Tag Archives: stocks

How To Pick An Emerging Market Fund

By Tim Maverick If there’s one truism I’ve found during my years in the investing field – which date back to the 1980s – it’s the fact that everything is cyclical. What runs hot will inevitably turn cold in a few years, and vice versa. This reality is beautifully illustrated in this following periodic table of asset class returns. The table appeared in The Wall Street Journal courtesy of Budros, Ruhlin & Roe in Columbus, Ohio. The firm’s advisors use it to explain to clients why diversification is necessary. It also reinforces my contrarian bent. For instance, I’m not at all interested in the red-hot biotech and tech industries right now. Instead, I’m looking at a sector everyone is avoiding like the plague… emerging markets . I’ve been investing in emerging markets since the 1980s. Today, I’d like to share some tips on how to pick the best emerging market funds – and, just as importantly, how to avoid the losers. Tip #1: DON’T Use an Index Fund Index funds seriously narrow your investing universe. That’s true here in the United States, as well, but it’s really bad in emerging markets. Data from the Institute of International Finance brings home my point. Only about $7.5 trillion of the $24.7 trillion universe of emerging market stocks is contained in the various indices run by J.P. Morgan (NYSE: JPM ), MSCI (NYSE: MSCI ), and others. The rest is simply ignored. I don’t know about you, but I don’t want to pretend that roughly 70% of emerging market stocks don’t exist. As I’ve said before, you don’t shop in just one aisle at the grocery store. Don’t do it in the stock market, either. Tip #2: Don’t Invest in Closet Indexers So now we’ve eliminated index funds. Next up is looking at the top 10 positions in any fund you’re considering. If you see the names of companies like Samsung Electronics Co. Ltd. ( OTC:SSNLF ) , Taiwan Semiconductor Manufacturing Co. Ltd. (NYSE: TSM ) , and China Mobile Ltd. (NYSE: CHL ) , move on. The fund manager is a closet indexer. They’re only interested in matching the index by which they’re judged, rather than actually making money for the fund’s shareholders. Tip #3: Avoid Funds That Over-Invest in Two Sectors Finally, it’s important to look at the sector breakdown of a fund. In far too many cases, these funds are over-invested in just two sectors. If you see 50% or more invested into financials and technology, skip over this fund. This fund manager doesn’t understand emerging markets and may be confused into thinking that they’re investing in the U.S. market. Indeed, these two sectors are loved by U.S. fund managers, and that fascination is one reason I believe most emerging market funds have performed so badly. What to Look For Now that we know what to avoid, let’s figure out what we should be looking for in an emerging market fund. I’m a great believer that people are people, no matter where they live. And all people aspire to better their lives and those of their children. For me, that means investing in funds that emphasize the growing consumer class in developing economies. Look at China, for instance. It’s moving away from an industrial economy toward a consumer economy. Just as we no longer consider U.S. Steel Corp. (NYSE: X ) a bellwether for the U.S. economy, we probably shouldn’t count on industrials to perform that role in China much longer, either. And that means you don’t want to own the usual Chinese names. Instead, you want to own something like the South Korean cosmetics company AmorePacific Corp. ( OTC:AMPCF ) . Its sales and revenues are soaring thanks to Chinese demand, which is boosting its stock. Another option is a frontier market stock like Safaricom Ltd. ( OTC:SCOM ) , Kenya’s dominant telecom firm. Kenyans have the same mobile phone addiction as everyone else, and the safety valve is that it’s 40% owned by telecom giant Vodafone Group Plc (NASDAQ: VOD ) . In closing, stick with funds that emphasize the growth of consumerism in places like China. Companies like Apple Inc. (NASDAQ: AAPL ) are benefiting, and so will the myriad number of home-grown consumer companies in the emerging world. Link to the original post on Wall Street Daily

