Tag Archives: utilities

Huntington Ecological Strategy ETF: Green Is Good

Summary The fund focuses on ‘corporate social responsibility’. The fund is smartly weighted with top market performers. Generally, it’s a very well-diversified, moderate risk, capital appreciation fund. There seems to be a majority consensus among scientists that the Earth’s climate is changing, however there does seem to be some disagreement whether that change is being caused by industrial emissions or simply part of a natural, ancient geological cycle. Some of this divisiveness is clearly along economic lines. For one example, many emerging market or emerged market nations rely on inexpensive coal resources to generate electric power. Further, there’s a huge global industry built up around coal: heavy equipment manufacturing, rail and marine transportation, power companies and even the miners whose livelihoods are threatened. On the other hand there’s a mindset that believes, ‘ better safe than sorry ‘. To be sure, most companies do have a corporate conscience and have implemented a responsible eco-policy. However, some companies take it a step further and practice a broader social responsibility policy . The Huntington Ecological Strategy ETF (NYSEARCA: HECO ) accomplishes exactly that. This fund offers a ‘single package’ opportunity for those wishing to invest with companies having strong sustainability and fair trade policies as well as eco-friendly policy. In Huntington’s own words (from their 2014 year-end commentary), ” … we look for companies that are practicing and promoting environmental stewardship while being able to generate sustainable level of profits that will represent logical investment over a long term…” (click to enlarge) There are similar funds to choose from. Two of the four funds filtered out by the Seeking Alpha ETF Hub , the First Trust NASDAQ Clean Edge Energy ETF (NASDAQ: QCLN ) and the PowerShares WilderHill Clean Energy Portfolio (NYSEARCA: PBW ) focus, as one might expect from their names, mainly on clean energy related companies. The PowerShares WilderHill Progressive Energy Portfolio (NYSEARCA: PUW ) has a somewhat broader objective being, “… focused on the following areas: alternative energy, better efficiency, emission reduction, new energy activity, greener utilities, innovative materials and energy storage …” There’s a difference in the Huntington Eco-Logical Strategy ETF in that it goes beyond energy concerns and, “… invests at least 80% of its net assets… …in the securities of ecologically-focused companies… …that have positioned their business to respond to increased environmental legislation, cultural shifts towards environmentally conscious consumption, and capital investments in environmentally oriented projects. These companies include all companies that are components of recognized environmentally-focused indices …” The strategy is smart. It isn’t restricting itself to a particular sector or manufacturing practice. Instead it seeks well performing, well established and well managed companies with an active and strong sense of corporate social responsibility in its operations, however that may be. (Data from Huntington) The fund is weighted towards cyclically sensitive sectors starting with IT, comprising 25%, Industrials at 10% and Consumer discretionary at 13% for a total of 48% of the fund. Defensive sectors are HealthCare at 17%, Utilities at 6% and Consumer Staples at 12% totaling 35% of the fund and lastly, sensitive sectors such as Financials at 12%, Energy at 2% and Materials at 2% accounting for 16% of the fund. (There is also a small cash position). Checking with three different sources, MarketWatch , Yahoo and the Wall Street Journal , the fund seems to have a surprisingly low beta of about 1; i.e., it moves with the market. (Data from Huntington) When putting aside the corporate social responsibility focus, it otherwise seems to be a reasonably well diversified fund with a moderate bias towards risk as demonstrated by its sector allocations. So the last question is just how socially responsible are the included companies? For instance, Google’s (NASDAQ: GOOGL ) participation is spelled out at Google Green: the Big Picture , where social-responsible investors will get a detailed accounting as only Google can present. Similarly, Nike (NYSE: NKE ) promotes ” A Better World ” and also details its efforts for manufacturing sustainability. The table below lists just a few corporate policy links. Some are really well presented, while others are rather straight forward, as if part of a shareholder’s report but are there nonetheless. In the left column are the larger