Affiliated Manager Group: Underfollowed Niche Asset Manager

Affiliated Managers Group (AMG) is a niche financial firm in the asset management business.  From their website:  Affiliated Managers Group, Inc. is a global asset management company, which operates through a diverse group of outstanding boutique investment firms. AMG’s unique partnership approach aligns incentives through equity ownership and preserves the entrepreneurial orientation that distinguishes the most successful investment management firms.

As the name suggests, this company takes a majority interest in investment shops called “affiliates.” Those boutique asset managers continue operating independently with AMG assisting with marketing through its vast global distribution network and with back-office chores. It also shares in the affiliate’s profits.

Affiliated has shopped wisely. It boasts an array of prestigious investment brands, including Tweedy Browne, Third Avenue Management, Genesis Asset Managers, AQR Capital Management Foyston, Gordon & Payne, and Yacktman Asset Management.

These are the kinds of names that will attract money as investors continue to warm up to the markets but realize that the days of buying anything and watching it go up are over. A sideways market calls for smart asset managers, and AMG has delivered.


The firm typically buys a majority interest in small to midsize boutique asset managers, receiving a fixed percentage of revenue from these firms in return.  Given the revenue-share model, AMG has rich margins and cash flow that will continue to fund acquisitions. It is estimated AMG will generate over $1 billion in free cash flow this year and is one reason reason Goldman Sachs on March 21 added AMG to its “Conviction List.”  While the stock has risen since, it still looks cheap given the potential, with a price-to-earnings ratio of 11.4.

AMG's affiliate model provides it with a diverse mix of assets under management AUM, investment styles  and earnings, with exposure to value and growth equity strategies, fixed-income products, and alternative investments.

At the end of 2015, AMG's affiliate network had $611.3 billion in managed assets, which is a sizeable share of the $2.9 trillion in alternative asset held by hedge funds.  

AMG is rolling up small boutique asset managers at a time when the entire field seems to be consolidating because of structural changes that have come about in asset management.  Concerns over higher tax rates and ongoing succession planning at boutique asset managers are expected to spark the sale of equity stakes in many of these types of firms to larger financial institutions in the future.Moreover, the firm’s exposure to institutional money, making up 62% of revenue, should give it an edge in fund flows in coming quarters. Keep in mind less “sticky” sovereign wealth fund assets comprise only 2% of AUM.

Goldman’s analyst reports, "Following a tough 2H15, we expect AMG's flows to see a sharp turnaround in 1Q (GSe +2% organic growth vs -4% in 2H15) which should drive the stock's deeply discounted valuation (12x P/E and 10x EV/EBITDA are 26% and 17%, respectively, below 5-year avg.) higher. Moreover, AMG's secularly relevant product set (Global Equities, Alts and Quant), defensive margins and M&A opportunities should drive stronger long-term growth, setting AMG apart from peers.  Retail flows (source of weakness in 2H15) are inflecting, tracking at +$4 billion 1QTD, driven by robust demand for AQR’s mutual funds (+$5bn) and less outflows from Yacktman (-$0.7bn QTD vs. -$2.4 bn 4Q15).”

AMG offers investors almost a mutual fund/ETF approach to alternative asset management.  By holding pieces of multiple well-known and successful managers, AMG offers better diversification than many singular firms.  

From their website is an explanation of the benefits of their unique corporate structure and wealth management approach: In contrast to other entities which attempt outright acquisitions of investment firms, AMG's investment structure aligns the interests of the Affiliate, its clients, and AMG. Affiliate managers typically retain control of the operational management and distinct culture that shaped their success through a customized revenue sharing agreement that leaves day-to-day operations (including compensation and budgeting decisions) to the management of the Affiliate. In addition, AMG's approach provides a mechanism whereby Affiliate managers can individually realize the value of their retained equity and transfer their interests to the next generation within the firm. Clients of AMG's Affiliates benefit from seamless management and ownership transition as well as an uninterrupted focus on service, performance and growth. AMG also benefits from the continued success of its Affiliates. We believe our structure not only incents the growth of our Affiliates, but is also more attractive to boutique firms that anticipate future growth and want to retain equity upside and independence while implementing a succession plan.

However, AMG is not immune to the recent weakness in the money manager business.  While Affiliated Managers shares have increased nearly 8% since the beginning of the year, the stock has fallen 24% in the last 12 months.

Investors seeking increased exposure to wealth management firms and are a bit skittish about taking a position in just one firm may want to review AMG.  Its divergence of clients, managers and asset strategies positions the firm as one of the most diversified firms in their industry.

This article first appeared in the May 2016 issue of Guiding Mast Investments.  Thanks for reading,  George Fisher  

Boeing: Ready to Take Off

Boeing (BA) has underperformed the market since Jan, but may be ready to make up the shortfall.  Earnings are on a nice upwards trajectory with BA earning $7.71 in 2015.  Management forecasts 2016 EPS at $8.15 to $8.35. BA is expected to earn $9.53 next year and $10.23 in 2018. This would equate to a 3-year EPS growth rate of 11% to 12%.   

The first-quarter 2016 report was better than expected, but more charges against the Air Force tanker and 747 programs cost the company $0.24 in EPS. Still, Boeing continued its buyback program ($3.5 billion in the first quarter) and continues to pay its quarterly dividend of $1.09 per share (a yield of 3.33%). From a shareholder’s point of view, those are solid reasons to like and own the stock.

Since January, BA has underperformed the S&P 500.  From June 2014 to this past January, BA performance has mirrored the overall index.  However, in the 1st qtr, BA declined from $140 to under $110, and has clawed its way back to $135.  Nonetheless,  BA should be a minimum of 10% higher if it were to match the index’s performance.

S&P Capital IQ recently trimmed their full-year 2016 earnings per share estimate from $8.57 to $8.45.   Even so, the analyst liked Boeing’s $480 billion backlog and said the backlog is “supportive of top and bottom line growth.” S&P is also “positive on the aggressive share buyback program and 3.3% dividend yield.”

S&P is not the only analyst reporting on BA.  Below is a sampling of recommendations and price targets from various Wall Street firms:

·         S&P Capital IQ rates BA a Buy with a price target of $160.

·         Bernstein raised its price target from $180 to $184.

·         Morningstar has a 3 Star, Neutral, with a Fair Value of $140.

·         Canaccord lifted its price target from $135 to $140 and rates the stock at Hold.

·         JPMorgan raised its price target from $120 to $140 with a Neutral rating.

·         RBC upped its price target from $128 to $132 with a Sector Perform rating.

·         SocGen raised its price target from $129 to $140 and has a Hold rating on the stock.

·         Merrill Lynch offers an underperform rating.

·         Goldman Sachs has a Sell rating on the stock but raised its price target from $100 to $101.

Management generated free cash flow (operating cash flow less capital expenditures) of $6.91 billion in 2015 and $7.88 billion on a trailing 12 month basis after reporting 1st qtr. 2016 results.  Management has pegged free cash flow for 2016 at $7.2 billion. 

Boeing has been buying back large amounts of its shares.  After peaking in 2013 at 767 million shares, the company has bought back 100 million shares, with 665 million shares outstanding in the 1st qtr. 2016.  This represents a reduction of 13% in shares outstanding and around $1.00 in increased earnings per share.    

On the positive side of share ownership is the current backlog of 5,700 commercial airplanes.  This provides future growth visibility and a floor for operating cash flow over the next five years.   BA’s marketplace should continue to experience an underlying 5% annual air travel growth.   The recent moves to rework the 737 and 777 aircraft rather than develop entirely new planes has saved BA billions in development costs.  It has been reported BA is looking at another generational variation of the single-aisle 737.  With a change in Administrations, the slump in defense spending may be coming to an end.  BA could be well positioned to capture a larger share of increased defense spending.   

In addition, management is starting to emphasize the total customer approach to the sales cycle. In the past, BA tended to leave the aftermarket for parts to their vendors and suppliers.  With the huge backlog and increasing inventory of planes in the field, management has begun to focus on the “life cycle” approach to its business.  This involves both maximizing new product orders and capturing a bigger piece of the aftermarket opportunities.  The impact on BA’s vendor relationships will be an interesting topic to follow.  

On the negative side, some believe the current airplane replacement cycle may be topping out and new order comparisons may begin to falter. Low jet fuel prices are delaying some airlines from upgrading their fleet.  Delta Airlines, for example, has slowed its pace of plane replacement as the cost to operate older, less fuel efficient planes is not as much of a burden as when jet fuel pricing was much higher.  Plus, there continues to be stories of a Chinese-made airplane to compete with the Boeing 737 and Airbus A320.     

