Tag Archives: utilities

The Tree Is Up With The Best ETFs

Christmas isn’t Christmas without a tree. While the evergreen never fails to bring in cheer to the most lonesome of hearts, we decided to do something very different this year – build a tree with the choicest of ETFs of the season. Let’s build the base first, which is the most valuable of all for investors, and of course, where all the gifts are to be found. And what’s more fitting than the broad market ETF, the SPDR S&P 500 (NYSEARCA: SPY ) , which tracks the major U.S. benchmark – the S&P 500 index – to give a solid foundation to our tree. It holds 506 stocks in its basket that are widely spread out across a number of sectors and securities. None of the securities hold more than 3.4% share while information technology, financials, healthcare, consumer discretionary, and industrials are the top five sectors accounting for double-digit exposure each. The product has $174.8 billion in AUM and charges 9 bps in fees per year. It has a Zacks ETF Rank of 3 or ‘Hold’ rating with a Medium risk outlook. Since the stock market tends to rise on holiday optimism and year-end seasonal factors, high beta and high momentum ETFs are expected to lead the market in the weeks ahead. This is because high beta funds experience larger gains than the broader market counterparts in a soaring market. On the other hand, momentum investing should be a winning strategy for investors seeking higher returns in a short spell in any market environment. This strategy seeks to take advantage of market volatility by buying hot stocks, which have shown an uptrend over a few weeks or a few months, and selling those stocks that are going down. So, a couple of high beta and momentum ETFs could be the best option to include in our Christmas tree. In particular, the PowerShares S&P 500 High Beta Portfolio ETF (NYSEARCA: SPHB ) and the First Trust Dorsey Wright Focus 5 ETF (NASDAQ: FV ) are the most popular choices in their respective areas. They went in to form the fronds and leaves of the tree. SPHB tracks the performance of 100 stocks from the S&P 500 Index with the highest beta over the past 12 months. It has amassed $65.7 million in its asset base and charges 0.25% in expense ratio. The product is widely spread out across each security as none of them holds more than 1.54% of total assets. About one-fourth of the portfolio is allotted to energy, while financials, information technology and healthcare round off the next three spots with double-digit exposure each. FV on the other hand tracks the Dorsey Wright Focus Five Index, which provides targeted exposure to the five First Trust sector and industry-based ETFs that Dorsey, Wright & Associates (DWA) believes have the maximum chance of outperforming the other ETFs in the selection universe. Securities with high relative strength scores (strong momentum) are given higher weights. Currently, the product has the highest exposure to the biotech sector via the First Trust NYSE Arca Biotechnology Index ETF (NYSEARCA: FBT ) at 24.8%, followed by the First Trust DJ Internet Index ETF (NYSEARCA: FDN ) and the First Trust Health Care AlphaDEX ETF (NYSEARCA: FXH ) at 21.0% and 19.3%, respectively. It has accumulated nearly $4.6 billion in AUM while it charges 94 bps in annual fees. For the top layers, we’ve included financial ETFs like the Financial Select Sector SPDR ETF (NYSEARCA: XLF ) as the sector is a major beneficiary of a rising interest rate environment. This is the most popular financial ETF with AUM of $19.1 billion and an expense ratio of 0.14%. The fund follows the Financial Select Sector Index, holding 89 stocks in its basket. It is heavily concentrated in the top five firms that collectively make up 36.7% of the portfolio while the other firms hold less than 2.6% share. At the very top is the star ETF of the year – the First Trust Dow Jones Internet Index ETF ( FDN ) . The fund offers exposure to the Internet corner of the broad technology space by tracking the Dow Jones Internet Composite Index. In total, it holds a small basket of 42 securities with double-digit allocation in the top two firms. The ETF has amassed $4.87 billion in AUM while charging 54 in fees. Now that we are done with the tree’s structure, we are left with decorating it with lights and chocolates. For this, the best ETFs that could fit in here are the iPath Pure Beta Cocoa ETN (NYSEARCA: CHOC ) for the chocolate decor, and most importantly the Utilities Select Sector SPDR ETF (NYSEARCA: XLU ) for lighting up the tree. And voila, the tree is up! May it bring in bountiful returns for the investor with the jingle of Santa’s bells. Original Post

