Tag Archives: stocks

Market Lab Report – Important Performance Update 11/17/15

Major averages rose but on lower, below average volume. Both the S&P 500 and NASDAQ Composite Indexes found logical support at their 10-week moving averages after selling off in cascading fashion over the prior three trading days. As institutions scramble to keep up with the major averages, it was not surprising to see big money pour into some of the mega-cap technology names such as FB, NFLX, AMZN, and GOOGL, most of which found support at their 20-day moving averages. Indeed, in this topsy-turvy market, the trend following wizards tracked here http://www.automated-trading-system.com/trend-following-wizards-october-2015/  had another down month, and are down yet again this year. That said, at Virtue of Selfish Investing, 2014 was a banner year as the performance by Gil Morales was a home run, and those members who took profits in context with the chart and cut losses short were also able to also well outperform the major indices. While 2014 was challenging but profitable, trendless 2015 has really tested one’s discipline in following their rules and being nimble. 2015 has been an up year so far for us, but considerably more challenging than 2014. That said, the VIX Volatility Model which is in beta has shown great promise in its profitability in backtests and more recently in real-time trading with the implemented fail-safes, even in this largely trendless year. That said, always remember that the only thing that never changes is change, so always assume markets will always change. Thus, the disclaimer “past performance is no guarantee of future performance” always holds true for any strategy. Static black boxes have a limited life expectancy. Self-learning/self-evolving strategies are essential. Both timing strategies at Virtue of Selfish Investing are self-learning as are our stock trading strategies. What worked before does not necessarily work now. The Market Direction Model adjusted to quantitative easing in 2009 among other things which accounted for its ability to continue to outperform while other timing strategies failed. Indeed most of the market timing websites around back then are now dead links. But as market manipulation by the Fed intensified as central banks began stepping up their quantitative easing programs, markets became the most challenging we have witnessed in decades. In the last few years, when markets looked like they were about to blow apart, they would find a shallow floor and head higher, but weakly so. And when the markets would fall, they would reverse a few weeks of gains in just a few days. Meanwhile, leading stocks would fall even harder than the fast falling market averages. But every problem contains its own solution. We put more focus on how to properly trade individual stocks, Thus the strategy of taking profits when you have them in context with the stock’s chart and the general market has proven profitable. Of course, keeping stops extra tight has also been essential given the behavior of most leading stocks when markets fall. Those very few that buck the trend are a big clue and can sometimes be held. Taking a Zen approach to the markets is the path every trader/investor should take. Trading in the now, in the present moment, and adjusting your trading to what stocks and the general markets are telling you is key to keeping trading strategies profitable. Thus every investor/trader can become a self-learning organism.

The 4 ETFs That Will Replace My Portfolio’s Core

Summary All of the ETFs mentioned have annual expenses under 0.15%. The ETFs mentioned will allow broad based diversification for my portfolio’s core. These offerings are from Vanguard, but several other low cost fund families exist. Nearly two years ago I wrote an article entitled My Retirement Portfolio Could Be Replaced With These 5 ETFs . At the time, the article was written basically to as an alternative concept to my portfolio (at that time) of individual stocks. We all tend to evolve as investors over time. Each of us are on our own journey, whether we’re talking about investing or life in general. I know the focus of my life has evolved over the past few years. If you are interested in a summary my family’s journey thus far, read about it HERE . Over the past 2 years I have come to two important realizations, which encourage me to eventually rotate mostly out of individual stocks and to the portfolio outlined below. First and most importantly, there simply aren’t that many companies around the world that deserve my family’s capital. To be clear, I don’t mean there aren’t some reasonable values in the global equity markets. I am talking about companies that are so well run, and have amazingly sustainable competitive advantages, that I would commit to owning these companies for the next 20 or 30 years. Perhaps