There are pictures of the debut of the first single-aisle Chinese-made commercial aircraft known as the C919. While the major components are produced by either foreign companies or Chinese joint ventures, the C919 currently has orders for over 500 airplanes. The C919 is expected to be put in service in 2019 in the domestic Chinese air travel market.    

Although not directly affecting BA, a separate state-owned company also has developed a smaller regional jet, the ARJ-21, to compete in the market dominated by Brazil's Embraer and Canada's Bombardier. 

Investors looking for an industrial and aerospace/technology stock which has lagged the market but still offers reasonable value should review Boeing.  There is a lot to like about BA from its earnings growth potential to its current and growing income yield.

This article first appeared in the May 2016 issue of Guiding Mast Investments.  Thanks for reading, George Fisher

Silver Run Acquisition: New Energy Vulture Fund to Compete with PE Firms

Silver Run Acquisition: New vulture fund in the energy sector.  Silver Run Acquisition (SRAQU) is a new IPO focused on investing in oil and gas opportunities.  Similar to KKR, Blackstone, and other private equity firms, SRAQU was formed to acquire distressed assets from financially shaky E&P firms. Silver Run will look for companies that are fundamentally sound but under-performing due to current commodity prices, according to its IPO prospectus.

Bloomberg reported on February 2 that several major private equity firms, such as Carlyle Group, Apollo Global Management, Blackstone Group, and KKR, are in the midst of taking massive positions in indebted oil companies. KKR, for example, provided $700 million in credit to Preferred Sands LLC, a producer of sand used to frack oil and gas wells. In exchange for the emergency loan, which carried a 15 percent yield, KKR took a 40 percent ownership stake in the company. Blackstone did a similar deal with Linn Energy LLC, another struggling oil firm.

Mark Papa, the "Godfather" of U.S. shale oil, retired from EOG Resources and has come out of hibernation to manage this opportunity.  Papa is known as a pioneer in the shale business and in 2007 switched EOG’s focus from finding natural gas to shale oil. Papa acquired some of the initial (and very low cost) leases in the Eagle Ford and Bakken shale oil plays for EOG.  These have since become prolific producing regions for shale oil.

Mark Papa’s new firm raised $450 million in its IPO in Feb.  From the PR Newswire:  The Company's units began trading on the NASDAQ under the ticker symbol "SRAQU". Each unit consists of one share of the Company's Class A common stock and one-third of one warrant. Each whole warrant entitles the holder thereof to purchase one whole share of the Company's Class A common stock at a price of $11.50 per share. Once the securities comprising the units begin separate trading, the Class A common stock and warrants are expected to be listed on the NASDAQ under the ticker symbols "SRAQ" and "SRAQW," respectively. The warrants become exercisable either 30 days after completion of an initial investment or by Feb 2017 – whichever is later

In Feb, Papa was quoted:  "I would predict in the next six to 12 months, you’re going to see a decimation of the industry — just bodies (companies) all over the place — a lot of bankruptcies, Chapter 7’s and Chapter 11’s.   From those ashes, you’re going to see the companies who survive, a lot of them will be grievously wounded. And the management teams who survive will be a lot more conservative as they go forward. We are pretty much convinced that there are no large shale plays in North America containing oil that are unfound.  It would surprise me very much if the industry discovered another Eagle Ford or Bakken." 

Unlike other vulture funds, Silver Run will be acquiring operational control and ownership, not just offering high interest loans to distressed firms.  

Based on the belief there are no unfound large shale plays in the US, Papa will be looking for existing businesses or land leases that can be acquired within these existing fields. 

Papa now has a $450 million blank check to develop a business around the distressed state of the industry.  Silver Run could leverage its potential asset base by taking on reasonable amounts of debt, by bringing in private equity joint venture partners but must retain a minimum of 50% of voting ownership, or by issuing new shares.

The prospectus is found linked below:

If investors are looking to bottom fish in the energy sector and willing to take on the substantial risk of an IPO, Silver Run is worthy of consideration. As with all IPOs, quality of management is critical, and with the pedigreed of this management, Silver Run has an above average chance of success in this low oil price environment.  

This article first appeared in the April issue of Guiding Mast Investmentsw.  Thanks for reaeding,  George Fisher

Spectra Energy Partners: MLP Worthy of Your Due Dilligence

Spectra Energy Partners:  Master Limited Partnership beating consensus earnings 4 out the last 5 quarters.

Spectra Energy Partners (SEP) is the MLP dropdown of Spectra Energy (SE).  SEP announced 4th qtr. earnings above consensus, which lifted the stock about 15%.  However, the company has little volume or commodity exposure (the soon-to-be-death-kneel of some smaller MLPs), making its 5.5% yield a bit more secure than some peers.

This is not the only quarter SEP has out earned estimates.  In 4 of the last 5 quarters, SEP has beaten expectations, with the only non-beating quarter was a match with projections.  Over the previous 5 quarters, the average positive surprise is 23%.

As a MLP, income investors seek dependable, tax efficient, and growing distributions. The company announced a distribution increase of 1.25 cents and is the 33rd consecutive quarter the company has increased its quarterly cash distribution. Management believes its project expansion plans will continue to allow for a growing distribution base, as indicated by the guidance offered below by management.  

The annual rate of dividend growth over the past three years was at 8.0%, and over the past five years was at 7.4%.

Of concern to MLP investors in the current low energy price environment is the credit worthiness of customers.  It does not matter if a pipeline has 100% of its assets spoken for if those who signed the contracts file bankruptcy or fail to maintain their business.  Of 2015 revenues of $2.7 billion, over $2.4 billion is with customers with credit rating above BBB, and about half rated are AAA/AA/A.  

 Management is planning on $5.7 billion in capital projects in 2016 and 2017. 

While MLPS are controversial in today’s low energy commodity pricing, SEP’s low exposure to prices and volumes should be seen as a very strong positive.  Income investors should use the current weakness to add or initiate a position.


This article first appeared in the March issue of Guiding Mast Investments.  Thanks for reading,  George Fisher

Cognizant Solutions: "2-in-a-box"

Cognizant Solutions offers tech consulting with a unique customer relationship model.

Cognizant Technology Solutions Corporation (CTSH) provides information technology consulting, and business process services worldwide. CTSH began operations in 1994 as an in-house technology development center for Dun & Bradstreet Corp.

The company operates through four segments: Financial Services, Healthcare, Manufacturing-Retail-Logistics, and Other.  Financial Services and Healthcare comprise the bulk of revenues and combined represent 70% of company sales.

The company offers services such as analytics, consulting, supply chain management, human capital management. In addition, Cognizant also sells a diversified selection of products and platforms like ModelEye, Cloud360, and LifeEngage. 

A big driver of its business is creating computer and data infrastructure in response to increasing government regulation in many different sectors and industries.  As regulations grow more abundant and complex, CTSH is a prime provider of solutions to these issues.

For the year 2015, revenues jumped 21% to $12.42 billion. Leading the way were financial services with an increase of 17% to $5 billion.  Investment by financial institutions for regulation and compliance, cybersecurity, and infrastructure transformation drove demand for Cognizant’s services. Healthcare segment revenue grew 36% to $3.7 billion, with the changing regulatory environment and consumerization of healthcare acting as primary spending tailwinds.

CTSH has a unique approach to customer relationships, known as “2-in-a-box”.   In this relationship model, a senior-level US-based manager oversees the customer interaction while an equal-level manager in India overseas product and solution delivery to the client.  This differentiation and attention to customer needs has created a strong bond between the company and its clients.    Since 2010, the company has more than doubled its annual revenue and looks to continue this upward growth trajectory.  With 78% of its business in North America, this business model is helping CTSH stave off competition.

2015 full year EPS were $2.65, up from $2.35 in 2014.  The company has offered guidance of a soft first half of 2016 with business improving in the second.  In 1Q16, Cognizant expects revenues of around $3.2 billion with EPS of $0.78 to $0.80. Full-year 2016 revenues are expected to be in the range of $13.7 billion to $14.2 billion with EPS between $3.32 and $3.44. 

Share prices have fallen from $70 as the high in 2015 to a current price of $57, and erased most of last year’s gains.  The current weakness is also a good time to review CTSH for possible addition to your technology portfolio. 

Based on 2016 guidance, share prices are trading at a 16.7 forward PE.  While higher than earnings growth rate of about 13%, the forward PE is still reasonable for a top-quality technology firm.   

This article first appeared in the March issue of Guiding Mast Investments.  Thanks for reading, George Fisher

Ventas Healthcare Is a Core Holding REIT

Ventas REIT offers outstanding growth potential for its dividend and health care facilities assets. 

