Hot Growth Stocks To Buy Right Now
Fastenal Co. (FAST) is a leading distributor of fasteners and other industrial supplies. Its shares fell after disappointing sales metrics, coupled with an ongoing investment in its sales force, weighed on recent earnings results. With improved business trends in the company's important manufacturing and construction end-markets, we are hopeful that Fastenal's growth will accelerate in 2014
From Baron Funds' fourth quarter letter 2013 to shareholders.
Also check out: Ron Baron Undervalued Stocks Ron Baron Top Growth Companies Ron Baron High Yield stocks, and Stocks that Ron Baron keeps buying
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Tuesday, February 18, 2014Equities ‘Frothy,’ Markets Volatile: Vanguard ExecsMore than half of Vanguard investors are looking to boost their equity holdings in 2014, according to a poll taken during a webinar led by the investing giant's top executives late Thursday. But the executives — Chairman, CEO and President Bill McNabb and Chief Investment Officer Tim Buckley — urged the 8,600 attendees to proceed carefully. The poll found that 33% of investors were somewhat likely to increase their equity exposure this year, while 24% were very likely to do so. “Often, after great returns … people chase them and risk getting in after a run-up. So, don’t overallocate to equities,” Buckley cautioned. Valuations, he notes, are historically in the top quartile and “are getting pricey.” In terms of what changes in Fed policy and quantitative easing could mean, McNabb says we are in “unprecedented territory.” “When something slightly unexpected happens, a lot of volatility enters the market, and there are likely to be disruptions as the end [of QE] works out," McNabb said. "There are likely to be surprises.” Vanguard’s financial models project that over the next 10 years, average returns could be in the range of 6%-7%. Overall, there are positive signs that the United States can move beyond its current 2% economic growth rate, Buckley noted. 2014 Outlook Vanguard’s economic and investment outlook, released earlier this week, says the firm’s experts “anticipate that the modest global recovery will likely endure at a below-average pace through a period of low interest rates, continuing high unemployment and debt levels.” However, the U.S. may be moving toward better-than-trend growth for the first time since the onset of the global financial crisis, it says. “Our economic outlook, in short, is one of resiliency,” the group said in its report. U.S. economic growth has been 3.2% on average from 1995 to 2007. For the next three years (2014-2016), this growth is expected to be 2.5% on average, Vanguard says. Europe’s growth was 2.3% from ’95-’07 and is poised to be just 1.6% in the ’14-’16 period. China’s 10% growth from 1995 to 2007 is coming down to 7% for the next few years. “Market volatility is likely as the Federal Reserve undertakes the multistep, multiyear process of unwinding its extraordinarily easy monetary policy,” Joseph Davis and a team of experts wrote. “Rather than frame this process as a negative, we view it as an indication of increasing economic strength.” Overall, the group says it is “uneasy about signs of froth in certain segments of the global equity market” and encourages investors to “exercise caution in making strategic or tactical portfolio changes that increase this risk.” Bond Picture Vanguard says its outlook for global bonds is muted, but it is boosting its 10-year median nominal return of a for a globally diversified fixed-income portfolio to 1.5% to 3% range versus last year’s 0.5% to 2%. The group expects “the diversification benefits of fixed income in a balanced portfolio to persist under most scenarios.” “We believe that the prospects of losses in bond portfolios should be weighed against the magnitude of potential losses in equity portfolios,” it added, “because the latter have tended to exhibit much larger swings in returns.” Top Retail Companies To Own In Right NowPortfolios with 60% stock and 40% bond allocations can anticipate returns of 3% to 5%, adjusted for inflation over the next 10 years. --- Check out Bogle’s 6 Best Books for Investors on ThinkAdvisor. Monday, February 17, 2014Citigroup, Bank of America, JPMorgan Chase: Pick a Bank, Any Bank?In 2013, Citigroup (C) returned 32%, while Bank of America (BAC) rose 34% and JPMorgan Chase (JPM) advanced 36% versus the S&P 500′s 32% return. What does 2014 have in store?  