you think the idea of holding an investment for decades is a simplistic and illogical consideration, but I contend that it’s exactly my intention when I invest in an individual company on the “long-term side” of our bifurcated portfolio . For that reason, in the future I will cap individual stock investments at 25% or 30% of our portfolio’s value. It will be limited to companies that can compound my capital, and unlock value, for decades and I think those are few and far between. The second consideration in proposing the portfolio outlined below, is my personal time commitment . Currently I have a day job and enjoy researching our individual stock investments, but we are moving toward semi retirement. I anticipate additional flexibility and travel in semi retirement, but I can’t allow the time commitments of monitoring a portfolio of individual stock investments to get in the way our flexibility/freedom. That sounds too much like work. With those two considerations in mind, let’s take a look at the ETF offerings below. (Note: the funds discussed are all Vanguard offerings, but there are also other low cost fund families to consider like Fidelity and T. Rowe Price. Vanguard Total Stock Market ETF (NYSEARCA: VTI ) First up is Vanguard’s Total Stock Market ETF, my proxy for exposure to domestic US companies. In the previous article I mentioned Vanguard’s S&P 500 ETF (NYSEARCA: VOO ). Several readers commented that Vanguard’s Total Stock Market ETF might be a better alternative, because it includes both small and mid capitalization companies. After some thought, I agree. While this ETF is capitalization weighted, which in this case means it’s heavily skewed toward the large cap companies of the S&P 500, it also gives me some exposure to the small and mid capitalization companies. I like the concept of this additional exposure, because the small and mid capitalization companies tend to be much more isolated from international troubles and get nearly all of their business within the United States. I like to think of this ETF as the S&P 500, with a little extra kick. Given so much diversification, it’s hard to beat the annual expense ratio of 0.05%. Below is a snap shot of Vanguard’s Total Stock Market ETF, from Vanguard’s website. The companies in the portfolio represent a wide variety of industries. (click to enlarge) Vanguard FTSE All World ex US ETF (NYSEARCA: VEU ) The next ETF would be Vanguard’s FTSE All World ex US ETF. This fund includes stock in more than 2500 different companies around the world. The holdings are skewed to the largest capitalization companies, because of the fund’s capitalization weighting. Also as a result of the fund’s weighting, you probably recognize all of the names in the top 10 portfolio holdings. (Think Nestle ( OTCPK:NSRGY ), Royal Dutch Shell (NYSE: RDS.A ), Toyota (NYSE: TM ), and Unilever (NYSE: UL )). In the graphic below, courtesy of Vanguard’s website, you can see that this truly is a global fund. This is the type of diversification I expect from a capitalization weighted all world fund. Additionally, if you don’t feel comfortable having a large weighting of emerging market companies in your portfolio you may be able to hit your desired asset allocation within the 17.5% of this fund that represents companies located in emerging market economies. The annual expense ratio of this fund is only 0.14%, which is paltry considering the diversification (and rebalancing efforts) achieved by owning this fund. (click to enlarge) Vanguard FTSE Emerging Markets ETF (NYSEARCA: VWO ) If you are optimistic about the future of emerging market economies, you may want to add additional exposure to your portfolio by including something like Vanguard’s FTSE Emerging Markets ETF. I own this fund, but be warned that everyone has a different definition of what an “emerging market” economy is. Some people think of frontier economies, like those found in Africa and the Middle East. Others think of countries like Brazil, Russia, India and China. I’m not here to tell you what the right answer is, but remember that some emerging market economies have been “emerging” for decades. Remember to dig into your fund’s portfolio allocation, to be sure you are comfortable with what you are buying. (click to enlarge) See the table below for a perfect case in point. This is the geographic distribution of Vanguard’s FTSE Emerging Market ETF. A full 28.2% of the portfolio is comprised of businesses based in China, and 55.3 percent of the portfolio’s companies are based in China, Taiwan, or India. I would prefer if the percentage of companies from those three countries was reduced somewhat, but overall I feel the diversification achieved by this fund fits my family’s needs pretty well. For my annual expense ratio of 0.15%, I gain exposure to over 2500 different global companies. As a result of the