Ventas (VTR) is one of the top three health care REITs, with HCP (HCP) and Welltower (HCN) being the others.  Combined, these three firms comprise 70% of the market cap for the health care REITs industry. 

Ventas management focuses on quality and desirable properties in areas favorable to demographics.  Last year, the company spun off its skilled nursing care as a separate REIT, Care Capital Properties (CCP).  Senior Housing comprises 58% of Net Operating Income NOI, Medical Offices 20%, and Hospitals 13%.  Many of the leases are long-term and are triple-net, which are generally beneficial to the landlord. 

VTR focus is also on properties in areas with preferred financial background.  From their recent presentation, VTR compares itself to industry benchmarks:

                                                VTR            Peers

Median Household Income     $73,315    $53, 706

Median Home Value              $393,000   $191,277

75+ Population Growth           11.2%         10.7%

Building Age                            16 yrs       22 yrs

As shown, VTR’s properties are in locations with higher incomes, higher home prices and a slightly faster aging rate.  The age of their building are on average younger than benchmark peers.

The REIT owns 1,288 properties, but has concentration risk from its customer base.  Five firms generate 53% of Net Operating Income NOI.  Listed below are locations of their properties, which favor the Northeast, Florida, Texas, and the West Coast.  VTR has properties in all the top 30 metropolitan centers.  43% of NOI is generated from the East Coast and 20% from the West Coast, areas which have high barriers to entry due to population density. 

While health care REITs have been around for a while, they account for a smaller percentage of properties owned than hotels, malls and apartments.  Based on the top 50 mall owners and the top 25 hotel chains, REITs own about 50% of properties. Comparable REIT penetration of health care facilities is pegged at 15%.   Management believes health care REIT opportunities include over $1 trillion in assets, of which 80% falls within their business focus.  

VTR has raised its dividend at twice the rate of its leading peers over a 3-yr, 5-yr and 7-yr time period.  Income and dividends should grow at an average rate of 5% a year. 

However, not all is perfect with health care REITs.  There is concern health care costs cannot continue to escalate at 2.5 times the underlying CPI.  With the nation’s focus on controlling costs, rent increases may be more difficult to implement.  While the cost to relocate is prohibitive in many instances, tenants will begin to defect if health care lease costs far exceeds the going rate of similar neighboring commercial properties. 

As with many interest sensitive sectors, such as utilities, 2015 was not kind as investors shied away from income producing assets.  VTR total return in 2015 was -5.5%. 

The current yield of 5.11% should provide ample long-term income and distribution growth should continue to far exceed the overall rate of inflation.   

This article first appeared in the Feb issue of Guiding Mast Investments.  Thanks for reading, George Fisher


Rolling Stones circa 1964:"Time, Time, Time is on My Side, Yes it is"

As the Rolling Stones sang in 1964, “Time, time, time is on my side, yes It Is.” 

From RBC: The Daily Grind. Much is made of the stock markets daily direction, but watching the movement too closely likely makes it more difficult to tell what the trend may be, but the allure and excitement of the process makes it an irresistible thing to watch for some investors. Often it seems that the market changes direction on a daily basis, with the reason for the move sometimes being a pretty weak excuse. This is because the daily market moves are driven more by the emotion that gets tied to the daily news rather than the trend of the fundamentals that determine the long-term success in investing. If the markets moved only in relation to the facts, they would be easier to understand, but once you throw opinion and emotion into the mix, it gets very confusing and uncertain. The table below illustrates how the daily market movement is close to a coin-toss in which direction that it may be as the emotion of investors is a lot harder to predict than the market itself, while the longer-term view generally supports the theories and benefits of a long-term investment plan.

Percentage of time the S&P has been up over the past 65 years:

On a Daily Basis: 52.9%

On a Weekly Basis: 56.4%

On a Monthly Basis: 59.3%

On a Quarterly Basis: 64.3%

On a Yearly Basis: 73.0%

In other words, investors have a 53% chance the markets will be up tomorrow but a 73% chance markets will be higher this time next year. 

From a technical viewpoint, the S&P 500 has trading support at 1905 to remain in the uptrend with resistance at 1950 to 1980. This is a pretty tight support range of only 1.8% down for the charts to turn negative again on the short term.   

Reviewing the Fair Valuation of Morningstar, 13 of the 17 Sectors and Indexes clocked in new 52-week lows in Jan.  While the market bottom may not be in quite yet, the precipitous decline over the past 3 months has been a cleansing move that has pushed many stocks into a buy range.  For example, financial stocks are traded at a 23% discount to their Fair Value, a far better risk/reward than last Oct when they traded at Fair Value.  

As reiterated before, remain watchful and nibble with positions in the most favorable sectors – Financials, Energy, Cyclicals, and Basic Materials.  While the market is in a negative trend and needs to rally upwards of 5% to 8%,  current prices have a 73% chance of being higher this time in 2017. 

Companies offering stable and secure dividends add not only to overall long-term investment returns but current income that can offset some current short-term market weakness. 


This article first appeared in the Feb issue of Guiding Mast Investments.  Thanks for reading, George Fisher

Morningstar/Huber Financial List of Stocks That Will Benefit From Higher Rates

A list of nine dividend stocks that will benefit from higher rates was compiled by Morningstar and Huber Financial, a purveyor of investment newsletters. As reported in Morningstar, 


Here are three reasons that dividend investors should not fear the Fed, and nine yield plays that should do well as interest rates rise, according to some of the best dividend stock newsletter writers.


Reason 1: Dividend payers outperform when the Fed is hiking rates (believe it or not)

Reason 2: The new Fed policy is already priced in

Reason 3: The Fed is not going into aggressive rate-hike mode


Nine stocks that will perform well are: 

Alliant Energy Corp. (LNT), which operates in Wisconsin and Iowa. The stock has a 3.7% dividend yield.


NextEra Energy Inc. (NEE), which is using stable, regulated cash flows from its business in Florida (about 70% of revenue) to invest in renewable energy, like wind power. It features a 3.1% yield.


Duke Energy Corp. (DUK), which has a 4.8% yield. Duke's shares are weak, in part, because of some exposure to Latin America, but this is only a small part of the business.


Ventas Inc. (VTR), a REIT that builds senior housing and has a lovely yield of 5.4%. Ventas' stock has been beaten down on concerns about overbuilding. But Peters thinks the worries are overdone, in part, because the growing number of seniors over the next few decades will support demand. What's more, Ventas has built-in markets where it will be tougher for competitors to add supply.


Procter & Gamble Co. (PG), whose stock has been hammered because investors have gotten tired of waiting to see the benefits from a turnaround. The company is selling off lots of businesses to focus on the more profitable brands. "You have to give them another one or two years," says M* Dividend Investor publisher Peters. "I like to buy a washed-out name where people are sick and tired of being patient." Procter & Gamble has been hurt by the strong dollar, which translates overseas earnings into fewer greenbacks in the U.S., where it reports earnings. "But the dollar won't be this fierce headwind year after year,"


AT&T Inc. (T), which has a yield of 5.7%, a level that's also its repetitive high yield.


Wal-Mart Stores Inc. (WMT), whose shares have fallen so much the company has blown through its repetitive high yield of 2.5%, to a yield of 3.3%.


WEC Energy Group Inc. (WEC), with a current yield of 4%, compared with a typical high of 3.6% at bottoms for the stock.


Chevron Corp. (CVX), which historically looks undervalued when it offers a yield of 3.5%. It has fallen so much it now has a yield of 4.75%.

This article first appeared in the Feb issue of Guiding Mast Investments.  Thanks for reading,  George Fisher

PowerShares Dorsey Wright Consumer Staples Momentum ETF (PSL) Outshines the Competition, but with Added Risks

Historically, consumer staples sector has been categorized as being defensive in nature and a safe haven in times of market turbulence.  Consumer staples are usually those produce we use every day regardless of economic conditions, and include cigarettes, soaps, beer and liquor, and food.  Consumer staples firms are typically low growth with below average dividends, and are considered lower risk.


Investors gravitate to consumer staples as a balance to their higher growth positions and to lower the volatility of their portfolios.


However, with the advent of “smart” ETFs, investors can now goose up their returns.  Invesco PowerShares has teamed with Dorsey Wright Associates to offer a line of ETFs that incorporate stocks that are in the top of their sector for relative strength, or those who have performed better than their peers.  The portfolio is adjusted quarterly to reflect updated performance.  The ETF holds around 30 positions.

