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RWE’s Share Price Bounce Should Be Short-Lived

The German government’s final decision on coal plants is favorable for RWE. Old plants will receive capacity payments. But there will be a very limited power price impact. The shares trade in line with the sector despite weaker profitability prospects and a less attractive dividend. I expect the short-term bounce to reverse. RWE’s ( OTCPK:RWEOY ) share price has risen 7.5% on the back of the German government’s final decision on coal plants . The government had previously proposed legislation for a levy on old coal plants that would have meant a de facto shut down. RWE’s plant would have been the main casualty. As a result of fierce opposition, the Economic Ministry has amended the draft bill and published a revised decision. The final decision is favorable for RWE for several reasons. There will not be any forced shut down of coal plants. And 2.7GW of old coal capacity will be brought into a strategic reserve from 2017. Effectively, they will be mothballed. But they will receive capacity payments. The CO 2 emission reduction of 22mt by 2020 that is targeted by the government should be achieved through new combined heat and power, as well as gas plant builds. I expect RWE to furnish the bulk of the plants that will be brought into the reserve. RWE is the most important coal-based power generator in the country, followed by E.ON ( OTCQX:EONGY ) and Vattenfall. It also has some of the oldest coal reactors in the country. The exact amount of the capacity payments is as yet unclear. But the industry has reportedly demanded eur 300/kW pa. That would correspond to an implied load factor just short of 60%, according to my gauge likely above current achieved load factors. The plant in question was already running at very low load factors and not likely cash flow positive. The remunerated shutdown will therefore be marginally positive. But in the greater context of things, it is worth noting that this makes up no more than 6% of RWE’s overall fleet. I estimate an impact on German power prices in the order of eur 2-3/MWh long term through limited positive merit order effects. But that is, by far, not enough to make RWE’s plant profitable. Furthermore, over time, the impact will get eroded again from more renewables builds. The German power market is severely oversupplied, and any plant other than renewables and a low-cost lignite plant is running on very weak utilization rates. My model suggests that even with the mothballing, the market will remain in firm oversupply. For more detail on the impact on RWE, see my previous article: ” German Government Provides Relief For RWE .” As a whole, the key feature in RWE’s investment case is its struggle with weak power prices and low utilization rates of its generation plant. The reason is its very coal heavy fleet. About 40%-45% of the company’s plant is currently not cash flow positive. The company is looking to shift the company’s profile toward decreasing the weight of conventional power generation and increasing the weight of renewables, supply, and regulated activities. But as I have argued before , even though I see that strategy as positive, it will take a long time still to make a meaningful impact on the company’s earnings profile. With all of the above, I see the rebound on RWE’s share price as short-lived. The shares now trade at a P/E of 12.7x 2016E, which is in line with the sector despite the company’s weak profitability outlook. The same holds true for the 4.5% yield. The impact of the positive news is not large enough on earnings for a major re-rating. RWE has said it may not rule out an E.ON-style split any longer. That might offer a prospect of share price recovery, but investors should keep in mind that E.ON’s generation business is significantly more attractive. I expect E.ON to resume its outperformance over RWE. 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/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.

Forget Greece, Buy These U.K. ETFs Instead

Uncertainty regarding Greek debt negotiations has continued to dampen investor sentiment since the start of this year. To add to the crisis, Greece overwhelmingly voted against the austerity package offered by lenders last Sunday. This poses serious questions about the economic future of the nation and whether it will continue to use the euro. On the other hand, economic doldrums in the continent seem to have had little impact on the U.K. The country has outperformed the major economies, including the U.S., China and Japan, attracting investors’ attention in recent times. Greek Crisis In the recent past, several opinion polls have shown that a vote on the Greek issue of continuing to be a member of the common currency bloc would be a close affair. However, on Sunday, 61% of citizens voted against adopting further austerity measures, escalating the crisis further. Meanwhile, Greece needs to pay 3.5 billion euros to the European Central Bank (ECB) on July 20. Greece faces the threat of exiting the currency bloc if it fails to make debt payments to the ECB within the stipulated time frame. The failure to do so could also lead the ECB to trim its emergency lending to Greek banks, eventually hampering the country’s financial system. Additionally, Eurozone leaders gave Greece a Sunday deadline to submit new aid proposals. Greece needs to come up with new economic measures to avoid a default. On Tuesday, Greek Prime Minister Alexis Tsipras proposed short-term financing until the end of July from its lenders. Tsipras asked for an interim financing in exchange for some policy overhauls demanded by Greece’s creditors. Separately, the IMF said last week that the country would need a significantly large amount of funds for debt relief. Moreover, an economic crisis lasting more than seven years and youth jobless rates as high as 50% have put additional pressure on the economy. Why U.K.? While escalating Greek debt concerns continued to weigh on Europe, it’s the U.K. which has bucked the trend. According to official data, GDP rose by 0.4% for the January-March period. This is higher than the previous estimate of 0.3%. Additionally, year-over-year growth for the first quarter was also revised upward to 2.9% from the earlier estimate of 2.5%. GDP growth for 2014 was revised up to 3% from 2.8%. Also, the National Institute for Economic and Social Research estimated that the economy has expanded at a 0.7% clip in the second quarter. It is also projected that the economy will grow at a healthy rate of 2.5% this year. Reportedly, industrial output in the U.K. increased at a better-than-expected monthly pace of 0.4% in May. Also, the slump in oil prices and low inflation boosted consumer confidence in the region. A separate report showed that market research company GfK’s consumer confidence index increased by six points to a total score of seven in June, its highest point in 15 years. A year-on-year increase of 4.5% in first-quarter real disposable income was the sharpest pace of growth since 2001. Moreover, wage growth increased to 2.7% in April, witnessing the fastest pace of growth in four years. While private jobs rose 3.3% in April and the public sector posted a 0.3% gain, joblessness has declined in the U.K. for nearly six years. 2 U.K. ETFs to Buy The encouraging economic data indicates that the economy in the U.K. is on a solid footing and is emerging as the only hope in Europe. It is speculated that the country will continue on its robust growth path this year as well as the next. In this scenario, investors may consider the following two favorably ranked U.K. ETFs to strengthen their portfolio and offset Greek debt concerns. First Trust United Kingdom AlphaDex ETF (NYSEARCA: FKU ) This fund provides exposure to 74 firms by tracking the Defined United Kingdom Index. The fund has amassed $362.3 million in its asset base, while it has an average daily volume of around 97,000 shares. None of the firms account for more than 2.9% of the total assets. Sector-wise, financials take the top spot at about 30.7% share, while consumer discretionary and industrials also have double-digit allocation. FKU charges a fee of 80 bps annually and has a Zacks Rank #2 (Buy) with a Medium risk outlook. The fund has returned 10.9% over the past six-month period. SPDR MSCI United Kingdom Quality Mix ETF (NYSEARCA: QGBR ) With AUM of $2.7 million, this product tracks the MSCI UK Quality Mix A-Series Index. In total, it holds 112 securities with nearly 31.5% of its assets allocated to the top 10 holdings. From a sector look, financials take the top spot at 16.1%, while information technology, consumer staples, consumer discretionary, energy and industrials round off the top five. The ETF is the cheapest choice in its domain as it charges only 30 bps in annual fees. QGBR trades in light volume of around 4,000 shares a day. It has returned 3.7% in the last six months and has a Zacks Rank #2 (Buy). Original Post