holdings of the fund and on the right some of the smaller holdings. In general, the corporate responsibility presentations cover the complete range from “WOW!” to “legal-formal”. Only a few are sampled below, however, in general, it always seems to be a good idea to read a company’s corporate responsibility policy before investing. All investors should keep in mind the losses which have occurred, both in share price and earnings, in the past when absent policies led to ‘oversights’; bad labor practices, illegally purchased resources or damaging environmental accidents. A socially responsible company mitigates risks. The fund is relatively new to the market having been incepted in June of 2012 and is actively managed. Huntington notes total assets of $7,228,416.00 with 200,000 shares outstanding; it trades on NYSE-Arca. Currently it trades at a -0.33% discount to NAV. Huntington notes it largest premium to NAV as 0.01%, largest discount to NAV at -2.24% as well as its average Premium/Discount of -0.67. The fund distributes annually, with a yield of 0.22%. The prospectus is a bit more detailed noting a weighted average market cap of $87.569 million, a weighted P/E of 26.8 and a price to book multiple of 5.7. Also, the prospectus identifies the underlying index as the MSCI KLD 400 Social Index . The investor should note that the First Trust Fund tracks the NASDAQ Clean Edge Green Energy Index ; the PowerShares funds, PBW and PUW track the WilderHill Clean Energy Index and the WilderHill Progressive Energy Index , respectively. The expense ratio is quite high at 0.95% with a gross expense ratio of 2.08%. However Huntington does note that, ” contractual fee waivers are in effect until August 31, 2015. ” Also, the average annual turnover is around 55%. To sum up, the fund is indeed, as advertised, Eco-Logical. All said and done, it seems to be a really good fund in general, and perfect for those concerned that their capital is being invested in social minded, sustainably conscience and earth-friendly companies. One word of caution: This fund is very lightly traded, but there’s absolutely no reason it should be that way! Aside from the ‘green motif’, this is a really well constructed, diversified fund with moderate risk. It merely needs to be discovered. 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. Additional disclosure: CFDs, spread betting and FX can result in losses exceeding your initial deposit. They are not suitable for everyone, so please ensure you understand the risks. Seek independent financial advice if necessary. Nothing in this article should be considered a personal recommendation. It does not account for your personal circumstances or appetite for risk.

The MnM Portfolio Supplement – I Want To, But Can’t Purchase A Water Utility

Summary I outline my preference for water utilities. I review my analysis of the five water utilities listed as Dividend Champions on David Fish’s monthly publications. The current prices, yields, and historical dividend growth rates are unattractive as compared to other opportunities. A little background When I look over my MnM portfolio, last written about here , one of the key considerations I make is sector diversification. As I have built out the portfolio this year, it has come to my attention that I do not have any exposure to several sectors, including, but not limited to: utilities, telecoms, and financials (excluding REITs and insurers). I have been tempted to add positions in these sectors to round out the portfolio a little more. I hope to potentially do so in the coming year. That being said, I wanted to look a little bit deeper into utilities, as when I look at the overall utilities sector, represented by the Dow Jones Utility Average (^DJU), I see that it’s trailing the broader S&P 500 this year. (click to enlarge) Source: Yahoo Finance, 11 September 2015 It’s important to note that there are various types of utilities in the U.S. There are those that provide electricity, those that provide natural gas, those that provide water services, and some that provide a blend of these services, or others. A Quick summary of the regulated utility industry I am well versed with the regulated utilities environment, having grown up with a parent who worked in the industry, and spending some time in it myself. For those unfamiliar with how these companies work, a simple explanation is that utilities work with state and federal utility commissions to get rates approved to charge customers (end users of the electricity, gas, water, etc.) based upon a cost plus margin model. The utilities generally have to justify their capital expenditures