As an example of the quarterly rebalancing, at the first of the year, the ETF removed Jarden Corp (JAH), Snap-on Corp (SNA) and Dr Pepper Snapple (SNA) from their top 10 positions and replaced these with Kroger, Tyson Foods, and UHaul Amerco.


The key to this ETF is the quarterly rebalancing.  Within the sector, Dorsey Wright identifies those firms and stocks that have outperformed their peers and holds about 30 to 35 of these companies.  From their website:  Relative Strength, the measurement of how one security performs in comparison to another, is a key concept within Dorsey Wright's methodology. Before investing in UPS, one should understand its recent performance relative to FedEx, or the S&P 500. The same logic can be applied to sector analysis, asset class evaluation, mutual funds, ETFs, commodities, fixed income, and even foreign countries. A relative strength matrix is like a massive tournament, where a huge quantity of investment options can be compared to one another - and we see who is strongest. Relative strength is the basis for virtually all of our managed products, where we select the best investment options from within a large universe of options.


PSL has outperformed both the S&P 500 and the S&P Consumer Staples ETF (XLP).  In 2015, PSL returned 12.14% while XLP returned 5.82%.  PSL has returned 22.9% annually over the previous 3 years and 21.3% annually over the previous 5 years, compared to 18.9% and 16.9% respectively for XLP. 

The divergence in performance favoring PSL accelerated in mid-2014.  However, reviewing previous years, PSL outperformed has outperformed the S&P 500 and at a minimum matched its sector peer. 


However, as a “smart” ETF, the portfolio is actively managed.  Unlike the S&P Indexes, PSL adjusts its portfolio four times a year, incurring both higher costs and higher risks.  A few months ago, Financial Industry Regulatory Agency, FINRA, issued an Investor Alert titled, "Smart Beta-What You Need to Know". The bottom line of the alert is the old adage: Know what you are buying and what the strategy is of the specific ETF. There are about 840 products that fall into a smart beta category, representing almost half of all the exchange-traded products listed in the U.S. and investors should understand that any strategy that aims to beat the market carries its own risks.


The FINRA report concludes, "Recently, there has been significant growth in the number of financial products, primarily ETFs, which are linked to and seek to track the performance of alternatively weighted indices. These indices are commonly referred to as "smart beta" indices. They are constructed using methodologies that rely on, for example, equal weighting of underlying component stocks, or measures such as volatility or earnings, rather than market-cap weighting. Investors need to understand there is no free lunch here. Any time you are deviating from the market, you're taking some kind of tilt. Understand what the fund is doing that is different than the market. That is a risk."

A copy of the FINRA Alert is below:


Investors looking to boost their exposure to the defensive nature of consumer staples would be well advised to add PSL. However, also heed FINRA’s advice and make sure you are comfortable with the added risks of this actively managed ETF. 


This article first appeared in the Feb issue of Guiding Mast Investments.  Thanks for reading,  George Fisher

Canadian-based Power Corp: Compelling value and Benefactor of a Weaker Dollar

Power Corporation combines undervalued NAV with benefits of foreign dividends in times of a weakening US Dollar.   

Power Corporation (PWCDF) is a Canadian financial holding company trading at a discount to the sum of its parts.  In addition, if the US Dollar were to weaken against the Canadian Dollar, income investors will be rewarded through a higher yield.  

However, the structure is a bit complicated.  Power Corp major assets include:
-    65.7% interest in Power Financial Corp, 
-    100% ownership of Square Victoria Communications,
-    100% ownership of Power Energy Corp,
-    100% ownership of the Sagard Funds.

Power Financial is a major Canadian financial services firm focused on insurance and investments.  Power Financial owns interests in several well-known life insurance and wealth management firms, these include:

1) 62.7% stake of Great West Lifeco. Great West Lifeco owns the following insurance companies:  The Great West Life Assurance Company, London Life Insurance Company, The Canada Life Assurance Company, Irish Life Group Limited, and wealth advisors Putnam Investments.  Combined, Great West has $1 trillion in assets.  

2) 58.8% stake of IGM Financial.  IGM in turn owns Canadian-based wealth managers Investors Group, Mackenzie Financial Corporation, and Investment Planning Counsel.

3) 27.5% indirect ownership of Brussels-based holding Company Groupe Bruxelles Lambert.

Power Financial’s interest in Great West Lifeco is worth C$21.07 billion (USD$15.05), and IGM C$5.07 billion (USD$3.63 billion).  With Groupe Bruxelles Lambert’s US$12.9 billion market cap, a 27.5% interest would be valued at C$3.5 billion (USD$2.4 billion).  Combined, Power Financial could be worth around C$29.66 billion (USD$21.60 billion).  

Power Corp’s interest in Power Financial could be worth about C$18.53 billion (USD$13.24 billion).  

In addition, Power Corp owns investments in Canadian roof-top solar, manufacturing, a French-Canadian newspaper which is a top Canadian site for news and information, along with online employment and advertising agencies.  Power Corp also owns Sagard Funds, a diversified European private equity fund manager, with investments in the US and China.  

As of June, Power Corp had C$812 million in cash and C$652 million in debt.  In addition, Power Corp other investments in Saga Funds, Power Energy and Square Victoria Communications is on the books as having a value of $2.1 billion (USD$1.6 billion).  In total, Power Corp should have an NAV of $20.7 billion (USD$14.9 billion)

However, PWCDF has a market cap of C$13.27 billion (USD$9.45 billion). Current valuations puts a 35%+ discount to a sum of the parts estimates.  Power Corp pays a quarterly dividend of C$0.31, or C$1.24 a year.  At the current exchange rate, this would be equal to USD$0.96 per share annually.  With PWCDF trading on the OTC markets at $20.60, the dividend would create a 4.6% yield and represents a comfortable 30% payout ratio.

Power Corp traded at a 9.1 PE vs a 5-yr average of 10.8, for a 15% undervaluation from its 5-yr average.   S&P and Dominion Bond Credit Ratings both rate Power Corp as “A” with a stable outlook.

The US share price collapsed with the strength of the US Dollar and represents an almost 30% difference in valuation solely from the foreign exchange exposure.  The Canadian Dollar has historically traded about parity to the US Dollar, but as with all major currencies, has declined to about $0.71 on the $1.

If the USD weaken in 2016, the US share price and dividend income would respond accordingly, increasing the potential gains for investors.  Even without a currency adjustment, Power Corp’s consensus price target is around C$35 for a 25% potential gain.

Investors looking for income and willing to take on a bit of foreign exchange risk should look at Power Financial.  The rewards could be quite pleasant over the next few years as the US Dollar weakens and Power Corp continues to grow, gaining higher investor attention.


This article first appeared in the Jan 2016 issue of Guiding Mast Investments.  
Thank you for reading,  George Fisher

It's Time to Focus on Taxes


Year-end is fast approaching and the time for tax planning is slipping away.  Forbes and Morningstar published articles as a reminder of familiar actions investors may take to reduce their tax burden.


1. Contribute to a tax-advantaged savings plan.

Contributing to a 401(k) or an IRA may be the smartest tax move that most taxpayers can make. Not only does it reduce your taxable income for the current tax year and allow your potential earnings to grow on a tax-deferred basis, it also helps get you closer to achieving your retirement savings goal.


Contributions to your 401(k), 403(b), or similar workplace retirement plan must be made by December 31, 2015, to impact your 2015 taxes, so you need to act quickly to increase your deferral. The 2015 401(k) contribution limit is $17,500 ($23,000 for people age 50 or older). With a non-workplace IRA, you have until April 15, 2016, to make a 2015 tax-deductible contribution of up to $5,500 ($6,500 if you’re age 50 or older).


Other possibilities for tax-advantaged plan contributions are a Simplified Employee Pension plan (SEP), for self-employed individuals, or a Health Savings Account (HSA). Contributions to either of these plans can be made up until April 15 and still apply to 2015.


2. Adjust your withholding.

Ideally, the amount of money withheld from your paycheck or sent to the IRS in quarterly payments should come very close to your actual tax liability. Withhold too little and you could have a big tax bill when you file your return. Withhold too much and you’re giving the IRS what amounts to a tax-free loan of money that you could be using to pay down debt or save for retirement (and, potentially, reduce your taxes). There’s still time to adjust your withholding for 2015 by making changes to the W-4 you have on file with your employer, or, if you make quarterly payments, by increasing or decreasing your payments between now and when the last 2015 payment is due in January. Keep in mind that the longer you wait, the fewer pay periods you’ll have to reach your target.


3. “Harvest” your investment losses.