difficulty gathering quality corporate information in many of these emerging economies, I have always used an ETF (and this one specifically) to purchase my desired allocation of emerging market companies. Vanguard Total Bond Market ETF (NYSEARCA: BND ) There is a conversation raging right now about whether or not bond investors are being adequately compensated for the risks present in the bond market. That’s a conversation for another day, although I will note that because I am still in my 30s and interest rates are so painfully low, I have not had any meaningful bond exposure in my portfolio for several years. Clearly this is an individual decision, and every investor is different. If however you would like exposure to more than 7700 bonds, for an annual expense ratio of 0.07%, Vanguard’s Total Bond Market ETF may be for you. As you can see in the three tables below, courtesy of Vanguard’s website, the vast majority of holdings are highly rated bonds. The bonds held in the portfolio are also from a variety of issuers and of varying duration. For simple and straight forward bond market exposure, Vanguard’s Total Bond Market ETF is worth a look. Specialty (Sector, County, and Asset) ETFs It’s amusing sometimes to look at all the different specialty ETFs and mutual funds currently being offered. While the typical investor has no need to invest in many of these funds, they are available if the investor so decides. Two specialty funds that come up in my conversations with readers are listed below, but rest assured that your own imagination is the only limit of fund offerings. If you want to invest in a socially responsible fund that only invests in women owned businesses in the former Soviet Union states, I’m sure there is a fund out there for you. I’m exaggerating to prove a point, but I assure you that there are literally thousands of specialty funds available to you, if you take the time to look for them. Remember that just because these funds exist, doesn’t mean they are worthy of your hard earned capital. Vanguard REIT ETF (NYSEARCA: VNQ ) In the current low interest rate environment, investors have been searching for yield anywhere they can get it. Many investors have turned to corporate dividends and distributions from REITs (real estate investment trusts) or MLPs (master limited partnerships). If you are interested in owning a basket of REITs, Vanguard’s REIT ETF may be for you. For a 0.12% annual expense ratio, you gain exposure to 140+ different REITs. In the graphic below (courtesy of Vanguard’s website) you can see the sector diversification offered within the fund, as well as the top ten fund holdings. (click to enlarge) Vanguard Healthcare ETF (NYSEARCA: VHT ) Many investors are keen to take advantage of long term trends, such as aging demographics, and global healthcare issues. If you are looking for this type of exposure, Vanguard’s Healthcare ETF is worth a look. For a low 0.12% annual expense ratio, you can gain exposure to over 330 companies within the healthcare industry. The distribution of those companies is shown in the graphic (courtesy of Vanguard’s website) below, as are the funds top portfolio holdings. (click to enlarge) In a future article I will write about my asset allocation goals for my portfolio, but I hope this article gave you an idea of several very sold ETFs offered within the Vanguard family of funds. (Other low cost fund families you may want to look at include Fidelity and T. Rowe Price). Given the impressive returns posted by equity markets around the world, I have been hesitant to shift all of our holdings over to passive index ETFs just yet. The reality is that I currently enjoy researching and picking individual stocks. Eventually I will not have the time, or desire, to spend so much time on our investments. At that time, having a core portfolio position in the group of ETFs mentioned here will be my best bet. I took an early step in that direction this summer, following China’s massive sell off, when began accumulating a large position in Vanguard’s Emerging Markets ETF. I still have a long way to go before I reach my desired asset allocations, but I am optimistic that better investment opportunities (and lower prices) will present themselves in the future. Do you hold index funds or ETFs in your portfolio? Why or why not? Disclosure: The only ETF mentioned that I currently own is VWO. I do own individual stocks included in some of the other ETFs. Please consult your investment professional to create an asset allocation mix that meets your specific needs. Mine is a fairly unusual case given my young age and mix of investment holdings. This article is for informational purposes only and should not be considered a recommendation for anyone to buy, sell, or hold any securities. I am not a financial professional. The information above is available at Vanguard.com.