REUTERS Jefferies’ Ken Usdin, Bryan Batory and Thomas Shearer expect the good times to continue. They write: While never free from controversy and incrementally burdened by regulation, this group offers attractive risk/return profiles. We see a path to solid EPS growth, ROA/ROE improvement, and increased capital return, providing an upward bias to stock prices and valuations. Usdin, Batory and Sheare do play favorites, however, starting Bank of America and JP Morgan Chase at Buy and Citigroup at Neutral. They explain why they like Bank of America… Bank of America has proven its intent to aggressively settle outstanding litigation, structurally lower its core expense base, and reengage in growing core businesses. The bank has grown its capital ratios to a point where capital return should directionally improve in '14 and beyond. A path toward improved profitability, potential for upward EPS revisions, and higher normalized earnings should result in multiple expansion. …and JPMorgan Chase: JPMorgan Chase recently put the largest of its litigation risk concerns to bed, which has allowed investors to re-engage to an extent. JPM still trades at a slightly lower multiple on '15 EPS vs. peers. With EPS closer to ‚normal‛ earnings level than the others, the story is more about execution and market share gains from here, which if successful should lead to additional re-rating over time. …but feel lukewarm about Citigroup: Citigroup has made substantial progress on winding-down Citi Holdings, generating excess capital, and improving efficiency. The bank has a path toward incremental EPS growth and ROA/ROE improvement for the next few years. We are concerned about downward EPS revisions on lower trading estimates and a slowdown of emerging markets economies. Downside risk is low with the stock around 1x tangible book, but shares could underperform peers. Citigroup has gained 0.8% to $16.56 today at 3:34 p.m., while JPMorgan has risen 0.6% to $58.70 and Bank of America is up 0.4% at $16.56. Sunday, February 16, 2014Legalized Marijuana Businesses Start Getting Federal Bank GuidelinesMarijuana may have become legalized for medical use in 20 states and legal for recreational use in two states, but what has not been legalized is how these companies conduct their business. Due to federal banking laws, these are effectively cash businesses which have a very hard time using banks and other regulated financial institutions. New Treasury guidelines may soon open the way to bring legal marijuana businesses into banking. The Treasury’s Financial Crimes Enforcement Network issued guidance on Friday. This memorandum is being called the “Cole Memo,” after James M. Cole – Deputy Attorney General, U.S. Department of Justice. Now there is a framework for financial institutions to slowly begin providing financial services to legal marijuana-related businesses. What is called the FinCEN guidance aims to clarify how financial institutions can provide services to marijuana related businesses consistent with their Bank Secrecy Act obligations. Again, these business have to operate in cash, without allowing customers to use credit cards and without banks. You can probably imagine the problems this can cause in how to store cash — and even how these businesses handle their accounting and how they are taxed. In a Jan. 11 story on the banking challenges for the legalized marijuana business The New York Times wrote: “Their businesses are conducted almost entirely in cash because it is exceedingly difficult for them to open and maintain bank accounts, and thus accept credit cards.” The Cole Memo is effectively giving the decision to banks to decide on their own how each bank account or relationship should be made, based on factors specific to that institution. The DOJ is not simply opening the floodgates here. Friday’s regulatory framework release said, “The Cole Memo reiterates Congress's determination that marijuana is a dangerous drug and that the illegal distribution and sale of marijuana is a serious crime that provides a significant source of revenue to large-scale criminal enterprises, gangs, and cartels. The Cole Memo notes that DOJ is committed to enforcement of the CSA consistent with those determinations.” Banks will still need to conduct due diligence in determining whether to deal with legalized marijuana businesses. The Cole Memo suggests that banks verify a business is licensed and registered with state authorities, whether they are authorized to operate as a marijuana-related business, and more. Banks will also have to consider whether a marijuana-related business implicates one of the Cole Memo priorities or violates state law. Banks that offer financial services to a marijuana-related business would be required to file suspicious activity reports, and the list of obligations here is far from being a short list. The National Cannabis Industry Association (there really is one) discussed this as clearing the way for banks to serve authorized cannabis businesses. It also projected that this industry will produce $2.57 billion in revenues in 2014. What is obvious here is that this framework is just the starting point. Still, these businesses will (likely) soon be able to operate in the banking system. At least with the banks that