If you have capital gains outside of your retirement accounts, you may be able to lower your tax liability through tax-loss harvesting. That simply means selling losing investments that no longer fit your investing strategy and using the loss as a write-off against some or all of your gains. If you employ a tax loss harvesting strategy, you must be aware of the wash-sale rule that disallows the write-off if you purchase substantially the same investment 30 days before or after the loss sale.


Note: The time has passed for the “double down” strategy of tax loss harvesting.  In Nov, investors could have bought shares of their losers, waited 31 days and then sold their original shares to maintain their position and capture their paper loss. Now, if investors want to harvest their loss for 2015, they either need to exit the position for 31 days or switch to a similar but not the same investment.




4. Contribute to charity.

Contributing to charitable causes before the end of the year is a tried-and-true tax-reduction strategy for taxpayers who itemize deductions. But remember to get a receipt for every contribution you make, not just those over $250. Also, if you want to be more strategic, you could open a donor-advised fund, which offers several advantages for managing your charitable-giving activity. You could, for example, contribute a lump sum to the fund before December 31, take the entire deduction on your 2015 tax return, and then instruct the fund to use the money to make next year’s gifts.


One strategy that offers two tax benefits is donating appreciated securities, such as stocks or bonds, to charity. The tax code allows you to use the current market value of the asset as a deduction without having to pay tax on the capital appreciation, so you get the charitable contribution deduction and avoid capital gains tax.


5. Use your annual gift tax exemption.

An individual can give up to $14,000 a year to as many people as you choose ($28,000 if you and your spouse both make gifts) to help reduce the amount of your estate and help reduce or avoid federal gift and estate taxes. This may include cash, stocks, bonds, and portions of real estate.


However, anything above $14,000 per person per year may be subject to gift taxes, so it’s important to keep track of this information. For more information, speak with your tax adviser and review IRS Publication 559, Survivors, Executors, and Administrators.


If you would like to contribute money toward a child’s education, consider a 529 plan account.

Contributions are generally considered to be removed from your estate. You can also make a payment directly to an educational institution and pay no gift tax.


Note: I prefer to use a Coverdell Educational IRA for the initial $3,000 per child contribution.  The Coverdell offers better control over the investment selection process and does not usually carry as high a fee as many 529 plans. 


6. Accelerate deductions.

In addition to charitable contributions, other types of deductions offer some flexibility. If you make estimated state or local tax payments, for example, you could send in the January payment before the end of this year. And maybe you could do the same with a property tax bill that’s due near the beginning of the next year. Other possibilities include accelerating payments for medical services or purchasing work-related items, such as uniforms, for which you are not reimbursed. Recognize, however, that increasing your tax deductions only makes sense if you have enough of them to exceed the standard deduction of $6,200 for single taxpayers, $12,400 for married couples filing jointly, and $9,100 for heads of household.

BGCP Partners: 46% of Market Cap is in stock of Financial Exchange Comanies

BGCP has sold two segments of its business for $1.2 billion in stock of NASDAQ (NDAQ) and Intercontinental Exchange (ICE).

A few months ago, we wrote a piece on BGC Partners (BGCP) and BGCP has been one of our top rated stocks.  As discussed, BGCP was in an acquisition battle with CME Group (CME), operators of the Chicago Mercantile Exchange, over GFI Group a European-focused middle market broker.  BGCP won with an offer of $750 million.  The crown jewel of GFI’s business is an electronic trading platform known as Trayport.   Trayport’s specialty is trading energy and commodity contracts.


As anticipated, BGCP recently announced the sale of the Trayport platform to Intercontinental Group (ICE), operators of the NYSE.  The sale price is $650 million in ICE stock.  In 2014, GFI’s revenues were split with Trayport trading platform accounting for around $80 million and the balance of GFI generated $640 million.   Based on these numbers, BGCP sold Trayport for 8 times revenues and paid 0.16 times revenue for the remaining GFI business.    


In addition to this sale, BGCP recently sold another trading platform used for trading currency futures to NASDAQ for $750 million, mainly in stock, which is to be paid out over the next 12 years at about 1 million shares annually, or a value of about $50 million a year. 


Combined, these two deals create assets of over $1.2 billion, or about 46% of the market cap of BGCP at $2.6 billion.  BGCP’s revenue are split 60% financial services and 40% real estate services. 


As shown, BGCP is a niche financial services and real estate services company.  While the real estate services are fairly straight forward as a leading commercial property leasing and sales broker, the financial services are a bit more specialized.  A good description of the financial services is provided by the company:

The Financial Services segment provides brokerage services, including fixed income securities, interest rate swaps, foreign exchange, equities, equity derivatives, credit derivatives, commodities, futures, and structured products. This segment also offers trade execution, broker-dealer, clearing, processing, information, and other back-office services to a range of financial and non-financial institutions; and electronic marketplaces comprising government bond markets, interest rate derivatives, spot foreign exchange, foreign derivatives, corporate bonds, and credit derivatives. In addition, it provides screen-based market solutions, which enable its clients to develop a marketplace, trade with their customers, issue debt, trade odd lots, access program trading interfaces, and access its network and intellectual property; software and technology infrastructure for the transactional and technology related elements; and certain technology services. Further, this segment offers financial technology solutions, market data, and analytics related to select financial instruments and markets through BGC Trader and BGC Market Data brands.


BGCP’s client base is diversified and primarily serves banks, broker-dealers, investment banks, trading firms, hedge funds, governments, corporations, property owners, real estate developers, and investment firms, as well as institutional clients.  62% of its business is from the Americas, 30% from Europe, and 8% from Asia.


BGCP was originally spun off from privately-held Cantor Fitzgerald, and Cantor still owns 25% of outstanding shares.  Management owns 31% and the public owns the remaining 44%.  Howard W. Lutnick is the Chairman of both BGC Partners and Cantor Fitzgerald.


Last month, BGCP raised their divided 16% and the stock now yields 5.96%.  BCGP is not a REIT or a MLP, and its dividends are qualified for tax purposes.


Investors should keep in mind the stock is used as a compensation tool for management.  This is the reason for a large yield and lots of stock options.  On the positive side, retail investors are linked at the hip with management’s self-serving goal of higher dividend income and higher share prices.   


BGCP is an underfollowed niche financial firm managed by some of the smartest minds on Wall Street.  Their push into real estate services should do well over the next few years as the fragmented commercial business consolidates and is the company’s growth platform going forward.  The current stock price of under $10 is a bargain based on BGCP’s holding of $4.60 in ICE and NASDQ stock. BGC

The Austrian Oak's Rules for Sucessful Investing

Arnold Schwarzenegger gave an interesting speech recently at the Global Transformation Forum in Kuala Lumpur, Malaysia.  The speech was short, and was an outline of his six rules of success.  Whether you like the Austrian Oak or not, it is difficult to argue with his level of success.  The rules are simple and directly apply to every investor. Take a few minutes to see how you are implementing the Austrian Oak’s guidelines.   

1. Have a vision.

“If you know where you're going everything will fall into place.”

2. Never think small

“It takes the same amount of energy to think big, as it takes to think small. So might as well.”

3. Ignore the nay-sayers

“Take the words 'it's impossible' and 'it can't be done' out of your vocabulary. Everything the nay-sayers say is a liability, will only prove to be an asset to you.”

4. Forget plan B

“As soon as you start telling yourself that you have something to fall back on, this is the most dangerous thing, because it means you're already doubting yourself. Don't take your eye off the ball, don't take your eye of plan A, there is no plan B!”

5. Work your ass off

“You never want to fail because you didn't work hard enough. None of my rules will help you, unless you're willing to work, work, work! You can't climb the ladder of success with your hands in your pocket.”

6. Don't just take, give something back

“We must serve a cause greater than ourselves. All of us need to create change. Don't just work on 'me', work on 'we'”

Success in accomplishing any financial goal begins with an objective and plan how to get there.  If the vision is to have sufficient funds saved and invested upon retirement in 30 years, development of a plan with benchmarks along the way will aid in its attainment.  Markets go up and markets go down, and what seemed very achievable in strong markets may not seem so in market declines. But staying the course with a clear destination in sight will help offset short-term negative investment psyche.

Developing a successful portfolio management and investment plan incorporates most of the above attributes. Determining your specific level of risk and overall investment goals will ensure a better portfolio outcome.  If you are risk adverse, buying a speculative utility stock with a higher dividend, justifying it as an income play, may not suit your overall needs.  Overweighting in a few industrial sectors may not be an inappropriate strategy, unless it is done unintentionally.

Time and efforts spent to expand your knowledge of finance always pays off in the long term.  It is important to know what you know and to know what you don’t know, and then to stay within the comfort zone of what you know.  As your knowledge expands, so does your comfort zone of investment strategies and options.