to the commissions in seeking to be reimbursed for the costs (and consequently their margin). This model exists as utilities generally have a monopoly of service for their territories, meaning that other utilities are not able to offer up competing services. It’s too cost prohibitive. End users generally have only one provider option. As noted above, I do not currently hold any utility stocks, but if I were to purchase one down the road, my preference would be towards water utilities. Why do I have a preference for water utilities? When I take a step back from the fundamentals and technicals, I question whether in 25 years (or shorter) our current electric utilities will still operate in the same way. For example, if you were to tell me in 1995 that we would be seeing a huge shift away from coal within 20 years, I might have laughed at you. When I went to Germany back in 2012, to visit the country and experience Oktoberfest, I couldn’t help but notice that virtually every roof was covered in solar panels. As we speak we’re seeing a transformation in the US in terms of solar being increasingly cheaper, more available, and installed in a distributed (vs. centralized) manner, even as far north as where I live where we see weekly articles of the local utility Xcel Energy (NYSE: XEL ) fighting with solar providers over the size of solar gardens. Don’t get me wrong, I’m not calling for the death of utilities as we know it, but I do think that technological change will put pressure on the current distribution model, and could be a major challenge to growth (i.e. higher electricity sales). Now, there are obviously counters to these concerns, such as expanding populations and increasingly more powered devices (such as cars) across the US, but you cannot deny that things are changing. Some might argue that you could thank the EPA for that. To get back to my point, water is one thing provided by current utilities that I do not feel faces the same kind of technological threats to growth that the other utilities face. We will always need it, and it seems like climate change (whether you believe it or not) is negatively impacting the supply as well, as demonstrated by the droughts in California. Given all of this, water to me, is the most defensive, and thus the one resource I would most like to consider investing in. Why haven’t I bought in already? I looked through David Fish’s U.S. Dividend Champions list for Water Utilities and found there to be five within the dividend champions. Not a bad number. These include American States Water (NYSE: AWR ), California Water Service (NYSE: CWT ), Connecticut Water Service (NASDAQ: CTWS ), Middlesex Water Co. (NASDAQ: MSEX ), and SJW Corp (NYSE: SJW ), and they boast some impressive dividend streaks. (click to enlarge) Source: Price, P/E and Yield metrics courtesy of FASTgraphs.com, closing prices as of 10 September 2015. Dividend growth metrics courtesy of David Fish’s U.S. Dividend Champions spreadsheet updated 31 August 2015. When I took a look through their fundamentals, I have to stop my analysis right there. What disappoints me the most is that for the most part, the dividend increases have been barely above, or even less than the assumed 2% level of inflation, and not just over the last five years, but over the last ten years. American States Water, which has shown superior growth, is just too expensive to buy right now. Further, I personally have a mental “4% yield” requirement for both Utilities and REITs, meaning that is generally the minimum yield I want in order to enter into these securities. This is especially true as we enter a rising rate environment. None of them even come close right now. I would throw in a FASTgraph, but it doesn’t seem warranted. Conclusion I like water utilities in principle, and would love to have a more defensive play in my portfolio; but I just can’t justify owning one right now at their current multiples and stodgy dividend growth. The valuations on these stocks don’t seem to justify the lack of growth. I will keep tracking the securities, as I would like to own one at some point, but I need prices to come down and to see some more accelerated growth before I would jump in. Right now it seems that I could likely do much better with a telecom, such as Verizon (NYSE: VZ ), which is trading at a much lower multiple, pays a much higher distribution, and has grown dividends at a much higher clip. I have my eyes on Verizon, and hope to initiate a position in it at some point in the future. (click to enlarge) Source: FASTgraphs.com, closing price as of 10 September 2015 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.