choose to deal with them. As a reminder, FINRA has issued a warning to investors about marijuana stock scams. Friday, February 14, 2014Gilead Sciences: Just How Good are Sovaldi’s Sales?Very, very good, says Citigroup’s Yaron Werber and team, who expect Gilead Sciences (GILD) sales of Sovaldi to blow away expectations. They explain:  Bloomberg [Gilead's] Sovaldi is tracking at $484M for the first nine weeks of launch and will post $5.74B in sales for 2014 and $1.21B for Q1:14 vs. Citi $516M and Consensus $368M, if Sovaldi scrips continue at same level as the recent week without any growth. We anticipate that Sovaldi will materially exceed our and consensus ests and believe that posting >$4B-$5B in total sales in FY14 is possible. In the ninth week of launch, Sovaldi's weekly TRx and NRx were 4,051 and 2,848 respectively. While this is only the ninth week, it is still much ahead of protease inhibitor Incivek' launch which had 1,365 TRx in the ninth week of launch. Top 10 Gas Utility Companies To Invest In Right NowShares of Gilead Sciences has dropped 1.3% to $81.52 at 10:33 a.m., while Amgen (AMGN) has fallen 0.3% to $123.78, Biogen Idec (BIIB) has gained 0.8% to $331.07 and Celgene (CELG) has risen 1.1% to $166.59. The SPDR S&P Biotech ETF (XBI) has advanced 0.6% to $153.43. Monday, February 10, 20142 Tech Stocks Rising on Unusual VolumeDELAFIELD, Wis. (Stockpickr) -- Professional traders running mutual funds and hedge funds don't just look at a stock's price moves; they also track big changes in volume activity. Often when above-average volume moves into an equity, it precedes a large spike in volatility. >>4 Stocks Poised for Breakouts Major moves in volume can signal unusual activity, such as insider buying or selling -- or buying or selling by "superinvestors." Unusual volume can also be a major signal that hedge funds and momentum traders are piling into a stock ahead of a catalyst. These types of traders like to get in well before a large spike, so it's always a smart move to monitor unusual volume. That said, remember to combine trend and price action with unusual volume. Put them all together to help you decipher the next big trend for any stock. >>5 Toxic Stocks to Sell Now With that in mind, let's take a look at several stocks rising on unusual volume recently. Ubiquiti Networks Ubiquiti Networks (UBNT), together with its subsidiaries, offers a portfolio of networking products and solutions for service providers and enterprises. This stock closed up 3.7% at $42.46 in Friday's trading session. Friday's Volume: 3.77 million >>5 Stocks Under $10 Set to Soar From a technical perspective, UBNT spiked higher here back above its 50-day moving average of $42.14 with strong upside volume. This move briefly pushed shares of UBNT into breakout territory, since the stock flirted with some near-term overhead resistance levels at $42.60 to $45.31. Shares of UBNT tagged an intraday high of $45.39 before closing well off that level at $42.46. Market players should now look for a continuation move higher in the short-term if UBNT can manage to take out Friday's high of $45.39 to its all-time high at $48 with strong volume. Traders should now look for long-biased trades in UBNT as long as it's trending above Friday's low of $41.03 and then once it sustains a move or close above $45.39 to $48 with volume that hits near or above 1.08 million shares. If we get that move soon, then UBNT will set up to enter new all-time-high territory, which is bullish technical price action. Some possible upside targets off that move are $55 to $60. ChannelAdvisor ChannelAdvisor (ECOM) provides software-as-a-service solutions worldwide. This stock closed up 3.6% at $41.52 in Friday's trading session. Friday's Volume: 1.32 million >>5 Big Trades to Take in February From a technical perspective, ECOM spiked sharply higher here back above its 50-day moving average of $41.38 with heavy upside volume. This stock has been downtrending over the last month, with shares moving lower from its high of $49.75 to its recent low of $37.87. During that move, shares of ECOM have been making mostly lower highs and lower lows, which is bearish technical price action. That said, shares of ECOM now look ready to possibly reverse its downtrend and enter a new uptrend, since the stock recaptured its 50-day on Friday with volume. Traders should now look for long-biased trades in ECOM as long as it's trending above $40 and then once it sustains a move or close above Friday's high of $43.59 with volume that's near or above 309,737 shares. If we get that move soon, then ECOM will set up to re-test or possibly take out its next major overhead resistance levels at $47.25 to its all-time high at $49.75. To see more stocks rising on unusual volume, check out the Stocks Rising on Unusual Volume portfolio on Stockpickr. -- Written by Roberto Pedone in Delafield, Wis.