Azure Power – A Good Way To Play The Secular Growth Of The India Solar Market

Summary The company has been expanding at a CAGR of 135% since May 2012. India offers huge growth potential with the solar market expected to increase to 100 GW by 2022 from around 5 GW now. One of the largest solar power developers in India with a strong pipeline. Azure Power (Pending: AZRE ) is amongst the largest developers and operators of utility scale solar assets in India. The company has committed to install 11,000 MW by 2022 in RE-Invest 2015. Though this target is more for the galleries than the company’s actual target in my view, the company will still grow tremendously even if it achieves a fraction of that figure. Azure Power started in 2008 and is currently present in the Indian solar commercial and utility sectors. The company has also built medium scale solar power projects in the rural parts of India. Currently the company has presence across 11 Indian states, with 242 MW of projects. Azure Power also has strong links with major USA financial institutions, having raised loans from IFC and US EXIM bank. The company is now thinking of doing an IPO in the US to raise $100 million. India is set to expand its solar industry to 100 GW by 2022, from around 5 GW now. Recently the Indian Prime Minister led the International Solar Alliance proposal in the Paris Climate summit, which shows the country’s serious commitment towards solar. India is expected to have a bright solar future and Azure Power should be a good way to play the Indian story. What Azure Power does Azure Power has presence across the utility and commercial segments and is rapidly expanding in rural India. Its top investors currently are IW Green (in which Mr. Inderpreet S. Wadhwa is the sole member), the World Bank’s International Finance Corp, Helion Venture Partners and FC VI India Venture. The company typically enters into 25-year, fixed price PPAs with government agencies and businesses. The company booked $22 million in sales for the 12 months ended June 30, 2015 and has plans to increase its operating capacity to 520 MW by December 2016. (click to enlarge) Extracts of P&L of Azure Power from F-1 filing with SEC Azure Power operates 17 utility scale projects and several commercial rooftop projects across India. The combined rated capacity of solar projects is 242 MW (out of which 18 MW was distributed rooftop solar). Its 100MW solar power plant was commissioned in Rajasthan in March this year and it also completed the first large scale solar plant in Uttar Pradesh in February 2015 The company has a good track record of completing its projects well ahead of the scheduled due dates. Azure Power has a goal to achieve 1GW and 5GW of projects, operating by December 2017 and 2020 respectively. (click to enlarge) “This is the first large scale capacity project operational under the Chhasttisgarh Solar and we are proud to have successfully brought down the cost of power by almost 64 per cent from Rs 17.91 per unit in 2009 to Rs 6.45 today, for this project.” – Inderpreet Wadhwa CEO Source: Indiatimes Project pipeline as of September 2015 Operational States Capacity (in MW) Punjab 36 Gujarat 10 Rajasthan 140 Karnataka 10 Uttar Pradesh 10 Chhattisgarh 30 236 Under Construction Karnataka 140 Andhra Pradesh 50 Rajasthan 5 Bihar 10 Punjab 28 233 Committed Madhya Pradesh 25 Delhi 3 Punjab 150 178 Commercial Rooftop 18 MW Data from Company’s F-1 filing with SEC Azure Power Positives Strong financial backing – The solar power industry is a capital intensive one and requires massive amounts of equity and debt funding. Azure Power has managed to garner both, thanks to its marquee investors. The company recently won a 150 MW order in AP despite stiff competition. A low cost of capital is essential to win and get good returns from solar power projects. In-house EPC – Azure Power is one of the few solar developers in India with an in-house EPC division. This not only allows the company to lower its cost, but also ensures quality components and design. Most other solar developers in India which are backed by PE investors such as Renew Power, get the EPC done from EPC players like L&T, Mahindras etc. This increases their costs and also sometimes may lead to quality issues. India has massive growth potential – The Indian renewable energy market is going to be one of the biggest markets in the world for the next 25 years. India has committed to make 40% of its total power capacity by 2030 to come through green energy sources. This will mean massive opportunities going forward for all solar players. Currently the Indian renewable energy capacity is less than 15%. Risks Although Azure Power looks promising and has executed well, the company has never been profitable in its limited operating history since 2008. Net losses amounted to $17 million for fiscal year 2015. Other problems common to independent power producers in India are related to land acquisition, regulatory delays and evacuation issues. Though India looks well committed on its target to attain 100 GW by 2022, the company’s profitability will further be affected if India is unable to meet its announced targeted capacity. Another major risk being faced by solar power developers is the increasing competition which has led to very low tariffs being bid in auctions. SBG Cleantech and SunEdison (NYSE: SUNE ) recently won solar tenders with an incredibly low price near 7 cents/kWh, which has been considered as risky by some market analysts. Azure Power which also wins projects through these tenders has to bid low in order to win new projects. US-based SunEdison Inc’s aggressive bid for the tender of 500 megawatts (MW) capacity offered under the Jawaharlal Nehru National Solar Mission (NSM) in Andhra Pradesh has seen India’s solar power tariff touch a record-low of Rs.4.63 per kWh (kilowatt-hour)…Some industry experts raised concerns over the viability of such an aggressive tariff, arguing it could result in further aggressive bids in the auction in Rajasthan-to be held later this year for a capacity of 420MW-given the lower solar park charges in the state compared with Andhra Pradesh. NTPC had invited bids from interested parties to participate in July. Source – LiveMint Conclusion Azure Power is one of India’s largest solar power producers with a massive expansion plan. The company has been considering a listing since June this year . It was one of the first players to enter the solar power generation in India. It has a leading market share in India with a good track record in project development across utility scale, commercial rooftop and micro-grids projects. There are no Indian renewable energy stocks listed on NYSE and Azure Power could be a good investment opportunity, given the massive solar installations the country is going to witness. I would look to invest in Azure Power given that the valuation is reasonable.