Thanks to a good friend, Mr. Bugs Tan, a renowned industrial inventor from Kuala Lumpur, for bringing this short speech to my attention.  Thanks, “Uncle Bugs”. 

This article first appeared in the Nov 2015 issue of Guiding Mast Investments.  Thanks for reading,  George Fisher

A link to the one minute speech:

What's Up with Stock Charts on Aug 24th?

Most investors look at charts as an important aspect of their initial investment decisions and of their investment monitoring.  On occasion, you look at a chart and scratch your head, thinking, “What is going on here”.  Such could be the case for some ETFs and stocks on Aug 25.

Reviewing the Equal Weight S&P 500 ETF (RSP), the close of the day was $72.30, marking a new 52-week low at the close.  However, the low of the day was recorded at $43.77, and stands as the official intraday price for most 52-week high and low reporting.  Review RSP charts offered above as a line graph and a point and figure graph to demonstrate this occurrence.

What happened is known as a “Flash Crash”.  A flash crash is a very rapid, deep, and volatile drop in prices occurring within an extremely short time period. A flash crash frequently stems from trades executed by computerized and high-frequency trading. 

On that Monday, in an instant, confusion descended and strange glitches were reported. Stocks fell like rocks, only to shoot back up minutes later. Exchanges spit out the wrong prices for widely held funds.  Some brokerage firms reported slow trading for its online customers.  Trading circuit breakers, or forced time-outs, were triggered at a rate 100 times more often than normal. The Washington Post described it as: “Popular stocks and ETFs bounced like rapid yo-yos.” 

       General Electric (GE) dropped 8% in seconds and then recovered just as quickly.
·        Vanguard Consumer Staples ETF (VDC) was briefly down 32 percent.
·        The iShares Select Dividend ETF (DVY) fell a similar amount.
·        In 15 minutes, the SPDR S&P Dividend ETF (SDY) dropped 33 percent, recovering within half an hour.
·        NASDAQ 100 ETF (QQQ) collapsed 17%, and along with others, recouped most of its losses quickly.

Our beloved Equal Weight S&P 500 (RSP) closed on Fri Aug 21 at $76.39.  The ETF opened on Mon Aug 24 at $71.39 for an initial decline of 6.8%.  Over the course of the flash crash, RSP fell to a low of $43.77 for an eye-popping decline of 38.6% from its open and 42.9% from its Friday close.  RSP closed the day at $73.33 for a daily decline of 4.0%.  

However, the stocks that comprised these ETFs did not decline by a representative amount.  For example, while VDC declined 32% during trading house, the underlying stocks within the ETF did not decline greater than 9%. 

While looking at stock charts and reported 52-week high and low ranges, it is important for investors to realize sometimes these low prices were not reflective of the market on that day and were unavailable to most retail investors like you and me - unless you were selling as a pre-programed stop-loss order. 

Stop-loss or good-til-canceled GTC limit sell orders were trigged by the swift action of their intended computerized precision, but also added fuel to the decline. Both of these order types do not guarantee an execution price but rather triggers a trade at or below the designated price. The execution price can be below the designated stop-loss or limit price if trading continues to fall between the activation price and market execution.   This was the case on Aug 24.    

Retail investors probably lost billions as their pre-programed stop loss orders were executed at what was unsustainable and unrealistic low prices.  Someone was on the other side of the trade, and they were the recipients of the billions lost by retail investors. 

Setting stop losses is a popular strategy to reduce risk exposure if either the premise for buying a stock or ETF proves wrong or in the case of a wide spread market pull back.  However, the computerized nature of these orders puts investors at greater risk in the event of a crash as experienced on Aug 24 – regardless of the reason. 

Similar too many other investing actions, the best use of stop loss and GTC orders is: Know What You Are Doing and Caveat Emptor

This article appeared in the Oct 2015 Issue of Guiding Mast Investments.  Thanks for reading, George Fisher

Go North, Young Man, Especially in Taxable Accounts

Interesting income opportunities from a geographically limited Canadian REIT.  Go North, Young Man, especially in taxable accounts.  John Babsone Lane Soule in an 1851 editorial in the Terre Haute Express, offered the phrase: "Go west young man, and grow up with the country."  Investors seeking higher after-tax income may want to look north of the border.  Canadian REITs offer both steady income and have some interesting tax implications that could be favorable to US investors.  

Canadian REIT yields are tax advantaged versus their U.S. counterparts. The Canadian authorities withhold 15 percent on their side of the border, as is the case for all trusts.  However, as with all foreign distributions in non-tax advantage accounts, U.S. investors can recoup a vast majority of these taxes by filing Form 1116 with their U.S. taxes.

Specifically, Canadian REITs are treated as foreign equities for U.S. tax purposes, so their dividends are taxable at a maximum rate of 15 percent like any other qualified stock. In contrast, a U.S. REIT’s dividend is taxed as ordinary income.
There are several Canadian REITs worthy of additional research by US income investors.  One such REIT is Cominar Real Estate Investment Trust (CMLEF, CUF-UN.TO).  Based in Quebec, Cominar owns a wide variety of real estate.  Their holdings include 566 retail, office and industrial/multiuse properties.  Of the 45.9 million sq. ft. owned, 36% is office space, 21% retail space and 43% industrial/multiuse space.  

One risk to CMLEF is its concentration of assets in Ontario.  While it is the third largest Canadian REIT and the largest property owner in the province of Quebec, the lack of diversified geography presents an interesting profile.  Although Quebec is home to more stable government-related offices than other parts of Canada, this tenant usually represents a slower growth profile than resource-based western Canada. Western and Atlantic Canadian assets represent only 10% of CMLEF’s portfolio.      

When converted into US Dollars, Cominar’s dividend are at the mercy of international exchange rates.  For example, the monthly dividend has not changed in Canadian Dollars, but when deposited in our US brokerage accounts, the amount varies.  

For example, the Canadian distribution has been steady $0.1225/share a month since it was raised 2.0% last Aug. However, when converted into US dollars, the monthly distribution has varied from $0.112, or $1.34 annualized, to $0.0.95 or $1.14 annualized.  Using the previous 12 months, distribution income totaled Canadian$1.47 and US Dollar $1.23.   

Cominar yields between 9.2% based on trailing 12 month income and 8.2% based on annualizing the most recent distribution of $.095.  If investors are looking to buy shares on the US markets, the average turnover is a bit light at 2,300 shares a day vs 263,000 shares on the Toronto exchange.  Limit orders should be utilized for US market buys and sells.  

CMLEF recently offered a secondary offering of $155 mil to finance continued expansion of its portfolio.  Share prices have been negatively affected on both the Toronto and US exchanges by this dilution, along with some concerns about stagnate, aka steady, FFO/share of $0.44 in the first quarter.  The Toronto 52 week high/low is $20.11 and $17.34 vs the US share prices of $18.50 and $13.42, respectively.  Market prices are currently sitting on their 52-week lows.

As/If the USD declines against the Canadian Dollar, not only will the US share price of CMLEF improve, but the cash income from the monthly distribution will increase as well – all else being equal.  Keep in mind the opposite is true as well.   

More information can be found on their website:

Note and disclosure:  We are not tax advisers and always check tax facts with your accountant and broker for the specific implications to your situation.

This article first appeared in the Aug issue of Guiding Mast Investments.  Thanks for reading, George Fisher 

Hennessy Focus Fund Outperforms

Mutual funds are usually on the bottom of our investment selection list, but Hennessy Focus Fund is the rare exception.

Hennessy Focus Fund (HFCSX) is a mutual fund selection we can support.  It is unusual for a fund to outperform the index over all time periods.  This fund, however, has outperformed the index by an average of 3.0% over the corresponding 1-, 3-, 5-, and 10-year investment periods.  For example, the 10-yr total annual return for HFCSX is 11.05% vs 8.13% for the S&P.  According to Morningstar, since 2005, a $10,000 investment would have grown to $28,500 vs $21,800 for the S&P.    

The fund is considered concentrated with holdings of between 20 and 30 positions.  The top five positions comprise 41% of assets. Consumer Cyclicals are 37% of assets, followed by Financials at 28% and Real Estate at 20%.

The fund is high cost with an annual expense fee of a whopping 1.4%, and a minimum investment of $2500.  Total fees over the previous 10-yr period would have been $2,600.  However, with its after-fee performance as outlined above, its high fee should not be a deterrent. Would you spend $2600 to make gross $9,300 more ($2600 fee + $6700 net outperformance)?     