Feeling Sensitive? Interest Rate Hikes May Tickle These Sectors

Greek uncertainty aside, the debate around a Federal Reserve interest rate hike is still a matter of when , not if . In this climate, which rate-sensitive stocks stand to benefit, and which could be stung by Fed moves? Indexes – Broadly Thinking Market interest rates – those set by the bond market – are already moving higher, reflecting trader belief that the Federal Reserve will crank up the interest rate dial at least once this year, possibly as soon as September. Ultra-low interest rate policy has goosed a bull market in the S&P 500 (NYSEARCA: SPY ) since March 2009. But now, economic prosperity will necessitate interest rate increases to keep growth from overheating and inflation from bubbling up. That means tighter interest rate policy is bullish for the broad market, even if it’s met by a collective grumble on Wall Street. That’s true at least for a time because it means the economy is on the right track. Watch for volatility, however, as traders speculate on how aggressive the Fed might be. Traders are mindful that the Fed could overshoot. Financials – In Their Best Interest Traditional banks and insurance companies can pull in more funds with higher interest rates, which means Fed hikes tend to be pro-financial stock. Banks that focus on traditional lower-risk community lending – more of a savings-and-loan model – will also potentially benefit from rising rates on the money they lend. Higher rates help insurance “float” portfolios earn more. Float is the gap between premium collection and claim payout. As that portfolio sits around, it needs to collect interest for the insurer. Conversely, the trading risk that can come with higher rates can reveal the risky underbelly of investment banks and their bond exposure. Consumer Spending – Who and What? Think luxury retailers, travel stocks, casinos, automakers – this type of spending tends to ramp up, not because of rate hikes, but because of the economic conditions triggering those rate hikes. It’s important to remember that consumer discretionary tends to do best in the early part of a rate-hike cycle, market history shows. That’s when the euphoria of the economic bounce is strongest and the bite of higher rates is less pronounced. Key for this pick is combing for attractive valuations and hidden gems in a category that could itself get pretty expensive. One might assume then – based on market history – that consumer staples don’t perform as well in a rising-rate environment. Investors might pick specific retailers or think about the growing e-commerce marts that offer all kinds of goods, both frivolous and fundamental. Technology – A Step Ahead Hey, if consumers are spend-happy in this environment, it’s likely that businesses are too. That means they’re retooling their technology needs. And as companies jockey to outrun any inflation risks, those most nimble with pricing power may come out on top. That’s because innovation (being early to market) can carry its own pricing power, which is potentially advantageous in this stage of an economic cycle. Utilities – Put in the Subs These typical dividend-payers are largely considered a bond alternative. During 2014, for example, when Treasury yields tumbled, the utilities sector more than doubled the 14% total return of the S&P 500 Index, according to Standard & Poor’s data. Because newly issued bonds will presumably pay higher issues in line with other rising interest rates, they tend to make the utilities alternatives less attractive. But utilities are a good example that more goes into stock-picking than just interest rate considerations. Utilities, for instance, win favor from some diversification-seeking investors because utilities are one way to limit exposure to U.S.-only consumer markets. That might sound good to investors who are casting a nervous eye toward Europe about now. Drilling Down – Think Companies, Not Sectors As for company-by-company selection, stock-picking criteria might focus on balance sheet health. Companies that need to borrow extensively to operate or innovate may struggle when money becomes more expensive. Investors should feel empowered to think of a Federal Reserve tightening period creatively. For instance, investors might consider a direct play on the improving job market with a look at job search companies; they stand to draw higher traffic as confident workers go for better pay and benefits. Robust payroll counts could also raise demand for payment processing companies or firms that run employee security checks. Bottom line: A big difference for this rate-hike campaign compared to others is the pace at which the Fed is expected to move. The economic recovery, and global turbulence, is still spotty, which could constrain the central bank to gradual hikes – hopefully providing enough time for stock investors to adjust accordingly. Inclusion of specific security names in this commentary does not constitute a recommendation from TD Ameritrade to buy, sell, or hold. Market volatility, volume, and system availability may delay account access and trade executions. Past performance of a security or strategy does not guarantee future results or success. Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options. 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