Follow Stockpickr on Twitter and become a fan on Facebook. At the time of publication, author had no positions in stocks mentioned. Roberto Pedone, based out of Delafield, Wis., is an independent trader who focuses on technical analysis for small- and large-cap stocks, options, futures, commodities and currencies. Roberto studied international business at the Milwaukee School of Engineering, and he spent a year overseas studying business in Lubeck, Germany. His work has appeared on financial outlets including CNBC.com and Forbes.com. You can follow Pedone on Twitter at www.twitter.com/zerosum24 or @zerosum24.Tuesday, February 4, 2014Marijuana Stocks: A Case of Too Far, Too Fast     Popular Posts: Satya Nadella as Microsoft CEO? That’s Just What MSFT Stock NeedsMarijuana Stocks: A Case of Too Far, Too FastThe Top 10 S&P 500 Dividend Stocks for January Recent Posts: Marijuana Stocks: A Case of Too Far, Too Fast BBY Stock vs. RSH Stock: Is Either Struggling Retailer Worth Your Cash? Satya Nadella as Microsoft CEO? That’s Just What MSFT Stock Needs View All Posts Marijuana stocks are off to a smoking-hot start in 2014 — major market weakness notwithstanding — and there are sure to be more catalysts ahead.
Medical marijuana stocks — which are illiquid penny stocks, subject to wild swings and even manipulation — aren’t taking off on a change in fundamentals. And that means they could fall just as far and as fast as they’ve run up this year. A terrible start to 2014 has the S&P 500 off 5.8% on a price basis for the year-to-date, and the average stock is down about 3%. The marijuana stocks, however, have been nothing close to average. Medical Marijuana Inc. (MJNA) is up just under 100% so far this year and — get this — MJNA stock is actually the big-time laggard in the group. Next up comes Growlife (PHOT), as PHOT stock has gained “only” 150%. Indeed, when it comes to medical marijuana stock, anything less than a three-fold gain is small beer. MediSwipe (MWIP) has tripled, with MWIP stock up 200%. Cannabis Science (CBIS) is closing in on quadrupling, as CBIS stock gained 273%. And GreenGro Technologies (GRNH)? Brace yourself, because GRNH stock is up over 1,000% … including an 18% so far today. Part of the euphoria in marijuana stocks no doubt stems from the successful implementation — and popularity — of legal marijuana in Colorado and Washington. But there are plenty of other, more incremental catalysts, as well. Just look at Hemp Inc. (HEMP). HEMP stock rallied as much as 60% Tuesday on anticipation of the Senate’s approval of the farm bill that would effectively legalize the cultivation of hemp. And hemp isn’t something you even smoke. This close cousin of marijuana cannabis can be refined into a wide-range of goods, including hemp oil, rope, cloth, paper and fuel. But it doesn’t have medical or recreational uses like marijuana does. It doesn’t matter. The change in hemp’s legal status is being taken as a sign of progress on the legalization of marijuana at the federal level. So while it’s too soon to get excited about that, the slightest hint of the possibility helps marijuana stocks. After all, nothing would cause MJNA stock, MWIP stock, PHOT stock, CBIS stock or GRNH stock to break out like the nationwide legalization of marijuana. Marijuana Stocks Set for a FallThe dangerous part of all this for investors in marijuana stocks? Well, it’s sort of the opposite of what happens when a stock gets cheap because of headline risk. Bad news is often overblown by the market — especially in the short term — which can create opportunities to buy a good stock at a bargain price. The same is true in the other direction, however. Good news can make a stock wildly overpriced, and that could easily be the case now with MJNA stock, MWIP stock, PHOT stock, CBIS stock or GRNH stock. Heck, anytime any stock doubles, triples or quadruples in a month like marijuana stocks have, you have got to be concerned that it’s gotten ahead of itself. It’s even more worrisome when the securities are illiquid penny stocks like marijuana stocks. That’s part of the reason why InvestorPlace has warned investors again and again about the dangers and pitfalls of penny stocks. MJNA stock, MWIP stock, PHOT stock, CBIS stock and GRNH stock all look like they’ve gotten ahead of themselves. True, more good news could push them higher still … but they won’t avoid the inevitable. All it takes is some bad news or for one large player to take some profits for these marijuana stock to come crashing down. Sorry to harsh your buzz, but the bottom line is that marijuana stocks are too high for their own good. As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities. A Tweaked Magic Formula Screen That Looks Very Promising10 Best Canadian Stocks To Watch Right Now
