Vanguard Mid Cap ETF: Cheap Valuations And High Quality (NYSEARCA:VO)


In this world nothing can be said to be certain, except death and taxes. – Benjamin Franklin

The Vanguard Mid Cap ETF (VO), a fund that is focused on mid-cap US stocks, has not been loved in recent years. It has had an impressive Covid-recovery, finally turning positive for the year, but remains below all-time highs made in February. Of course, this is not new for mid-cap investors. In the last three years, despite overwhelmingly positive equity markets and a risk-on sentiment, mid-caps have outperformed large caps, as measured by the Vanguard S&P 500 ETF (VOO). And by a significant amount, with a gain of 47.29% for the latter in the last 3 years to a gain of only 29.38% for the former.

Looking at the holdings of the ETF, the top 10 holdings account for only 8.1% of the portfolio, as much of the company-specific risk has been diversified away. Sector-wise, the holdings are balanced, with the top 3 sectors being Technology (21%) Financials (20.6%), and Industrials (15.3%). That gives a nice balance to the ETF in growth industries and value industries, which lets you hedge out the bet on which strategy will win out over the long term after more than a decade of growth stocks flourishing. Eventually, value investing can return, and you will have exposure to those types of companies with this holding.

Source: Vanguard

Thoughtful Selections

While the Covid crisis has many challenges for the mid-cap space, the portfolio has some excellent picks. For example, Lululemon Athletica Inc (LULU) is in a unique position, as their demand has likely increased with more consumers looking for comfort while working from home, a trend that the athleisurewear company has been excellent at capitalizing on. DexCom Inc. (DXCM) recently smashed earnings expectations in late July, with revenues gaining 34%, and earnings up a whopping 541%. SBA Communications (SBAC) managed to keep their dividend and beat FFO by $0.45, also beating on revenues, in their recent earnings report as more internet was used during the stay at home period. These, among other mid-cap plays, are extremely interesting in the ability to pivot and capitalize in a poor economy and should rebound stronger if the economy can continue its up leg.

Potential Risks

  1. If the economic recession is worse than thought, mid-caps may not have enough resources to weather the storm. Bankruptcies have been happening at an increased rate, especially when you go down the capitalization ladder, and could pose trouble throughout the rest of 2020 and into 2021, especially if government stimulus fails to gain traction in Congress. Many of these companies depend on a strong consumer.
  2. The dividend yield of VO could be under pressure here, especially if there is some movement on the political side to halt buybacks and shareholder payouts. While this remains a far-off risk, it is not implausible, and should be discounted as a risk when investing in these companies. With balance sheets that are inferior to larger-cap companies, there could be more pressure to keep free cash flow for future economic pullbacks and/or business pressure, lowering the dividend yield.
  3. This holding has 357 holdings currently, with a median market cap of $18.9 billion. While you are not going to be worried about diversification, you may suffer the effect of over-diversification with that many holdings. There have been studies done that say the proper amount of holdings for accurate diversification should be around 20-50 holdings only – at 357, the number is much higher.
  4. General market risk remains high after a Federal Reserve (Fed) fueled rally in 2020 off the March lows. If the Fed fails to stoke inflation, or they do not provide enough stimulus, stock markets are at risk of another major pullback. We saw some of this in the price action in early September, when tech stocks spurred a significant decline.

The ETF VO, and its underlying holdings, have shown a great ability to weather a downturn in the recent months. Although valuations remain elevated, at 25.3x P/E, the earnings growth rate of 13.7% should make up for that level over time. This is a great fund to get domestic exposure, as its foreign direct exposure remains 0%, and with a relatively low turnover of 15.2%, you should be comfortable holding this ETF long term.

While highly diversified, there are enough excellent ideas within the portfolio that can push the ETF to new highs, eventually. Whether the overall economy and markets remain in their uptrend is a huge question, but if you are looking for a 10- to 20-year investment, VO fits the bill. The nimbleness of mid-caps should allow them to adjust to the new normal economy, and if there is progress on a vaccine in late 2020 or early 2021, many will flourish.

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The Highest Quality Mid-Cap Dividend Growth Stocks


Mid-cap stocks are stocks of companies with a market capitalization between $2 billion and $10 billion. Historically, large-cap stocks tend to be slow-growing and relatively stable, while small-cap stocks often are fast-growing but volatile. The best mid-cap stocks fall somewhere in between: they are less volatile and have strong growth potential.

This article presents the 30 highest quality mid-cap dividend growth stocks tracked by Dividend Radar, a weekly automatically generated spreadsheet listing stocks with dividend increase streaks of five years or more. I use DVK Quality Snapshots to assess quality, and rank stocks by decreasing quality scores and using tie-breaking metrics.

