#$duk

YOUR WEEKLY EDITION OF THE Top 10 Long/Short Estimize Signal Scores Monday, May 2, 2017

The Estimize Signal has identified the following 20 stocks to have the highest likelihood of positive and negative drift around their earnings today. The Signal is calculated by consolidating several predictive factors within Estimize’s earnings estimates collected from 45,000 buy side, independent, and amateur analysts.

At Estimize, we've always done extensive research on our crowdsourced earnings estimates. Every week, we'll be sharing some of our findings to help you effectively dissect earnings news. Please get in touch with me at [email protected] to discuss.

Top 10 Positive Signal Scores

Highlest likelihood of a positive pre/post earnings drift

1 EHTH eHealth, Inc. Thu, Apr 27 99.73 post 2 PSX Phillips 66 Fri, Apr 28 99.62 post 3 VVI Viad Corp Thu, Apr 27 95.29 post 4 DUK Duke Energy Corporation Tue, May 9 92.26 pre 5 CQP Cheniere Energy Partners LP. Thu, May 4 91.96 pre 6 AGCO AGCO Corporation Fri, Apr 28 90.41 post 7 POT Potash Corp. of Saskatchewan, Inc. Thu, Apr 27 89.01 post 8 BVN Compania de Minas Buenaventura SA Thu, Apr 27 86.78 post 9 ICUI ICU Medical, Inc. Tue, May 9 86.58 pre 10 PEN Penumbra, Inc. Tue, May 9 86.06 pre

Bottom 10 Negative Signal Scores

Highlest likelihood of a negative pre/post earnings drift

1 CYTK Cytokinetics, Incorporated Thu, Apr 27 -99.73 post 2 MDCA MDC Partners Inc. Thu, Apr 27 -99.73 post 3 VSLR Vivint Solar, Inc. Tue, May 9 -99.21 pre 4 NTNX Nutanix Inc Thu, May 4 -98.11 pre 5 CWST Casella Waste Systems, Inc. Thu, May 4 -96.53 pre 6 GTT GTT Communications, Inc. Thu, May 4 -96.04 pre 7 RVLT Revolution Lighting Technologies, Inc. Tue, May 2 -95.93 pre 8 MDC MDC Holdings Inc. Tue, May 9 -95.53 pre 9 MIC Macquarie Infrastructure Company LLC Wed, May 3 -94.67 pre 10 SWX Southwest Gas Corporation Mon, May 8 -94.42 pre

As one example of the Signal's predictive power, we tested it in isolation as a stock selection signal over the last 5 years and found it produced 23.1% returns and 1.75 sharpe. Our quantitative research team developed it as a new way to help our clients generate alpha.

DJ Kinder Morgan $KMI Slashes Dividend

We admittedly are shocked that Kinder Morgan Inc. slashed its quarterly dividend by 75% on Tuesday, and according to the WSJ, “an unprecedented step for the massive energy company that just one year ago was promising unfettered growth. ”

The company said it would cut the dividend to a level of 12.5 cents a share per quarter–or 50 cents annually–down from its prior level of 51 cents each quarter.…

This piece is part of InvestorPlace’s 2015 Stock Market March Madness contest. Follow the link and vote for your favorite stocks.

I’m torn as we enter Round 2 of InvestorPlace’s Stock Market March Madness, as I have to choose between two of my favorite energy stocks, ExxonMobil Corporation (XOM) and Kinder Morgan Inc (KMI). 

Exxon beat rival oil major Chevron Corporation (CVX) in Round 1. (You can read my Round 1 pregame predictions here.) While I consider Exxon to be the better buy of the two majors because of its better potential for dividend growth and its massive holdings of Russian drilling rights bought for a song, Chevron was no pushover. The fan voting made this one of the tighter races. 

Kinder Morgan’s win over Duke Energy (DUK) was a blowout, however. Kinder Morgan took 81% of the vote, and justifiably so. Kinder Morgan is a blue-chip pipeline operator in position to buy up assets from distressed shale producers on the cheap, whereas Duke is a slow growth utility that will face very serious headwinds once rates bond yields eventually start to rise. 

I expect Round 2 to be a close game, but I’m going with Kinder Morgan. Let’s take a look at each team.

Kinder Morgan

Kinder Morgan is not an “oil major,” per se, as it has little international reach and little in the way of upstream energy exploration, but it is the largest energy infrastructure company in North America with about 80,000 miles of pipelines in operation. And while Kinder Morgan has not been completely immune from the effects of falling energy prices, the damage has been pretty minimal. About 85% of KMI’s cash flows are fee-based, meaning they have virtually no exposure to falling energy prices, and most of the remaining 15% of cash flows are hedged. 