I've recently decided to go back and re-read a few classics on performing valuations and what value-based systematic strategies have worked over the years. One of the most impressive findings in the financial literature of the past 10 years is the now-famous book by Joel Greenblatt (Trades, Portfolio): "The Little Book That Beats the Market." This is based on the simple realization that ranking companies based on specific measures of return on capital and earnings yield and choosing the best ranked ones to construct a portfolio would have outperformed the S&P over any three-year period since the mid-1960s. While I was a bit skeptical initially as to the merits of a single formula to outperform the market, the back-testing provided was compelling, and I decided to take a closer look at how I could implement the formula while using the GuruFocus tools. While it is not possible to rank the stocks based on any metric, the All-in-One screener allows us to screen for companies based on both ROC and earnings yield. I chose a slightly more restrictive approach to the Magic Formula by imposing stringent lower limits: An ROC of at least 25%. Earnings yield higher than 14%. These two conditions are very similar to the ones used in the Magic Formula. Since I am a big believer in watching insiders' ownership, I also chose to focus on companies with insider ownsership of 1% or higher. Also, I decided to exclude companies with declining mid-term growth rates, so a condition was added of positive five-year EBITDA growth to weed out rapidly falling angels. Finally, to take full advantage of the Gurufocus website functionality, I added a condition saying we would screen out for companies with at least one guru buying over the past 6 months. I should also mention that I focused on non-financial companies as the high ROC measure breaks down as a value proxy for financials.Even with very stringent criteria like these, I was surprised to have a list of about 18 companies that meet all criteria: incredible returns on capital, high earnings yield, insider ownership and growing EBITDA and liked by at least one guru. You can find the list here. My only wish would have been to be able to calculate ROC and earnings yield as a five or 10-year average (hint hint, GuruFocus developers!). The first thing that struck me looking down that list is that most companies are small- to mid-cap. I was glad to discover that, since I also believe this is the most fertile ground to bargain hunt. The other thing that I was happy about is the diversity of industries, which probably means there is no inherent bias in the methodology, as we are able to find bargains across sectors from oil and gas to education and training. The other thing that drew my attention is that Joel Greenblatt (Trades, Portfolio), the "inventor" of the Magic Formula, has been adding to quite a few of the positions the screen identified. Clearly, this indicates the screen might have some overlap with what Mr. Greenblatt has been advocating, and I'm looking forward to doing more fundamental research on these companies to identify the ones with a durable moat. Also check out: Joel Greenblatt Undervalued Stocks Joel Greenblatt Top Growth Companies Joel Greenblatt High Yield stocks, and Stocks that Joel Greenblatt keeps buying
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Sunday, February 2, 2014Utilities: The Capex Conundrum While credit-rating agencies are applauding the first few utilities to reach the end of their multi-billion dollar capital expenditure programs, there is some debate in the industry as to whether this will be a positive for future earnings growth. Some have argued that those utilities that finish their programs early will have more cash on hand, which will not only help them endure rising costs such as potentially higher taxes, but will also afford greater financial flexibility to take advantage of mergers and other opportunities for investment once interest rates start to rise. But others have argued that the expected