I present details, quality indicators, key metrics, and fair value estimates of the top 19 stocks, those with quality scores of 19-22 (rated Fine). The remaining 11 stocks each have a quality score of 18, rated Decent. I identify them in rank order by ticker, without additional details.

I happen to own two of these mid-cap stocks and they are ranked #1 and #2, coincidentally.

Personally, I’m not looking particularly to add mid-cap stocks to my DivGro portfolio, but there are several candidates worth due diligence research, nonetheless.

Why Consider Investing in Mid-Cap Stocks?

As mentioned earlier, mid-cap stocks have market caps between $2 billion and $10 billion. They include fast-growing companies that have outgrown small-cap status and more mature companies that operate in stable, profitable corners of the market. Overall, mid-caps are less volatile than small-caps and have more growth potential than large-caps.

Mid-caps have been around longer than small-caps and are not as risky as small-caps. When doing research, you’ll likely find information more readily about mid-caps than about small-caps.

Mid-caps may be on the verge of breaking out, either via merger and acquisition activity or by announcing new product lines. Or they can be targeted by large-cap companies in takeover bids, often with generous offers to existing shareholders. Other mid-caps may have business models that may not allow them to grow larger and become large-cap stocks. So it is important to research mid-cap candidates to understand their outlook, growth prospects, and risk profiles.

It is quite interesting to note that mid-caps have outperformed both their large-cap and small-cap counterparts since 1972. This is fascinating, especially considering that mid-caps are less volatile than small-caps. Here is a chart from a blog article comparing the returns of large-caps, mid-caps, and small-caps over this timeframe:

Source: fourpillarfreedom.com

The same article provides annualized returns per cap category over this timeframe, as well as a measure of volatility:

Source: fourpillarfreedom.com

It is important to note that the outperformance of mid-caps is for this specific timeframe starting in 1972. There have been some stretches where small-caps and even large-caps have outperformed mid-caps.

Quality Assessment and Ranking Stocks

In an article published in June, David Van Knapp (DVK) presented the highest-quality dividend growth stocks. In that article, he describes the scoring system we both use to assess the quality of dividend stocks, called Quality Snapshots. The approach is “to consult widely-used, trusted sources, and use them to create a scoring system that pulls various factors together into an overall quality score.”

While we both use Quality Snapshots, I have different rating and ranking systems.

My rating system maps to different quality score ranges. Ratings are Exceptional (25), Excellent (23-24), Fine (19-22), Decent (15-18), Poor (10-14), and Inferior (0-9). Furthermore, Investment Grade ratings correspond to quality scores in the range 15-25, while Speculative Grade ratings have quality scores below 15 points.

To rank stocks, I sort them by descending quality scores and use the following tie-breaking metrics, in turn:

  1. SSD Dividend Safety Scores
  2. S&P Credit Ratings
  3. Dividend Yield

When two stocks with the same quality score have the same Dividend Safety Score, I next compare their S&P Credit Ratings, ranking the one with the better Credit Rating higher. I rarely need to break ties with Dividend Yield.

Mid-Cap Dividend Growth Stocks Rated Fine

There are 94 mid-cap dividend growth stocks in Dividend Radar with quality scores of 15 or above. I ranked these stocks and present the top 30 in this article. The following table presents the 19 stocks rated Fine, with quality scores of 19-22. (There are no mid-cap dividend growth stocks in Dividend Radar with higher quality scores).

Table created by author with data sourced from Dividend Radar, Value Line, Morningstar, S&P Capital, Simply Safe Dividends, and Google Finance. I own the two top-ranked stocks in my DivGro portfolio. NA* indicates stocks with no S&P Credit Ratings, but low debt levels.

The table presents key metrics of interest to dividend growth investors, along with quality indicators and fair value estimates. These include the years of consecutive dividend increases (Yrs), the dividend Yield for a recent Price, and the 5-year compound annual dividend growth rate (5-Yr DGR).

I also include the Chowder Number (CDN), a popular metric for screening dividend growth stocks for possible investment. The CDN column is color-coded to indicate the likelihood of delivering annualized returns of at least 8%. Green means likely andyellow means less-likely. I consider green CDNs favorable.

The fair value column (Fair Val.) shows my fair value estimates, determined from fair value estimates and price targets from several sources, including Morningstar and Finbox.io. Additionally, I estimate fair value using the 5-year average dividend yield of each stock using data from Simply Safe Dividends.

Company Descriptions

The following company descriptions are the author’s summary of company descriptions sourced from Finviz.

1. Pinnacle West Capital Corporation (PNW) – Utilities

PNW is a holding company that provides retail and wholesale electric services primarily in the state of Arizona. Its subsidiary, Arizona Public Service Company, is a vertically-integrated electric that generates, transmits, and distributes electricity using coal, nuclear, gas, oil, and solar resources. PNW was founded in 1920 and is headquartered in Phoenix, Arizona.

