The 931-stock fund also charges 20 bps in fees a year from investors. The fund has amassed over $217 million in assets since its debut in December 2014. Its exposure is quite similar to LOWC, as Apple (1.92%), Microsoft (1.17%) and General Electric (0.82%) are the top three holdings. The fund’s geographic exposure is also pretty much like that of LOWC. Etho Climate Leadership U.S. ETF (NYSEARCA: ETHO ) This new ETF has a 400-stock portfolio having a carbon emissions profile that is 50-70% lower per dollar invested than a conventional broad-based benchmark. The index studies total greenhouse gas emissions from over 5,000 equities to choose “climate leaders” in each industry. No stock accounts for more than 0.56% of the basket. Netflix (NASDAQ: NFLX ), M&T Bank Corp. (NYSE: MTB ) and Energy Recovery Inc. (NASDAQ: ERII ) are the top three holdings of the fund, which charges 75 bps in fees. Original Post

Top-Ranked ETFs To Tap India’s Growth Story

Finally, a slew of economic reforms including four rate cuts this year have started to pay off and stimulate growth in Asia’s third-largest economy. This is especially true as India picked up momentum with 7.4% growth in the second quarter (ending September). While this is far below the year-ago growth of 8.9%, it is up from 7% recorded in the first quarter and the market expectation of 7.3%, as per Reuters. Bright Spots A major boost to the economy came from solid progress in the manufacturing, mining and service sectors. Agriculture, industrial, automobiles and consumer durables are witnessing strong growth while investments are also showing signs of recovery. Additionally, current account deficit has narrowed and the currency has moved up significantly. Further, lower oil prices and rising consumer spending have added to economic strength. In particular, the current account deficit has narrowed sharply to around 1.3% of GDP in fiscal 2014-2015, below 1.7% in fiscal 2013-2014. Trade deficit in the first seven months of the current fiscal (April-October) contracted to $77.76 billion from $86.26 billion. Though inflation rose to 5% in October from 4.41% in September, it is expected to decline once the festival season ends. The central bank expects inflation to reach 6% by January 2016 and then moderate to 5% by March 2017. Given the positive developments, India has now become the world’s fastest-growing economy, outpacing China, and remains a bright spot given that most emerging economies are struggling to revamp growth. The Reserve Bank of India expects the country’s economy to grow 7.4% annually for fiscal 2015-2016 and the World Bank projects economic growth of 7.5% for the current fiscal year, followed by further acceleration to 7.8% in 2016-17 and 7.9% in 2017-18. The Organization for Economic Co-operation and Development (OECD) also sees robust growth prospects in India compared to the other emerging markets. It expects GDP growth to remain above 7% in the coming years fueled by more structural reforms. India ETFs to Buy Based on a speedy recovery and bright outlook, we recommend investors to buy India ETFs at least for the short term. For interested investors, we have found a number of top-ranked ETFs in the broad emerging Asia-Pacific space targeting India that have a Zacks ETF Rank of 2 or ‘Buy’ rating and are thus expected to outperform in the upcoming months. Among these, the following five funds could be good choices to play in the coming months and have potentially superior weighting methodologies which could allow them to continue leading the emerging Asia-Pacific space in the months ahead. iShares MSCI India ETF (BATS: INDA ) This ETF follows the MSCI India Total Return Index and charges 68 bps in fees per year from investors. Holding 72 stocks in its basket, the fund is highly concentrated on the top two firms – Infosys (NYSE: INFY ) and Housing Development Finance Corp. ( OTC:HSDGY ) – that together make up for 20.2% of total assets. Other firms hold no more than 6.63% share. Further, the product is slightly tilted toward the information technology sector at 21.7% while financials, consumer staples, health care, and consumer discretionary round off the top five. INDA is the largest and popular ETF in this space with AUM of over $3.5 billion and average trading volume of more than 2 million shares a day. The fund is down 7.9% in the year-to-date time frame. WisdomTree India Earnings Fund (NYSEARCA: EPI ) This product tracks the WisdomTree India Earnings Index, holding 238 profitable companies using an earnings-weighted methodology. Reliance Industries and Infosys occupy the top two positions with a combined 17.9% of assets while other firms hold less than 5.8% share. The fund is heavy on financials with one-fourth share, while energy and information technology also get double-digit allocation in the basket. The fund has amassed nearly $1.7 billion and trades in volume of more than 4.8 million shares a day. Expense ratio came in at 0.83%. The fund has lost about 9% over the trailing one year. iShares India 50 ETF (NASDAQ: INDY ) This ETF provides exposure to the largest 53 Indian stocks by tracking the CNX Nifty Index. It is pretty well spread out across components with none of the securities holding more than 7.73% of assets. With respect to sector holdings, financials takes the top spot at 26%, closely followed by information technology (16%), consumer discretionary (11%) and energy (10%). The product has managed assets worth $814.9 million and trades in good volume of nearly 320,000 million shares a day. It is the high cost choice in the space, charging 93 bps. The product shed 8.4% in the trailing one-year period. PowerShares India Portfolio (NYSEARCA: PIN ) This fund offers exposure to the basket of 50 stocks selected from the universe of the largest companies listed on two major Indian exchanges by tracking Indus India. The top two firms – Infosys and Reliance Industries – take double-digit exposure each while the other firms hold no more than 5.6% share. From a sector look, the fund is tilted toward energy and information technology, each accounting for over 20% share, followed by financials (12.1%) and health care (10.8%). The fund has amassed $431.7 million in its asset base and trades in solid volume of around 1.3 million shares a day on average. It charges a higher expense ratio of 85 bps and has lost 7.7% in the year-to-date timeframe. Market Vectors India Small-Cap Fund (NYSEARCA: SCIF ) This fund targets the small cap segment and tracks the Market Vectors India Small-Cap Index. In total, it holds 135 securities in its basket with none making up for more than 3.21% of assets. Here again, financials occupies the top position from a sector look at 28.3% while industrials, consumer discretionary, and information technology round off the next three spots. The fund has so far amassed $203.5 million in its asset base while charging 89 bps in annual fees. Volume is good, exchanging around 105,000 shares in hand a day. Bottom Line Given the current trends and favorable dynamics, India will likely get a solid boost. So a solid play on the country might be a good idea. This is especially true if investors take a closer look at the top-ranked ETFs in the space for excellent exposure and some outperformance in the coming months. Original Post