jump in electric power prices in the coming years will make it difficult for utilities to take on new projects, as regulators will be less willing to approve them as rates come under pressure. So those utilities still in the midst of large capital expenditure programs may have the advantage, since they’ll enjoy higher earnings as they complete each project, while those that finished their programs earlier may not be able to find new projects of similar quality with the same attractive terms. Regardless of the relative timing of such investments, faith in management’s ability to generate shareholder value from capital projects is at an all-time low, based in part on the industry’s experience during the last period of major capital expenditures. As depicted in the chart below, the percentage of firms able to deliver returns on invested capital (ROIC) that exceeded their weighted average cost of capital (WACC) dropped precipitously toward the end of that period. Chart A: Will Utilities Be Able to Generate Better Shareholder Value This Time? At the heart of this debate is which situation will provide investors with the best combination of strong growth and sustainable income. Before proceeding, however, it should be noted that this discussion could end up being moot if new regulations on carbon emissions require significantly higher spending levels. Based on available capital expenditure forecasts, according to an SNL Energy report, “Spending is projected to decline after 2013, with the drop-off due largely to the completion of large generation projects and the finalized installation of environmental projects to comply with Mercury and Air Toxins Standards (MATS) and other standards promulgated by the Environmental Protection Agency (EPA).” Among those companies that are winding down their spending programs, NextEra Energy Inc (NYSE: NEE) accounts for almost 30 percent of the projected $10 billion decline in annual spending from 2013 to 2015. Other larger-cap companies with projected 2015 budgets that are below their 2013 levels include: CenterPoint Energy Inc (NYSE: CNP), Dominion Resources Inc (NYSE: D), PPL Corp (NYSE: PPL), Public Service Enterprise Group Inc (NYSE: PEG), and Southern Company (NYSE: SO). Meanwhile, the companies that are projected to be spending more in 2015 than they are presently include The AES Corp (NYSE: AES), Ameren Corp (NYSE: AEE), American Electric Power Co Inc (NYSE: AEP), CMS Energy Corp (NYSE: CMS), and Northeast Utilities (NYSE: NU). When Cash Is King The main reason to be concerned about the timing of major capital projects is that there are a number of financial and economic challenges looming ahead. In addition to the potential for higher taxes in the near term if bonus depreciation is not extended, the eventual rise in interest rates will make it costlier to pursue debt-financed deals as well as initiate new capital investment projects. Overcoming these challenges will be more difficult for utilities that are in the midst of capital-intensive investments, and that could lead to dividend cuts. Below, we survey these headwinds’ potential effects on earnings: 1) Bonus Depreciation and Capital Spending: According to a report from Moody’s Investors Service, “The US telecommunications and utilities industries could face more than $100 billion in combined federal tax payments in the coming years resulting from accelerated depreciation benefits they have taken since 2008. Assuming the ‘bonus depreciation’ allowance expires as scheduled at the end of 2013, companies will have to adjust capital spending and shareholder dividends to offset higher taxes.” Though the credit-rating agency asserts that time is on utilities’ side if the bonus depreciation expires, as there are various tax strategies that firms can undertake to offset higher taxes, this could still undermine dividend coverage. Indeed, Moody’s says, “Our projections suggest that the industries’ combined dividends will rise to $52 billion in 2020 from $44 billion in 2013. Such dividend payouts are unsustainable because net income and free cash flow will remain essentially flat, in part owing to higher taxes.” 