Unitil Is Becoming Overvalued On A Forward Basis

Summary Northeastern electric and gas utility Unitil Corp. reported Q3 earnings last month that beat expectations on net income despite missing on revenue. The share price declined in the wake of the earnings release, due to a combination of profit-taking and concern over the company’s outlook over the next 6 months. A strong El Nino is developing across the U.S., and such events in the past have resulted in warmer-than-average winters across the company’s service area. With natural gas demand expected to be low through April, diminished earnings expectations, and high P/E ratios, I do not recommend Unitil as a long investment at this time. Small Northeastern electric and gas utility Unitil Corp. (NYSE: UIL ) reported Q3 earnings late last month that beat slightly on net income despite missing on revenue. The company’s shares have lost almost 10% of the value since the earnings report’s release, however, suggesting that even the beat didn’t meet investors’ expectations. In a bullish article on the company written back in June, I highlighted management’s plans to increase the penetration of its natural gas services in an area that has historically been dominated by heating oil, concluding that current investors should maintain their positions. The company’s share price rose by 17% over the subsequent four months, as an expected Federal Reserve interest rate hike failed to materialize. The company’s short-term outlook has diminished somewhat since then, as an especially strong El Nino has begun to make its presence felt. This article reconsiders Unitil Corp. as a long investment opportunity. Q3 earnings report Unitil reported Q3 revenue of $74.7 million, down by 2.5% YoY (see table) and missing the consensus analyst estimate by $7.4 million. The decline and miss were attributable to the company’s electric utility segment, which reported a revenue decline of $2.8 million YoY to $51.4 million due to lower rates. An increase in kWh sales of 1.1% over the same period, split between the company’s residential, commercial, and industrial customers, was insufficient to prevent the revenue decline. The natural gas utility segment’s revenue increased slightly by $0.8 million YoY to $21.7 million despite the presence of lower rates during the quarter, with gas therm sales increasing by 4% over the same period as strong demand from commercial and industrial customers offset weakness from residential customers. The gas utility segment also reported a 1.4% increase in customers compared to the previous year, further offsetting the impact of lower rates. Finally, Unitil’s non-regulated Usource segment reported revenue of $1.6 million, virtually unchanged from the previous year’s result. Unitil Corp. Financials (non-adjusted) Q3 2015 Q2 2015 Q1 2015 Q4 2014 Q3 2014 Revenue ($MM) 74.7 77.5 172.2 119.8 76.6 Gross income ($MM) 40.0 40.1 61.6 50.7 39.3 Net income ($MM) 1.7 1.7 13.6 9.4 1.6 Diluted EPS ($) 0.12 0.12 0.98 0.68 0.11 EBITDA ($MM) 18.7 20.1 39.8 31.3 18.5 Source: Morningsta r (2015) The company’s electric sales margin came in at $22.2 million, down slightly YoY, as a large decline to the segment’s cost of revenue resulting from the presence of lower fuel prices during the quarter offset the aforementioned revenue decline. The gas segment’s margin came in at $16.7 million, up YoY by $1 million, as a similar decline to its cost of revenue complemented its revenue increase. O&M and income tax expenses both fell over the same period, although the impacts were offset by higher depreciation and interest expense costs. Unitil reported net income of $1.7 million, up by 11.1% from $1.6 million in the previous year. This generated a diluted EPS of $0.12 for the most recent quarter, up from $0.11 in the previous year, and beating the analyst consensus estimate by $0.01. EBITDA came in at $18.7 million, up slightly from $18.5 million over the same period. Including the Q3 results, the company is on pace to report a 9.7% allowed return on equity for the TTM period, an achievement that management attributes to the presence of cost trackers. Unitil also reported a number of positive developments during Q3 in addition to its earnings beat. First, it extended the duration of its credit facility by two years to 2020, while simultaneously reducing its interest rate by 0.125%. With sufficient liquidity in place following this move, management announced a 1.4% dividend increase compared to the previous year. While lower than those increases reported by many of its peers, the increase does leave it with an attractive forward yield of 4%. The company stated that the penetration of its natural gas utility segment into its service area increased to 60% during the quarter. While this is low relative to its system potential, natural gas is a relatively new arrival in the Northeast as a heating fuel, with heating oil having a lengthy history there instead. The company’s future earnings expectations are based on the assumption that natural gas will continue to make