One interesting aspect of studying outperforming funds is to investigate their new positions. As it is impossible to replicate their success on existing positions, the strategy is to review their recent moves with the expectations of these being within their parameters that created the outperformance.  In this light, the 1st quarter purchases in HFCSX portfolio are as follows:
•    Cell tower operator American Tower (AMT)
•    Asset management firm Brookfield Asset Management (BAM)
•    Specialty finance company Encore Capital Group (ECPG)
•    Specialty material manufacturer Hexcel Corp (HXL)
•    Industrial asset protection firm Mistras Group (MG)
•    Business equipment financing firm Marlin Business Systems (MRLN)
According to Morningstar analysis, Hennessy Focus Fund carries Below Average Risk and Above Average Return, with over 75% of assets in high growth choices across the capitalization spectrum from micro caps to mega cap.  

It should be noted a trend within the markets serviced by AMT.  The latest innovation in cell towers for populated areas calls for more towers but shorter height to gain better cell coverage. 
This will cause more sites to be utilized for the same current area coverage, increasing competition for AMT.  Based on this change, the best days for AMT may well have passed.   

Investors looking for greater exposure to these sectors should review HFCSX.  Investors looking for fresh ideas for the growth portion of their portfolios should spend some time researching management’s recent purchases


This article first appeared in the July issue of Guiding Mast Investments.  Thanks for reading, George Fisher

KKR & Co: Value, Income & Growth

There is a lot to like about KKR & Co Ltd (KKR) – value, income, and growth, wrapped in an aggressive management history.    KKR, also known as  KOHLBERG, KRAVIS and ROBERTS, is a private equity  and hedge fund management firm, known for buying and selling companies.


KKR trades at a PE ratio that is half its growth rate, is structured as an LLP offering an 8.0% tax-advantages yield, and should grow earnings at 12% to 14% a year.  KKR manage a portfolio of assets worth $99 billion.  These include private equity ownership of companies and debt to these same companies.

KKR thrives on its brand name and expertise to buy top tier companies, improve margins and revenues, and then sell or spin off the company when appropriate.   In the interim, KKR offers mezzanine and direct financing for companies under their wing, especially after the re-incorporation of their specialty financing are, KKR Financial, in 2014.  An advantage to selling a business to KKR is their access to cheaper and more diversified capital than the majority of their portfolio companies could on their own.  

The underlying business of private equity is expected to continue to grow in size.  Morningstar believes by 2020 alternative asset managers could command 40% of the global asset manager revenue pool versus 33% in 2013. KKR invests its own capital into buyout pools along with investors.  In this way, KKR generates both an equity position in the subsequently owned asset, but charges the pool a management fee.  For example, in a recent pool offering, KKR garnished $1 billion from third-party investors, and matched that with a $250 million contribution sourced from other selling transactions.  

KKR has been very successful in generating money for additional investments, raising over $16 billion in third-party capital in 2012 to 2013. 

In addition, its reputation has helped hire and retain executives in specific field that work diligently to turnaround targeted companies.   One aspect of being taken into the fold is the fees the portfolio companies pay to KKR for consulting services utilized in the design and implementation of a new business strategy. 

In essence, KKR earns management consulting fees, becomes the portfolio company’s lender, and realizes capital gains when the company is sold. 

For example, KKR purchased a safety harness company, Capital Safety in 2012 for $645 million.  Last month, 3M (MMM) agreed to buy Capital Safety for $2.5 billion.  KKR will receive a profit of $1.9 billion for its investment, including a dividend last year.  

Bloomberg’s comments:

 KKR is notching wins as it prepares to market a new private equity fund later this year targeting as much as $12 billion. The New York-based firm has beat analysts’ profit expectations in five of the past seven quarters, benefiting from sales of drugstore chain Alliance Boots GmbH, digital-photo company Fotolio, financial-data provider Ipreo Holdings LLC, South Korean beer maker Oriental Brewery Co., retailer Dollar General Corp. and Biomet Inc., a maker of artificial hips and knees.

In a rising interest rate environment supported by underlying economic expansion, KKR should experience greater spreads in its portfolio financing and fee based businesses.  

Over the longer term, there will be a consolidation of the industry as institutions become more selective in their asset allocations.  Those firms with larger portfolios and stronger brand names will the survivors.  

Long-term investors should consider buying KKR for its current 8.9% distribution yield and the potential for capital gains.

This first appeared in the July issue of Guiding Mast Investments.  Thanks for reading, George Fisher

Enviva Partners: Unique Biofuel MLP With Juicy Yield

Enviva Partners (EVA) is a new MLP with a juicy 8.2% yield and is the largest global producer of utility-grade wood pellets used in power generation.    

It is not our intention to cover new IPOs.  However, in the past two months there has been interesting niche companies coming to market with a MLP or REIT structure favoring higher distributions.  Last month it was InfraREIT, an electric transmission utility structured as a REIT, and this month it is Enviva Partners (EVA), a wood pellet manufacturer structured as a MLP.

EVA is a new offering by Riverside Fund, a private equity firm, and Hancock Natural Resources Group, a registered investment advisor and a wholly owned subsidiary of Manulife Financial Corporation.  This joint venture was the previous owners of the production facilities.  The JV built four plants and acquired an additional plant.  The JV is also building more plants in anticipation of dropping them down into EVA.

These five plants have current production of 1.7 million metric tons of utility-grade pellets, which is a lower grade of pellets than the “premium” grade used in residential pellet stoves.  There are plan to increase production to 2.0 million tons over the short term. 

EVA has long-term “take or pay” contracts for 100% of its production until 2017 and then 50% of production after 2018.  In other words, the factories are sold out for the next 2 ½ years – and all to the export market.

With over 170 pellet manufactures in the US, why is EVA of interest?   The Europeans are much further ahead of the US in converting their coal-fired power plants to biofuel, with pellets being the preferred biofuel.  Japan and South Korea are also growing utility-grade pellet markets.  Overall, the US supplies 60% of the global wood pellet market, and EVA is the largest. 

In 2014, power generation in Europe consumed 9.2 million metric tons of utility-grade pellets, with the UK representing 50%.  Annual pellet European consumption for power generation is expected to grow by 21% a year, representing a market of 25.8 million metric tons by 2020. 

In the US, natural gas is being used as a coal replacement due to low gas prices – just ask any natural gas E&P investor.  However, with limited domestic supplies of gas and international pricing for LNG gas running 3 to 4 times the price in the US, wood pellets are becoming an important fuel source in Europe, in tandem with a reduction of coal generating capacity.  Wood pellets have the immense advantage of being a base-load fuel source rather than the intermittent nature of solar and wind. 

In addition, EVA owns a pellet export terminal in Chesapeake VA to facilitate the export process.

Pellet plants usually source their raw materials within a 75-mile radius and the five plants are strategically located in the southeast: two in northern North Carolina, two in Mississippi and one in the panhandle of Florida.     

The JV, also acts as the General Partner, Enviva Holding GP and is building three more pellet plants, which should be sold to EVA over the next three years.  The additional production should increase current capacity by 75%. EVA also has the right of first refusal on two more export terminals in Wilmington NC and Pascagoula, MS.

The initial distribution is pegged at $0.41 a quarter, or $1.64 a year.  At a current price of $19.90, the yield is a juicy 8.2%. 

On a pro forma basis, 2014 reported cash available for distribution was $1.46.  Importantly, it does not include production acquired in Jan 2015 that substantially increased capacity.

Based on expanding capacity from the dropdowns and the additional export facilities, EVA is expected to increase EBITDA over the next three years.  This could equate to annual distributions close to the 50% top tier of the General Partner’s Incentive Distribution Rights IDR.  See the article in “Strategic Subject of the Month” section for an explanation of IDRs.  While the General Partner will see substantial per unit fee income, unit holders will be still be adequately rewarded. 

Investors could see their annual distribution increase to $2.47 from the initial target distribution of $1.61 year.

EVA began trading at the end of April, and the quiet period expired at the end of May.  While the underwriters of the IPO have an ingrained self-interest in EVA doing well, the recent consensus is a “buy” with a price target of $25.

According to, Goldman Sachs has a “Buy” recommendation and a $25 target price.  From their report,  

The analysts believe that the stock offers an attractive investment option, given its leverage to rapidly growing wood pellet demand, its low cost asset base, a favorable contract structure, a strong dropdown pipeline and distribution/unit growth, and compelling valuation relative to its closest comparison set.
The company is well positioned to leverage the continuing growth in wood pellet demand. This demand is being driven by major utilizes that are converting their traditional power or heat plants to burning wood pellets in an attempt to meet the EU 2020 renewable energy goals. This is especially true in key European countries, such as the UK, Netherlands, Denmark and Belgium.
The analysts also expect that EVA's sponsors will drop down six additional plants through 2019 given favorable wood pellet fundamentals, while also expecting the company to witness distribution growth at a robust 17 percent CAGR through 2018, driven by a robust dropdown pipeline and cost execution.