Clean Energy Fuels: Consider On The Drop

Summary CLNE shares have lost 46% of their value in the past year despite negotiating the drop in natural gas prices smartly as it has improved both its revenue and margin. CLNE’s volumes delivered have been increasing and the trend will continue in the future as natural gas is a cheaper fuel to run trucks as compared to diesel. The increase in natural gas demand is expected to provide a boost to prices going forward, but the fuel will still have a positive differential over diesel. CLNE’s customers in both the transit and refuse markets have been adding more natural gas trucks and this will act as a tailwind by increasing the addressable market. The past one year has turned out to be very difficult for Clean Energy Fuels (NASDAQ: CLNE ) on the stock market. The company’s stock price has taken a beating as the price of natural gas has dropped steeply in the past year. In fact, last quarter, Clean Energy’s revenue was down 11% year-over-year as low fuel prices affected its top line performance negatively to the tune of $5.6 million. Why Clean Energy’s drop is not justified However, I think that the 46% drop in Clean Energy’s shares in the past year is a bit harsh, especially considering the fact that the company has been able to actually improve its financial performance in the past year. This is shown in the following chart: Henry Hub Natural Gas Spot Price data by YCharts As seen above, Clean Energy’s top line performance has improved despite difficult conditions. This can be attributed to the fact that Clean Energy is seeing an increase in volumes delivered of natural gas as customers are still adopting natural gas-powered vehicles despite the drop in diesel prices. Looking ahead, it is likely that Clean Energy will continue to see an improvement in both volumes and its margins. Let’s see why. More volume and margin growth ahead Natural gas enjoys an advantage over diesel when it comes to running natural gas truck fleets in terms of both costs and emissions. This is the reason why Clean Energy is seeing an increase in gallons delivered even though diesel prices have dropped rapidly in the past year. In fact, Clean Energy saw its transit customers add more than 224 buses to their fleets in the previous quarter. This represents natural gas fuel consumption of 3 million gallons annually. On the other hand, waste haulers such as Republic Services (NYSE: RSG ) have also been enhancing their natural gas fleets. In 2015, Republic has increased its CNG fleet by 130 trucks. Looking ahead, by the end of the year, Republic plans to add 150 more trucks to its fleet. This is despite the fact that the cost of a natural gas conversion kit is $50,000 more than a diesel truck. Now, the fact that Clean Energy’s customers are still adopting natural gas trucks despite the drop in diesel prices is not surprising, as natural gas is still a cheaper fuel when compared to diesel. This is shown in the chart below: (click to enlarge) Source: Clean Energy Fuels investor relations Looking ahead, I won’t be surprised if Clean Energy’s volumes continue improving as the adoption of natural gas vehicles gains more momentum. As per Navigant Research , “global annual NGV sales are expected to grow from 2.5 million vehicles in 2014 to 4.3 million in 2024.” More importantly, apart from volume growth, Clean Energy is also focused on reducing its expenses. The company has reduced its selling, general, and administrative expenses by over 16% as compared to last year. Also, it has reduced its capital expenditure by more than 58% to $26 million in the first six months of the year as compared to the prior-year period. As a result of these moves, Clean Energy has been able to improve its EBITDA by $3 million as compared to the first quarter and $2.1 million from the prior-year period. More importantly, this improvement in EBITDA has been achieved despite a double-digit drop in revenue from last year. Thus, Clean Energy is following a smart two-pronged approach to grow its business – first by increasing volumes and second by lowering costs. However, Clean Energy will need a boost from better natural gas prices in order to enhance its financial performance. Higher natural gas prices are a possibility The Energy Information Administration expects natural gas prices to improve in the future due to an increase demand in both domestic as well as international markets. In a reference case study, the Henry Hub natural gas spot prices are expected to rise from $3.69 per MMBtu in 2015 to $4.88 per MMBtu in 2020, followed by $7.85 MMBtu in 2040 as shown in the charts below. Source: EIA The expected increase in natural gas pricing is not surprising as global gas demand is expected to grow 51% by 2035. The increase in demand will be driven by an increase in consumption from the power and industrial sectors. New gas-fired power plants are being built to meet the increase electricity demand and existing plants are being converted from burning expensive and polluting oil products to cheaper, cleaner natural gas. So, this switch from coal to gas-fired power plants will increase demand for the fuel, thereby leading to higher prices. More importantly, despite the expected rise in natural gas pricing, the fuel is expected to be cheaper than diesel. This is shown in the chart below: Source: Westport Innovations Thus, as seen above, the differential between gas and diesel price is expected to favor the former in the long run, and this will aid Clean Energy’s growth. Conclusion Clean Energy Fuels has been beaten down badly in the past year, but the drop seems unjustified. The company has been able to do well in a difficult end-market environment and its outlook looks strong as well. Hence, in my opinion, the drop in Clean Energy’s shares in the past year is an opportunity to buy as the company could do well in the long run on the back of improving NGV adoption and an expected rise in natural gas pricing. Thus, investors should consider the drop in Clean Energy’s shares as a buying opportunity since the stock could deliver upside in the long run. 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.