After its reorganization last year that saw it merge with its popular master limited partnerships, Kinder Morgan now sports a gargantuan $87 billion market cap. This pales in comparison to ExxonMobil’s $353 billion market cap, but it’s enough to make Kinder Morgan the fourth-largest holding in the Energy Select Sector SPDR ETF (XLE). ExxonMobil is the largest holding, of course. 

My choice of Kinder Morgan comes down to dividends. Kinder Morgan sports a higher current yield than Exxon (4.5% vs. 3.3%), and while all dividend forecasts have to be taken with a grain of salt following the collapse in the price of crude oil, Kinder Morgan should also be in better position to raise its dividend in the years ahead, come what may with energy prices. 

Since initiating its dividend in 2011, Kinder Morgan has more than tripled its quarterly dividend. In the last year, its dividend is up a cool 9%, and management wrote last year that it expected to see dividend growth of at least 10% per year through 2020. That may be harder to achieve if domestic energy production falls off, but it is still probably a little better than what ExxonMobil will be able to produce going forward.

ExxonMobil

I should be clear on one point, however: ExxonMobil is no slouch when it comes to raising its dividend. And as I wrote back in December, ExxonMobil continued to raise its dividend throughout the 1980s and 1990s, one of the worst energy bear markets in history. From 1980 to 2000, Exxon nearly tripled its quarterly dividend from $0.075 per share to $0.22.That works out to annualized dividend hikes of about 6% per year. 

That’s not too shabby at all, and if Exxon could achieve that over the next several years I would be thrilled. But I don’t think that 10% annual growth is likely unless we see energy prices rebound in a hurry. 

I would be remiss if I didn’t mention that Exxon is one of only three public companies in America to still have a AAA bond rating. The other two are Microsoft Corporation (MSFT) and Johnson & Johnson (JNJ). Exxon may be operating in a tough environment right now, but this is still one of the very bluest of blue chips. 

Kinder Morgan and ExxonMobil are both stocks that I’d be comfortable recommending you buy and hold, reinvesting your dividends. But in Round 2, I’m expecting Kinder Morgan to pull through with a win. 

Disclosure: Long KMI, XOM, MSFT, JNJ

This piece is part of InvestorPlace's 2015 Stock Market March Madness contest. Follow the link and vote for your favorite stocks.

In a showdown between Kinder Morgan Inc (KMI) and Duke Energy Corporation (DUK), Kinder Morgan will dribble circles around Duke. If we’re playing on college basketball metaphors, Kinder Morgan is Duke University while Duke Energy would be some obscure community college in Wyoming.

I’m probably not being fair to Duke Energy here. It is by no means a bad company within its industry. It just so happens that Kinder Morgan is a long-time holding of mine and one of my favorite stocks at current prices. 

Kinder Morgan is the largest energy infrastructure company in North America with about 80,000 miles of pipelines in operation. And while Kinder Morgan has not been completely immune from the effects of falling energy prices, the damage has been pretty minimal. About 85% of its cash flows are fee based, meaning they have virtually no exposure to falling energy prices, and most of the remaining 15% of cash flows are hedged. 

I expect that the slowdown in domestic production will slow the rate of growth in the amount of energy that Kinder Morgan transports. But I also expect the effects to be temporary, and in fact, Kinder Morgan is using the slowdown to its advantage. As I wrote earlier in March, Kinder Morgan has been buying quality pipeline assets from motivated sellers. 

If you’re considering a purchase of Kinder Morgan or Duke Energy, the dividend of each is a major selling point. So with that, let’s dig into Kinder Morgan’s dividend. Since initiating its dividend in 2011, Kinder Morgan has more than tripled its quarterly dividend. And in the last year, its dividend is up a cool 9%. 

Expect a lot more of the same going forward. When Kinder Morgan announced its business reorganization last year, management wrote that it expected to see dividend growth of at least 10% per year through 2020. 

Buying Kinder Morgan today, you get to enjoy a 4.4% current dividend. But let’s now assume that hold the stock through 2020 and that management’s estimates are correct. Assuming five years of 10% dividend growth compounded annually, you’d be looking at 61% cumulative dividend growth. That would give you a yield on cost of 7.0% five years from now. And that assumes the minimum 10% annual growth; if Kinder Morgan continues to pick up assets from distressed sellers, the real growth rate might be significantly higher. 

