This is a brief update to notify you of a new trade in our Blue Harbinger Disciplined Growth portfolio. We’re swapping out shares of a lower growth opportunity for a higher growth opportunity. We believe the new position is a better fit and has significant growth potential.
As a continuation to our free article "Six Special Situation Investments Worth Considering" this members-only article includes the Top 3. Two have to deal with the potential "aquiree" in M&A deals and the other is simply a high-yield distressed debt opportunity that is far less "distressed" than it used to be. Without further ado, here are the top 3...
This week’s Blue Harbinger Weekly is a continuation of our public report titled “Top 6 Big-Yield Fertilizers Worth Considering” except in this members-only version we disclose and review the Top 2. In addition, we provide a brief update on our utility stock holding, news regarding its upcoming merger, and our expected double digit return over the next 9 months (or sooner).
In this week’s Blue Harbinger Weekly, we provide a brief performance review and outlook for each of the 28 holdings across our Blue Harbinger strategies. We also provide access to a members-only report on our “Top 3 Covered Call Stocks.” Lastly, you’ll notice we’ve updated performance though the end of July, and all three Blue Harbinger strategies continue to significantly outperform.
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, and no, it's not the BNSF shown in the picture). 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.
This week’s Blue Harbinger Weekly reviews three of our current holdings that present terrific buying opportunities right now. First, a diversified refining company that recently sold off thus creating an attractive buying opportunity. Second, a revenue-growing juggernaut that likely can’t be stopped for many years to come. And third, a smaller utility company that may soon be acquired. Log in to view all the details, and if you’re not currently a member, consider a subscription.
Long-term investors should not forget the risk-reward tradeoff. For example, if you were diversified into investment-grade bonds over the last year then your account balance probably hasn’t suffered as much as if you’d invested entirely in stocks. However, over the long-term, we expect stocks to significantly outperform less-risky bonds. This week’s Weekly highlights some extremely attractive stock-specific opportunities that have been created by 2016’s recent market volatility.
There is a long history of mean reversion in the stock market. And considering the soon-to-be dueling monetary policies of the hawkish US Fed and the dovish ECB, combined with 2015 year-to-date performance, small-cap value stocks with high dividend yields look very attractive heading into 2016.
Immediately following this week’s more hawkish Fed announcement, high-dividend utilities stocks declined and interest rate sensitive banking stocks increased.
Our “Blue Harbinger 15” utilities stock, Westar Energy (WR), declined sharply this week immediately after the Fed came out with its more hawkish announcement on interest rates, but then gained back a significant portion of the losses by the end of the week. We continue to believe in Westar going forward because the company sources its electricity from diversified sources including renewables (not just dirty coal like other utilities). Also, it’s in a state that is more balanced in its views on the tradeoffs between economics and expensive regulations. Additionally, it adds diversification to our overall Blue Harbinger 15 portfolio. Lastly, its 3.6% dividend yield is attractive, and suggests the stock has some upside because 3.6% is historically high for the company. You can read our complete Westar thesis and research report here.
Current Price: $39.92
Price Target: $46.48
We own Westar Energy because it offers shareholders a growing dividend and opportunities for capital appreciation. We also appreciate the company’s diverse energy generation mix, including its growing renewables capacity. Lastly, as a utilities company, Westar adds important diversification to our Blue Harbinger 15 portfolio.
Westar Energy is the largest electric energy provider in Kansas. The company provides generation, transmission and distribution to approximately 687,000 customers. Westar maintains a flexible and diverse energy supply portfolio. In doing so, they continue to make environmental upgrades to their coal-fired power plants, develop renewable generation, build and upgrade their electric infrastructure and develop systems and programs with regard to how their customers use energy. The following chart shows Westar’s mix of energy generation capacity:
The diverse sources of energy, particularly renewables, are important and valuable because Westar faces significant environmental regulation challenges. Some companies throughout the US generate almost all of their energy from coal, and this exposes them to heightened regulatory risks as coal is the dirtiest form of energy. Westar acknowledges this risk in their annual report as follows:
“Our costs of compliance with environmental laws and regulations, including those relating to greenhouse gas emissions, are significant, and the future costs of compliance with environmental laws and regulations could adversely impact our operations and consolidated financial results.”
Because Westar has significant renewables capacity, it keeps the company out of the direct cross-hairs of federal regulators who often have little regard for the economic impacts of expensive regulations on the well-being of the surrounding communities. Additionally, Kansas is a strongly republican state which means it tends to be less extreme with regards to the imposition of expensive environmental regulations.
Important for future growth of the company, Westar operates in economically healthy regions of Kansas including the cities of Topeka, Lawrence, Manhattan, Salina, Hutchinson and Wichita. Unemployment is low in these areas, and Westar is a large employer. The strong economy helps ensure Westar also remains strong. The following chart shows the breakdown of Westar’s customer base:
In March 2015, Westar requested approval from the Kansas Corporation Commission to increase the rates it charges by 7.9% or $152 million to recover Environmental Protection Agency (EPS) costs as well as increased service reliability. And in August they reached an agreement for a $78 million rate increase. The approved rate increase demonstrates the region’s support for Westar Energy.
We value Westar at $46.48 per share by discounting its $2.44 expected 2015 earnings per share using a required rate of return of 6% (weighted average cost of capital) and a growth rate of only 0.75% per year which is the long-term rate Westar expects (annual report p.28). If the growth rate ends up being higher than 0.75% then the stock is worth even more. Our $46.48 price target gives the stock more than 16% upside, with potential for further increases depending on the company’s future growth and profitability.
In addition to potential gains via capital appreciation, Westar offers shareholders an increasing dividend. Dividends are common for stable utility companies like Westar, and in this case Westar offers and attractive 3.62% dividend yield. And the amount of Westar’s dividend payments has increased over time (see graph below), and the company expects this trend to continue.
Westar is a diversified electric utility company that rewards shareholders with a growing dividend and opportunity for capital appreciation. Additionally, this electric utility company investment adds important sector diversification to our Blue Harbinger 15 portfolio. It is important to invest across a variety of market sectors (e.g. utilities, consumer discretionary, technology, etc.) to reduce exposure to sector specific risks and to minimize overall volatility in the value of your investment portfolio.