The Natural Gas Market Isn’t Heating Up

Natural gas prices remain low. The storage buildup was 49 Bcf – higher than normal for the season. Extraction season should start in the coming weeks. The rise in production efficiency more than offsets the drop in rigs. Even though the natural gas market is getting closer towards moving from injection to extraction season, the price of natural gas remains low. This upcoming winter is still expected to be warmer than normal. And the rise in efficiency in producing natural gas more than offsets the decline in operating rigs. This trend will keep production higher than last year, which could keep pressuring down the price of natural gas. The recent EIA storage report showed another buildup of 49 Bcf; it wasn’t far off market estimates but was still higher than normal. When it comes to the futures markets, a lot has also changed there, as you can see in the following chart of the differences among prices of near term (next month) and future months. (click to enlarge) Source: EIA Right before the end of October, the contango in the futures markets picked up – an indication for a rise in expected future price of natural gas in the coming months. Since then, however, the contango has contracted and the prices have converged to a narrow spread. This could suggest the market doesn’t anticipate the price of natural gas to sharply rise anytime soon. For holders of the United States Natural Gas ETF (NYSEARCA: UNG ), this could result in a more modest adverse impact from the contango on its pricing with respect to the spot price due to lower roll decay. Looking forward, the market still projects the EIA will report additional buildup in storage next week albeit at a much slower pace; the storage depletion will be reported the following week – at a lower rate than the 5-year average. The EIA, in its recent monthly outlook , expects the U.S. storage will drop to 1,862 Bcf by the end of March – the end of depletion season; this will reflect a modestly lower than average withdrawal from storage due to warmer than normal winter. The EIA projects the overall demand for natural gas will only slightly rise in 2016 compared to 2015 – most of this gain will come in the industrial sector that will offset the decline in power and residential/commercial sectors. But if natural gas prices were to remain this low for a while longer, this may push even further up the demand for natural gas in the power sector, which already is expected to experience a sharp gain in consumption in 2015 of nearly 17%, year on year. These projections don’t vote well for natural gas producers, which have already suffered this year from low oil prices. In terms of rigs, according to the latest update from Baker Hughes , the natural gas rotary rig count fell again by 6 rigs to 193 – nearly 45% lower than the levels recorded last year. Although production has recently declined – as of last week, U.S. natural gas production slipped by 0.5% week over week and is only up by 0.8% for the year – the EIA still estimates production will be up by 6.3% for the year and 2% next year. The higher efficiency of gas producers will more than offset the drop in rig activity. But if prices were to remain this low, this may eventually lead to a slower growth in output as producers scale back on projects and cut capital spending. The natural gas market is likely to remain soft in the near term even as it turns into the extraction season. Unless the winter outlook changes or the number of operating rigs start to tumble down again, prices aren’t expected to rise much higher than their current levels in the near term. For more see: Natural Gas is Still Floating… Barely

The Forensic Accounting ETF: Where The Bodies Are Buried

Forensic accountant John Del Vecchio likes to joke that he knows “where the bodies are buried” in the financial statements. In his line of work, you have to. John is a professional short seller and the author of What’s Behind the Numbers , an excellent primer on short selling I reviewed two years ago. I call Del Vecchio the Horatio Caine of Wall Street. With single-minded purpose, he looks for the bad guys that are cooking the books and then brings their misdeeds to the light of day. Or more accurately, he looks for companies that are using aggressive accounting techniques to mask poor operating performance and then shorts them. Eventually, management runs out of ways to hide slowing performance, and when they do, the jig is up and the stock takes a tumble. This is where it gets interesting. If Del Vecchio’s sleuthing can effectively catch earnings manipulators in the act, then it only stands to reason that it can also be used to identify good companies with high quality earnings and conservative accounting. And that brings me to the WeatherStorm Forensic Account Long-Short ETF (NYSEARCA: FLAG ) , which has been recently revamped and is now based on a new proprietary index developed by Del Vecchio. “FLAG” is exactly what it sounds like. It’s an ETF that looks for accounting red flags, such as accelerated revenue recognition and manipulation of inventory and receivables numbers. But that’s only part of the story. FLAG’s strategy combines six distinct forensic accounting and valuation factors for scoring and ranking stocks. These factors cover: cash flow quality, revenue recognition, earnings quality, shareholder yield, earnings surprise and valuation. The FLAG ETF runs a 130/30 long/short portfolio, investing 130% of its capital in stocks that rate high for earnings quality based on Del Vecchio’s metrics and maintaining a 30% short position in stocks with low ratings. The net result is that you’re buying the highest-quality companies at reasonable prices… and you’re shorting the expensive junk. While still rare in mutual funds and ETFs designed for regular investors, long/short strategies have long been used by hedge fund managers. So in FLAG, you’re essentially getting a hedge-fund strategy in an ETF wrapper. Let’s take a look at FLAG’s portfolio. As of 9/30/2015, FLAG was long 132 companies and short 41. The average P/E and P/S ratios on the long positions were 15.62 and 0.79, respectively. The averages on the short portfolio were a much higher 27.61 and 1.85. So, FLAG is clearly practicing what it preaches by owning relatively cheap stocks and shorting expensive stocks. Breaking it down by sector, technology stocks make up the largest net long position at 19.0% of the portfolio. 23.7% of the long portfolio is invested in tech and -4.7% of the short portfolio. Financials also make up a large chunk of the portfolio with a net long position of 16.1% (19.1% long and -3.0% short). In looking at individual stocks, we see some household names. AT&T (NYSE: T ) , Molson Coors Brewing (NYSE: TAP ) , Coca-Cola Enterprises (NYSE: CCE ) and Intel (NASDAQ: INTC ) all make the top 10 long holdings. And on the other side, some of the largest short positions include Constellation Brands (NYSE: STZ ) , The Priceline Group (NASDAQ: PCLN ) , Chipotle Mexican Grill (NYSE: CMG ) and Netflix (NASDAQ: NFLX ) . FLAG doesn’t have a long enough trading history to draw firm conclusions about performance. But given its focus on quality and value, I would expect it to significantly outpace the long-only S&P 500 over time. Disclaimer: This article is for informational purposes only and should not be considered specific investment advice or as a solicitation to buy or sell any securities. Sizemore Capital personnel and clients will often have an interest in the securities mentioned. There is risk in any investment in traded securities, and all Sizemore Capital investment strategies have the possibility of loss. Past performance is no guarantee of future results. Link to the original post here .