Generating 15% Returns Using The Growth Rating System

Summary How the Growth Score is created. What Growth related ratios I focus on from a value viewpoint. Types of stocks produced from the Growth Score. The Growth Score Introduction The backtests for this Growth Score show that it’s another winner at 15.3%. Previously I showed the Quality Score generating 16.8% and the Value Score achieving 16.7% . Creating the Growth rating was harder than I thought as I don’t have much of a typical “growth” mindset. My interpretation and focus on growth has to do with the qualitative side. “Growth” questions I ask myself are things like; what other industries or creative ways is the company executing to grow? is the industry large enough to accommodate more growth by the company? is the industry also growing or shrinking? (sample questions you can add to your own checklist) I look for stocks that are solid fundamentally and in a position to grow. I don’t search for stocks based on how much revenue, earnings or other numbers have grown over the past years. Relative strength and other technical indicators are beyond me also. That’s the approach I took here as well. Rather than search for high flyers, what the Growth Rating really represents are stocks with positive growth who are growing by utilizing their assets well. I’m going to share the full details with you. Just don’t focus too much on the 15.3% returns. The 15.3% returns from the backtest is just theoretical proof that this works on paper. In other words, the strategy itself is a winner. But what I really want to show is how and why this works. Analyzing the Results First the numbers on a yearly basis. As I pointed out in the quality score, I focused on reducing drawdown as much as possible. Drawdowns are a huge problem with mechanical strategies and since you end up buying stocks you don’t know, it’s easy to give up. And since I create tests and strategies based on 1 year holding periods, the drawdowns are larger than trading systems where you buy and sell about 20 stocks a day. As much as I don’t like drawdowns, I also don’t believe in frequent trading as it eats away your portfolio with fees as you end up playing the same game as the traders. They will out trade you with their eyes closed. Now, there are really 3 bad years here where the Growth Rating seriously underperformed. 2007, 2008 and 2014 where 2008 was horrific with a -44% decline. That’s close to half of a portfolio being wiped out. 2009 more than made up for it, but 2008 is enough to make anyone puke. However, when coupled with Q and V, the final combined Action Score performed marvelously well in 2008. That’s the power of combining Q, V and G all together. But I’ll be talking about the Action Score in another post. How I Created the Growth Score I kept the max number of criteria to 4. The more filters a stock has to pass, the bigger the drop in performance. Just because stocks can pass a 8 point checklist, it doesn’t mean it’s a buy. It could be the total opposite where you are too strict and end up only allowing mediocre upside stocks to pass through. Here’s what I narrowed the Growth criteria to: TTM sales percentage change: greater than zero 5 year sales CAGR: greater than zero Gross Profit to Asset Ratio (GPA): greater than 1 Piotroski F Score: higher the better Here’s the initial backtest I performed that proved I was onto something. This is a 20 stock portfolio backtest. Growth Score Backtest – Full Universe Woah. Deep breath. Just theoretical returns. After eliminating OTC stocks, financials, energy, mining and utilities, the results continue the outperformance. Growth Score Backtest w/ no OTC, Financials, Energy, Mining or Utilities Based on this data, I’m really excited because the combination of metrics I’m using is validated and it’s not a borderline combination. The ugly spike in the first backtest is gone. Most likely from an OTC stock that exploded temporarily and crashed back down. Rationale for Each Criteria TTM Sales Percentage Change > 0 The goal here is to look for stocks that actually grew. I’m not interested in high flyers and wall street darlings. I’m really looking for growth stocks with a strong value flavor. 5 Year Sales CAGR > 0 Same thing as above. I don’t want companies that are perennial losers for 5 years or more. Gross Profit to Asset Ratio (GPA) This ratio deserves an article of its own. In this case though, it has the biggest positive effect on the results. Comparing gross profit to assets tells you whether or not the assets are profitable. In other words, GPA measures the growth of profitability. When I look for stocks with a GPA above 1, I’m saying that I want stocks that are generating more than a dollar for every $1 of asset. A GPA of 0.5 means the company is generating profits of $0.50 for every dollar of assets. You can see how this is also a great way to compare competitors within the same industry. Piotroski F Score I include the F score for quality and value. Best way to filter out horrific stocks so that it doesn’t cloud the results. A Rating System is NOT a Screener I have to repeat this because I get this question about the results often. Since my goal is building a rating system where every stock is scored and ranked, it’s very different to a screener. A screener is to simply get stocks that pass specific numbers. A rating system may have stocks at the top of the list that fail certain criteria. That’s why each variable is weighted in the final formula. Stocks outside of the ideal ranges are penalized. You’ll see what I mean in the list of 2015 stocks below. Top 20 Growth Stocks from 2015 If you look at the GPA column, only 4 stocks meet the criteria of being 1 or above. That’s what I meant by a rating system being different to a screener. If you bought these 20 stocks at the beginning of the year, you’d be looking at a price return of 1%. Sure I’d love to have shown you the growth stocks exploding and defying the struggles of 2015, but the final Action Score is so much better and you’ll be amazed at the results. Watch out the for the final part of how the OSV Ratings have been created. Disclosure: Long GILD