2) Interest Rates and Merger Deals: Slower load growth is causing utilities to look beyond their service territories. According to Moody’s, “Growth has been moderating in recent years primarily because of greater energy conservation and efficiency, and increased distributed generation and the 2008-09 economic downturn.” The rating agency says, “These growth trends have pushed some utilities to look beyond their service territories for additional load growth in areas that are growing faster than the national average. Recent deals have been credit neutral as they have been financed with a balanced mix of debt and equity.” But the report notes that once interest rates start to rise, an increase in the cost of capital could slow or impede mergers and acquisitions, or at least those transactions that are heavily financed via debt. Thus, during a rising-rate environment, companies with relatively strong balance sheets should be better positioned to secure low-cost financing than those in the midst of large capital expenditure programs that may have to wait until their credit position improves. 3) Interest Rates and Equity Risk Premiums: Higher interest rates would not only affect the cost of debt financing, but would also raise the cost of equity issuances. A report from analysts at J.P. Morgan, dating from 2010, examines the cost of equity should Treasury rates revert to a level between 5 percent and 6 percent in the medium term. Assuming that stocks generate returns consistent with their long-term premium of roughly 6.5 percent above risk-free investments such as Treasuries, the utility industry’s cost of equity would increase to 10 percent to 11 percent. The implications are significant. “At 11 percent, the regulated utility sector’s cost of equity would outstrip the current industry median allowed return on equity (ROE) of 10.7 percent. Even at 10 percent, the cost of equity would be outside the historical margin of error of what utilities have been able to realize relative to allowed ROEs. Over the past decade, the utility industry has typically under-earned its allowed ROE by approximately 75 basis points,” J.P. Morgan found. Even more concerning, the banker added, not only have realized industry ROEs compressed since 2004 to a median of 9.6 percent as allowed ROEs have ratcheted down, but the under-earning spread has widened as well, from a median of approximately 60 basis points that prevailed prior to 2005 to 110 basis points since then. “Thus, if we assume that the industry is likely to continue to under-earn its allowed ROE by approximately 100 basis points, then with a current average allowed ROE of approximately 10.7 percent, the industry is likely only to be able to earn approximately 9.7 percent–below its cost of equity should the 10-year Treasury rate increase to 4.7 percent or higher,” J.P. Morgan concluded. Trust, but Verify So how do investors evaluate which utility management teams are most likely to not only skillfully allocate their capital, but also get the timing right on its deployment? Since we can’t see into the future, it all comes down to trust in their decision-making based on their track record (See Chart B). The big question to ask is whether management is generating a return on invested capital (ROIC) that’s greater than the company’s weighted average cost of capital (WACC). ROIC is a ratio that incorporates shareholder returns from equity and debt to help investors identify managers who maximize profits from all sources of capital at their disposal. Many investors usually highlight earnings and dividend growth, yet these come with a heavy price for regulated utilities. That heavy price is a growing investment base funded by large and usually increasing long-term liabilities on their respective balance sheets. Earnings growth rates and return on equity do not consider the impact of these higher liabilities. ROIC provides insight into how effectively total capital is deployed, regardless of its origin. Some have argued that ROIC is not a good metric for the utilities industry since it doesn’t reflect issues such as regulatory lag, while under-collection on capital investments can distort it. But a 2007 study by Accenture found that ROIC was 58 percent correlated to high total shareholder return. Conversely, a high dividend yield had a negative correlation to total shareholder return. Furthermore, in its own historical analysis, J.P. Morgan found that utility stocks whose underlying companies had higher spreads between ROIC and WACC realized greater returns over the same period. Chart B: Top ROICs Meant Top Total Shareholder Returns in the Past At present, when looking at