One final thing to consider on Kinder Morgan stock: When we buy KMI, we’re investing alongside the people running the company. They have serious skin in the game. Since last February, company insiders have bought a net 812,599 shares worth over $33 million at today’s prices. And Richard Kinder himself earns no compensation other than the dividends he collects on his shares. So Mr. Kinder has every incentive to continue raising Kinder Morgan’s dividend for the benefit of us all. 

Now let’s take a look at Duke Energy. There is nothing necessarily wrong with Duke Energy. Its stock has outperform most of its peers in the utilities sector over the past five years, and its total return including dividends last year was nearly 28%. 

But as a boring, regulated utility company, Duke cannot possible expect to keep pace with Kinder Morgan. Today, Duke offers a dividend yield that is competitive, at 4.2%. But Duke’s dividend growth rate over the past five years has been a very modest 2.2% per year, and I don’t expect it to accelerate much over the next few years. 

Furthermore, Duke and many of its peers in the utilities sector have been used as bond substitutes by yield-starved investors for years. I expect bond yields to stay low for a while, but I also fully realize that the utilities sector will be the first to get slammed once bond yields really do meaningfully rise. 

So in Duke, your upside is a 4.2% dividend with 2%-3% growth. That’s hard to get excited about. But in Kinder Morgan, you get one of the fastest dividend-growers in America backed by a class-act owner-operator in Richard Kinder. 

The choice is clear here: Kinder Morgan is a slam dunk. 

Disclosure: Long KMI

For Part 3, see  S&P 500 Sector ETFs: A Look Under the Hood, Part 3

Materials Select Sector SPDR

Next on the list is the Materials Select Sector SPDR ETF (XLB). XLB’s performance over its life has been quite good, roughly doubling the return of the S&P 500 since inception in 1998. 

This sector ETF is not at all what it sounds like. When you hear “materials,” you expect a portfolio full of mining companies. But the materials sector ETF is more diverse than that. Chemical companies EI Du Pont De Nemours (DD) — which most know better as DuPont — and Dow Chemical (DOW) are the first and third largest holdings, at 11.5% and 8.9% of the portfolio, respectively. Agribusiness giant Monsanto (MON) fills in the gap at No. 2, with 9.5% of the portfolio. 

Paper products company International Paper (IP) and paint seller Sherwin-Williams (SHW) also make the top ten holdings. The largest mining company in the portfolio — Freeport-McMoRan (FCX) — makes up only 3% of the portfolio. 

In XLB, you get a solid portfolio of global industrial companies. You distinctly do not get a collection of volatile mines at risk of copper price swings.

Utilities Select Sector SPDR

And finally, we get to the Utilities Select Sector SPDR ETF (XLU). The utilities sector was one of the real standouts of the last year, up about 16%. And for calendar year 2014, the utilities sector was the strongest performer of all sectors, due in no small part to the massive decline in bond yields. 

As the most “bond-like” of all sectors, utilities tend to move with bond yields. This was a disaster in 2013, the year of the “taper tantrum.” And it’s shaping up to be a disaster this year, as the utilities sector is the only S&P 500 sector currently in the red year-to-date. XLU is down more than 6% since the start of the year. 

If you’re looking for a portfolio of boring, regulated basic utility companies like Duke Energy (DUK) or Dominion Resources (D), then XLU is the ETF for you. 

But if you’re specifically hunting for high yield, you might want to keep looking. After the run XLU had, its dividend yield has fallen all the way to just 3.3%.

Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog.

After yesterday's 1.4% advance, the utilities sector once again took the lead as the best performing major sector in the U.S. market in 2014.  I discussed the technical situation in last month's MorningWord, when the Dow Jones Utility Index broke out to a new all-time high:

Dow Jones Utility Index monthly chart, Courtesy of Bloomberg

As part of the back and forth action in the utilities sector in the past few months, both implied and realized volatility have gradually inched higher as options traders re-priced the market after the breakout:

30 day implied volatility in blue, 10 day realized volatility in white, Courtesy of Bloomberg

While most assets have implied volatility near multiyear lows, the utility sector is an outlier in that options prices are near the middle of the 2 year range.

Given the outperformance in the sector and the technical situation, I wanted to take a brief look at the largest stocks in the sector.  The 5 largest components are DUK, NEE, D, SO, and EXC.

Those 5 components should be considered in two separate groups. NEE, D, and SO are the three growth stocks, where EPS is 40-100% higher over the past 10 years, and the stocks' valuation on a Price/Book basis is between 1.75 and 3.50.  On the other end are DUK and EXC, which are the cigar butts of the group.  EXC annual EPS has actually contracted over the past 10 years (and has been very volatile in the process), while DUK EPS is up about 20% in the past decade.  EXC and DUK both have a P/B ratio in the 1.2 to 1.3 range.