inroads. Finally, Unitil is asking Maine to approve the implementation of a rate surcharge mechanism for the natural gas segment that will enable proactive expansion and replacement of its existing distribution infrastructure, thereby minimizing regulatory lag and maximizing the company’s ability to initiate its planned capex spending. Outlook Unitil’s management expects the natural gas utility segment to be the major driver of its earnings growth moving forward, stating during the Q3 earnings call that it anticipates annual rate base growth of 10% for the gas utility, compared to only 4% for the electric segment. This expectation is, in turn, being driven by the continued presence of low natural gas prices, especially compared to those seen in previous years. While natural gas has already begun to replace heating oil in many Northeastern buildings, the percentage of residential homes using natural gas in Massachusetts, for example, is still lower at 44% than the U.S. average of 51%. Maine, which is home to most of the natural gas utility segment’s service area, has natural gas penetration of only 4% . Likewise, the percentage of homes heating with electricity in both states is also well below the national average. Inexpensive natural gas provides consumers with a major incentive to convert from heating oil, which is both relatively dirty and a fire risk, to natural gas. This incentive becomes especially pronounced when natural gas prices exhibit low volatility, as has been the case for the last two quarters. Increased adoption of natural gas by utility customers presents Unitil with a substantial future growth opportunity, primarily due to the relative lack of natural gas penetration within the gas segment’s own service areas. The company can bring in new customers without needing to build additional pipelines or move into new service areas and potentially unknown regulatory schemes; instead, it just needs to build the necessary distribution infrastructure within the existing service area. While Unitil’s long-term growth drivers remain in place, its share price is at risk of a decline in the near term due to weather-related impacts. This year’s El Nino event is now expected to be an especially strong one, and its effects have already begun to be felt across the U.S. Unitil’s service area has experienced warmer-than-average temperatures between October and April during previous El Nino events, resulting in fewer heating degree days than average. The timing of this impact could not be worse for the company’s earnings given that the large majority of its annual earnings are reported in Q4 and Q1 due to its heavy exposure to natural gas, which is primarily utilized for space heating in the service area. This impact could be partially offset by higher-than-average precipitation in the Northeast coastal states, with humidity making it feel colder than it actually is. Overall, however, I expect Unitil’s Q4 earnings in particular to come in under expectations and fall on a YoY basis. Valuation The consensus analyst estimate for Unitil’s EPS in Q4 has held steady over the last 90 days, although the FY 2016 consensus estimate has declined. The FY 2015 estimate has remained at $1.89, while the FY 2016 estimate has decreased from $1.96 to $1.91 over the same period. Based on a price of $34.79 at the time of writing, Unitil’s shares are trading at a trailing P/E ratio of 18.3x and forward ratios of 18.4x and 18.2x, respectively. All three of these ratios are above their long-term averages, with the latter, in particular, approaching a 3-year high. High ratios could be justified in the event that the company offered either an especially high forward dividend yield or strong near-term earnings growth potential. While the forward yield is relatively attractive at 4%, this is offset by a lack of near-term earnings growth potential (a mere 1% in FY 2016 if the consensus estimates are correct) and a negative short-term outlook due to El Nino. Conclusion Unitil reported Q3 earnings that beat on net income despite missing on revenue, although investors were ultimately not impressed. While some of the share price’s subsequent decline can be attributed to profit-taking in the wake of its earlier Fed-induced increase, the fact that the company’s winter outlook has been diminished at the same time due to El Nino is also likely weighing on shareholders. With minimal earnings growth expected in FY 2016, the likelihood that warm Q1 and early Q2 temperatures will have a disproportionately negative impact on Unitil’s earnings, and higher-than-average forward P/E ratios, I cannot recommend the company as an attractive long investment opportunity at this time. El Nino and a potential interest rate hike early next year provide too much potential downside risk, although they could also create a potential buying opportunity given the company’s more favorable long-term outlook. Dividend investors should wait for a falling share price to make the company’s forward yield even more attractive before placing any buy orders.