CitiGroup, Barclays, Raymond James, and RBC have a “Buy” on the stock.  These are also some of the book-runners of the IPO.

If their target market grows to 25 million tons and EVA’s capacity grows to 3.4 million tons by 2019, their market share of European pellets will decline from the current 18% to 14%, but still represents a substantial share.  

Investors willing to take on a bit higher risk should be amply rewarded over time.  While there is risk concerning fall-off of take or pay contracts past 2017, the growth and strength of the underlying utility-grade pellet market in Europe should alleviate much of those concerns.

For more information, the SEC IPO prospectus is linked below:

This article first appeared in the June issue of Guiding Mast Investments 

Thank you for reading, George Fisher

Berkshire Hathaway - Gettin' Lots of Love, and for Good Reason

Berkshire Hathaway is getting lots of love recently.  As a core long-term holding, if you do not own BRK.B, now could be the time for a starter position.

 We all know of Mr. Buffet and his stock picking acumen.  However, the real value in BRK.B lays in its base business as an insurance company and the investments its makes with its substantial cash flow, also known as the insurance float.

The insurance float is the described as the moneys collected by insurance companies that are not paid out in claims.  For example, when you pay a premium on your auto policy, they cover operating costs of keeping the lights on and of the claims being paid for other policyholders who have accidents. The difference between the two is the insurance “float”.   

 Berkshire Hathaway has amassed a sizable amount of insurance float.  At the end of 2013, BRK has $77 billion on the books, up $7 billion in just the previous 3 years.  In other words, BRK had generated $2.3 billion a year in new investable cash.   Since the early 1970s, BRK has grown its insurance float by 19% compounded a year. 

Most other insurance companies invest their float in fixed income instruments, such as bonds.  BRK, on the other hand, buys companies and operates them for the additional cash flow they can provide.  The media puts the spotlight on BRK’s publically traded stock holdings but the most compelling investment thesis is the privately held companies that are subsidiaries of BRK. 

As of Dec 2013, BRK held $115 billion of listed companies in its insurance portfolio.  This compares with holdings of $166 billion in other assets such as railroads, utilities, energy and financial firms.  BRK has more than 80 units that operate airplanes and power plants, manufacture mobile homes, bricks, and chemicals, and sell products from furniture to chocolate to running shoes. Links to the websites of 60 of these companies can be found below.

For example, BRK recently closed on the purchase of largest privately held auto dealer in in the country, located in Dallas.  From the press release, “Berkshire Hathaway Automotive is fifth among all U.S. auto dealership groups with over $9 billion in revenue and 81 independently operated dealerships with over 100 franchises in 10 states, including Arizona, California, Florida, Georgia, Illinois, Indiana, Missouri, Nebraska, New Mexico and Texas. Through its affiliated administrator MPP, Berkshire Hathaway Automotive is able to offer its auto retail customers a unique, industry-leading portfolio of proprietary vehicle service and ancillary contracts, which are insured by its two affiliated insurance underwriters, Old United Casualty Co. and Old United Life.”

BRK has accomplished quite a feat by building an economically sensitive portfolio of assets from its growing base of insurance float.   The downside is this strategy adds economic growth risk while other insurance companies have higher interest rate and bond default risk due to their fixed income portfolios.

Nonetheless, BRK has shown the ability to manage its assets for both higher investable cash flow and the purchase of companies at reasonable prices for reasonable growth. This difference will continue to aid in BRK to continue to grow earnings by 7% to 9% a year.     

Of question is wither BRK is getting too large to keep up with its rich history.  Even after spending $26 billion on acquisitions in 2013 and 2014 combined, their cash hoard still grew to $63 billion or $22 billion more than at the end of 2012.  Management has pegged $20 billion as a comfortable cash cushion for its business profile, leaving a potential investable fund of over $43 billion.  For comparison, this excess capital would be enough to buy half of Boeing, United Technologies or 3M – for cash.    

With rising earnings trends in place, BRK is getting more attention from brokerage houses.  Over the past 90 days, earnings estimates have been rising and now stand at $7.61 for 2015 and $8.22 for 2016. 

BRK is one of those stalwart American companies that belongs in every investor's portfolio.  Why?  Because it makes money for its shareholders hand over fist, has done so for the past 50 years, and will continue to do so going into the future.  BRK very infrequently goes on sale and now is a good time either to add to an existing position or to begin a starter position.

This article first appeared in the May issue of Guiding Mast Investment

Thanks for reading,  George Fisher

InfraREIT - Financial Engineering Continues in the Utility Sector

InfraREIT (HIFR) is the first publicly traded high-voltage electric transmission company wrapped in a REIT structure.  Spun off from the Hunt family of companies in January, HIFR is structured more like a MLP than a traditional REIT. 

InfraREIT is a real estate investment trust REIT. The Company owns state-regulated electric transmission and distribution (T&D) assets, such as power lines, substations, transmission towers, distribution poles, transformers and related property and assets, in Texas. The Company leases its T&D assets to Sharyland Utilities, a Texas-based regulated electric utility privately owned by the Hunt family. The Company owns T&D assets throughout Texas, including the Texas Panhandle near Amarillo, natural gas rich Permian Basin, Central Texas, Northeast Texas, and South Texas.  Its T&D assets consist of approximately 50,000-electricity customer delivery points, approximately 620 miles of transmission lines, approximately 10,500 miles of distribution lines, 35 substations and a 300-megawatt (MW) high-voltage direct current interconnection (DC Tie) between Texas and Mexico.  75% of total assets are high-voltage transmission lines.  

Taking a page out of the MLP playbook, HIFR owns the assets, but there is no management team to run the operations.  Similar to a General Partner, IHFR has hired a Hunt-affiliated management company, appropriately called Hunt Management,  for operations and will pay a two tiered management fee.  The first is similar to the IDRs, or Incentive Distribution Rights, usually associated with General Partners and includes a fee of 20% of the shareholder distributions over $1.07 a year.  The second is a fee equals to 1.5% of shareholder equity with a minimum of $13 million and a maximum of $30 million (or $0.22 to $0.50 a share, based on 60 million shares outstanding). 

HIFR will purchase all projects developed by Hunt Development, a construction arm of the Hunt family, which falls within its service territory.  In addition, HIFR has the right of first option to buy several other transmission projects in the planning stages through Texas. 

HIFR currently has a rate base of $1.1 billion and plans on expansion of around $775 million over the next few years.  The current configurations of its assets lie within the boundaries of Texas and falls under the jurisdiction of Texas state utility regulators. Regulators have approved a 9.7% return on equity, Based on 55% debt and 45% equity structure.   As HIFR gains in size, it should be expected management will look to expand into interstate transmission assets as these are regulated by the federal government and offer a higher ROE of upwards of 11.5%.   

Management expects to grow its business by 10% to 15% a year, in line with other transmission firms like ITC Holdings (ITC).  The initial annual dividend is set at $0.90 and dividend growth should match the expansion of the firm’s underlying profits, as a REIT needs to distribute 90% of its taxable income.   

The book-runners of the IPO have issued their analysis of HIFR.  While it may be a bit self-serving to be the underwriter of the IPO and have a “Buy” on the stock, Citigroup initiated coverage at “Buy” with a $33 price target.   RBC Capital and Wells Fargo initiated coverage at Outperform.  At its current price of $27, HIFR is anticipated to generate a 13% to 15% annual total return, including a 3.3% current yield. 

Based on a 45% equity contribution and an aggressive capital expenditure growth program, current shareholders should expect share dilution over the next few years.  As there is very little in retained earnings within the REIT structure, future rate base asset acquisitions will be financed by the PUCT–approved formula of 55% debt and 45% equity.  The Hunts could increase their share count as partial payment for future dropdowns.     

As the overall utility sector continues down its path of financial engineering and consolidation, transmission REITs may be the next wave for regulated electric utilities.  Most all electric utility investors should be cognizant of the happenings over at InfraREIT.      

While IPOs are not usually part of our stock universe, HIFR is a bit different.  Founded in 1990s and converted to a REIT in 2010, the Hunt family still owns 27% of HIFR.  The company has a sizeable asset base, its profits are regulated,  and the ability to participate in drop-down assets from the Hunts.      

Latest investor presentation can be found here:

This article first appeared in the April 2015 issue of Guiding Mast Investments newsletter.  Thanks for reading,  George Fisher