the top five utilities with the largest capital expenditure programs, we found many firms were barely exceeding their cost of capital, while there were a few that weren’t. According to Bloomberg analytics, those that earned above their cost of capital were: Duke Energy Corp (NYSE: DUK) (1.32 percent), American Electric Power (1.12 percent), NextEra (0.64 percent) and Southern Company (2.94 percent), while those firms not earning their cost of capital were Dominion (-2.27 percent) and PG&E Corp (NYSE: PCG) (-0.36 percent). There may be various reasons why ROICs are low for these firms, such as the effectiveness of management decisions or regulatory lag. According to McKinsey, “Since a company’s continuing value is highly dependent on long-run forecasts of ROIC and growth, this result has important implications for corporate valuation. Basing a continuing value on the economic concept that ROIC will approach WACC is overly conservative for the typical company generating high ROICs.” Investors should look closely at individual capital expenditure programs and past management effectiveness to determine which firms are the best investments. But if the prospect of examining the spreads between ROIC and WACC makes your head spin, there’s another way that’s even easier. In the end, we believe the answer to the capex conundrum is the balance sheet. A strong balance sheet is always preferable, as it gives management options against the unknown. Furthermore, strong balance sheets create more value and, therefore, lower the long-term cost of capital. Saturday, February 1, 2014Cash in On LinkedIn (LNKD) Bullish Move LinkedIn Corporation Credit Spread (NYSE: LNKD) TheOptionPlayer.com sets up a LinkedIn (LNKD) short-term (8-day) option strategy. Investors could simultaneously: Sell the February week-one expiration LNKD $190 put for $2.12 (mid-morning bid) AND Buy the $185 put at $1.45 (mid-morning bid) The difference between funds received and paid out is a $.67 per share credit which we keep if LinkedIn stock closes above $190 on Friday February 6th, but immediately exit the position if it appears the price will end up lower. If the price gaps lower open the trade using lower strike prices. See Guidelines page at www.theoptionplayer.com/ for explanation on how trade is set up.
Why we recommend it: We are playing LinkedIn (NYSE: LNKD) stock to continue trading above its long term support after bottoming out following earnings announce a few weeks ago. Take a gander at the LinkedIn chart, we can easily identify the support level established at the beginning of the month. LinkedIn shares crashed this week along with the overall stock market. Note that the support level held as the price is moving up and the technical momentum indicators are turning positive. LinkedIn shares have not been below the target price since the middle of last summer and there is a high probability that the stock will continue to trade above $190 for another week. 52-Week High: $257.56 52-Week Low: $112.08 Average Volume (3 month): 2,033,500 The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited. TheOptionPlayer TheOptionPlayerPosted-In: Markets Tech Trading Ideas Most Popular Reports: Microsoft Will Pick Satya Nadella and Bill Gates Will Step Down Analysts React to Las Vegas Sands Earnings #PreMarket Primer: Friday, January 31: Emerging Market Turmoil Spills Over Into Europe As Goes January, So Goes the Year? A Quantitative Look Market Wrap For January 30: Markets Focus on Good News CEO Jeff Bezos: 'It's A Good Time To Be An Amazon Customer' Related Articles () Market Wrap For January 31: Markets End January On Sour Note State Dept. Assessment Of Keystone Project Expected To Anger Pipeline's Opponents Cash in On LinkedIn (LNKD) Bullish Move Benzinga Weekly Preview: Twitter To Release Earnings For The First Time Since Going Public Our Outlook For Stocks in 2014 Intraday Elliott Wave Analysis: S&P500 And German DAX Around the Web, We're Loving... Lightspeed Trading Presents: Thunder and Tubleweeds: Trading Techniques for the New Market Enviroment Pope Francis Rips 'Trickle-Down' Economics Come See How the Pro's Trade in this Exclusive Webinar Wynn, MGM, Other Casino Giants Vying For U.S. Turf What Should You Know About AMZN? View the discussion thread. Partner Network
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But that doesn’t mean investors are safe from getting smoked.