Some of the relative strength or weakness among the utilities can be attributed to geographic disparity.  NEE is based in Florida, a major growth market, and has benefitted from a higher growth in demand than utilities in other areas.  SO is headquartered in Georgia, and Dominion is in Virginia and North Carolina.  All 4 of those states have had above average population growth over the past 5 years (see the list of population growth by state).  Meanwhile, Excelon operates primarily in Illinois and Pennsylvania, where the population has hardly grown.  Duke is based in North Carolina as well, though its operations are more diversified.

In terms of management prowess, NEE looks like the standout of the group, as EPS has grown in each year since 2005.  Moreover, the company is making a strong push in wind and solar power plants in the U.S.  Though the renewables segments are still a small part of the overall business, the long-term prospects look encouraging.

However, valuation for the growth stocks, NEE, D, and SO, is significantly higher than EXC and DUK, and also quite a bit higher than the historical valuation of NEE, D, and SO.  That is of course an indication of the conducive market backdrop over the past few years, and the search for yield that has led so many investors to the utilities sector.

At this juncture, I'd still rather buy the consistent performers, like NEE and SO, and possibly hedge some of the risk of a breakdown in the utilities sector as a whole with farther dated XLU puts.

Investors’ love affair with high-dividend utilities stocks waned last year as U.S. Treasury yields rose, and the sector could underperform again in 2014 if the economy continues to improve.

Utilities have performed well overall during the past decade as interest rates declined, and some investors have viewed the companies as an alternative to bonds because of their stability and dividends.

“Now an inflection point looms,” says Morningstar analyst Robert Goldsborough. Starting in the middle of 2013, “utilities companies' stock prices went into a tailspin and utilities companies' valuations compressed as investors began to become spooked about sharply higher Treasury rates,” the analyst notes. “Utilities have a long history of underperforming the broader market when interest rates rise.”

The chart below shows the relative performance of a utilities sector ETF versus the S&P 500. Utilities lagged the overall market badly during the second half of 2013 -- when the chart is falling, it means utilities are trailing the S&P 500.

Chart source: StockCharts

Utilities stocks handily outperformed the S&P 500 in 2011, but have trailed the market the past two calendar years by a wide margin.

Some investors expect the trend to continue to 2014, as the cost of hedging against losses in utilities stocks has climbed to the highest level in five years.

“Sentiment toward utilities is negative,” Tim Hoyle, director of research at Haverford Investments, tells Bloomberg News. “We’re in a rising rate environment and utilities, which are often seen as an alternative to fixed income, become relatively unattractive.”

The yield on the 10-year Treasury note recently climbed above 3% after the Federal Reserve said it would begin tapering its monthly bond purchases by $10 billion to $75 billion.

Gregg Giboney, who manages the Dividend and Growth portfolio on Covestor, said a number of factors are weighing on utilities.

First, the sector became overvalued after the financial crisis as investors gravitated to utilities for stability and income.

“Now, the economic recovery is looking more sustainable and investors are moving out onto the risk spectrum into more cyclical stocks,” the portfolio manager said. For example, of the nine major S&P 500 sector ETFs, Consumer Discretionary Select Sector SPDR (XLY) was the best performer in 2013 with a total return of more than 40%. Utilities were the worst sector by far.

Giboney added that utilities are also facing a tough regulatory landscape with environmental restrictions and targeted rates of return set by the government. He does own Duke Energy (DUK) and Dominion Resources (D) in his Dividend and Growth portfolio, but has less than 4% of the portfolio in utilities.

“I run a dividend strategy but I don’t have a lot in utilities because I’m sensitive to the sector’s valuations, and I see better opportunities in other areas of the market,” Giboney said. In particular, he has decent position in the financials sector, including banks Wells Fargo (WFC) and PNC Financial Services Group (PNC).

“The banks are well-capitalized and they’re figuring out the new regulatory environment after the financial crisis,” he said. “Credit costs are not severe, the economy is picking up and bank stocks can have a decent 2014 if the credit curve steepens.”

Scott Rothbort, who manages the High Dividend Low Volatility portfolio on Covestor, says he has lightened up his utilities sector exposure recently.

“Utilities tend to do better when you don’t have big moves to the upside in the stock market. These are more widow-and-orphan stocks. Now, investors are putting money into the market and chasing stocks with more momentum and growth, while utilities are seen as more boring and staid.”

If Treasury yields keep migrating upwards, he expects more selling of utilities as income investors move into bonds.

“However, if we do see a flight to ‘safety stocks’ in 2014, that could create a bid for utilities,” Rothbort said.

Photo Credit: jeffkraem