This week’s Blue Harbinger Weekly covers three exciting topics. First we discuss a railroad stock that we really like a lot right now (and yes, we own shares). Next, we review the new fixed income purchase in our “Smart Beta” strategy, and why we believe it’s a very intelligent way to play bonds. And finally, we discuss our plan of action for our utility stock holding which is already up over 30% this year.
Union Pacific is Up Big—And we still love the stock!
Even though the shares are already up more than 31% since their low in January, we still love our holding in Union Pacific, and we plan to keep owning it because of its attractive valuation and wide economic moat. You can read more about the wild ride this stock has recently taken, and why we still love it, in this week’s new stock report: Union Pacific: Back on Track with Room to Run.
We bought a Bond ETF: Blue Harbinger Smart Beta
The Vanguard Total Bond Market ETF (ticker symbol: BND) is a great way to add low risk diversification to a long-term investment portfolio while simultaneously earning relatively attractive low-risk interest payments (currently 2.06%). This ETF holds over 8,000 bonds (so you get plenty of diversification) and they’re all high quality (investment grade). The ETF is managed by Vanguard (a very trust name in the industry), so it charges an extremely low management fee, only 0.06%. For perspective a typical bond fund charges 0.82% (according to Vanguard) and this difference really adds up over time. This ETF is appropriate for medium- to long-term investors, and we really like it because it is a fantastic complement to the stock ETFs within our Blue Harbinger Smart Beta strategy.
Traditionally, as a base case, many long-term investment portfolio start with a mix of 60% stocks (equities) and 40% bonds (fixed income). And then they increase the allocation to stocks if they can handle more volatility in exchange for higher long-term expected returns. Or they increase the allocation to bonds if they want less risk (albeit with lower long-term expected returns). We have allocated 20% of our Blue Harbinger Smart Beta strategy to bonds (via this Vanguard Bond ETF), which may be considered slightly higher risk compared to a more traditions 60% stocks / 40% bonds portfolio. However, with the long-term investment horizon of the Smart Beta strategy, we’re comfortable with the risk and higher long-term expected returns.
This is an ETF (BND) that can be held for a very long time (as long as nothing goes wrong with Vanguard, the company that manages it). We trust Vanguard, we love the low fees, and we believe this is a great way to gain broadly diversified expose to the high-quality bond market.
Our Shares of Westar Are Up +32% this Year.
We own Westar Energy (a utilities company) in our Blue Harbinger Income Equity AND Disciplined Growth strategies, and the shares are up more than 32% so far this year as news has emerged that Great Plains Energy plans to acquire Westar. In our view, Westar is a company that has been undervalued by the market based on a variety quantitative valuation metrics since we first purchased shares back in 2007 (we’ve liked it qualitatively too). However, we’re less enamored with the prospects of the combined entity, and may begin to look for a replacement holding at some point before the acquisition is set to consummate in the spring of 2017. In the meantime we’re happy to keep collecting the attractive dividend payments, and the share price should continue to rise towards the $60 acquisition price that Plains has set. You can read more about the details of the acquisition deal below…
Under the terms of the agreement, which was unanimously approved by the boards of directors for both companies, Westar shareholders will receive $60.00 per share of total consideration for each share of Westar common stock, consisting of $51.00 in cash and $9.00 in Great Plains Energy common stock, subject to a 7.5 percent collar based upon the Great Plains Energy common stock price at the time of the closing of the transaction, with the exchange ratio for the stock consideration ranging between 0.2709 to 0.3148 shares of Great Plains Energy common stock for each Westar share of common stock, representing a consideration mix of 85 percent cash and 15 percent stock.
The companies anticipate making the required regulatory filings with the Kansas Corporation Commission and other regulatory entities during June and July of 2016. In addition, Great Plains Energy and Westar will seek shareholder approvals later this year. The transaction is subject to approvals from the Federal Energy Regulatory Commission and the Nuclear Regulatory Commission. The transaction also is subject to the notification, clearance and reporting requirements under the Hart-Scott-Rodino Act by the Federal Trade Commission and the U.S. Department of Justice. The companies anticipate closing in the spring of 2017. In the coming months, the companies will work together to develop a robust integration plan.