2. Snap-on Incorporated (SNA) – Industrials

SNA manufactures and markets tools, equipment, diagnostics, repair information, and systems solutions. It serves aviation and aerospace, agriculture, construction, government and military, mining, natural resources, power generation, and technical education industries, as well as vehicle dealerships and repair centers. SNA was founded in 1920 and is headquartered in Kenosha, Wisconsin.

3. Tootsie Roll Industries, Inc. (TR) – Consumer Staples

TR, together with its subsidiaries, manufactures and sells confectionery products primarily in the United States, Canada, and Mexico. The company sells its products under various trademarks, including Tootsie Roll, Tootsie Pops, Dots, Junior Mints, and Sugar Babies. TR was founded in 1896 and is based in Chicago, Illinois.

4. Landstar System, Inc. (LSTR) – Industrials

LSTR provides integrated transportation management solutions in the United States, Canada, Mexico, and internationally. It operates through two segments, Transportation Logistics and Insurance. The company markets its services through independent commission sales agents and third-party capacity providers. LSTR was founded in 1968 and is headquartered in Jacksonville, Florida.

5. American States Water Company (AWR) – Utilities

Founded in 1929 and based in San Dimas, California, AWR provides water and electric services to residential and industrial customers in California through a holding company, Golden State Water Company. AWR provides water and wastewater services to military installations in the United States through American States Utility Services, another holding company.

6. Robert Half International Inc. (RHI) – Industrials

Founded in 1948 and headquartered in Menlo Park, California, RHI provides staffing and risk consulting services to customers in about 400 locations worldwide. The company operates through three segments: Temporary and Consultant Staffing, Permanent Placement Staffing, and Risk Consulting and Internal Audit Services. RHI markets its staffing services to clients as well as to employment candidates.

7. Globe Life Inc. (GL) – Financials

GL, through its subsidiaries, provides various life and supplemental health insurance products, as well as annuities, to lower-middle and middle-income households in the United States. The company operates through four segments: Life Insurance, Supplemental Health Insurance, Annuities, and Investments. GL was incorporated in 1979 and is based in McKinney, Texas.

8. Amdocs Limited (DOX) – Information Technology

Founded in 1988 and headquartered in Chesterfield, Missouri, DOX provides software and services to communications, pay-TV, entertainment, and media industry service providers. The company also provides advisory services, mobile financial services,, and advertising and media services. DOX was founded in 1988 and is headquartered in Chesterfield, Missouri.

9. Commerce Bancshares, Inc. (CBSH) – Financials

Founded in 1865 and headquartered in Kansas City, Missouri, CBSH is a bank holding company of Commerce Bank. The bank provides a range of retail, mortgage banking, corporate, investment, trust, and asset management products and services to individuals and businesses. CBSH operates through three segments: Consumer, Commercial, and Wealth.

10. Carlisle Companies Incorporated (CSL) – Industrials

Founded in 1917 and headquartered in Charlotte, North Carolina, CSL operates as a diversified manufacturing company in the United States and internationally. The company designs, manufactures, and markets a range of products for various niche markets, including commercial roofing, energy, agriculture, mining, construction, aerospace and defense electronics, medical technology, transportation, and healthcare.

11. SEI Investments Company (SEIC) – Financials

Founded in 1968 and based in Oaks, Pennsylvania, SEIC provides wealth management, retirement and investment solutions, asset management, financial services, and investment advisory services to its clients. SEIC enables corporations, financial institutions, financial advisors, and ultra-high-net-worth families to create and manage wealth by providing investment and investment-business solutions.

12. Dolby Laboratories, Inc. (DLB) – Information Technology

Founded in 1965 and headquartered in San Francisco, California, DLB develops and licenses audio and imaging technologies to film studios, content creators, post-production facilities, cinema operators, broadcasters, and video game designers. The company sells its products directly and through distributors worldwide. DLB was founded in 1965 and is headquartered in San Francisco, California.

13. Lancaster Colony Corporation (LANC) – Consumer Staples

Founded in 1961 and based in Columbus, Ohio, LANC manufactures and markets specialty food products for the retail and foodservice markets in the United States. LANC’s products include salad dressings and sauces; fruit glazes, vegetable and fruit dips; Greek yogurt vegetable dips and hummus; and a variety of frozen bread and dry snacks.

14. ITT Inc. (ITT) – Industrials

ITT manufactures and sells engineered critical components and customized technology solutions for the energy, transportation, and industrial markets. The company operates in three segments: Industrial Process, Motion Technologies, and Connect & Control Technologies. ITT was founded in 1920 and is headquartered in White Plains, New York.

15. Everest Re Group, Ltd. (RE) – Financials

Through its subsidiaries, RE provides reinsurance and insurance products in the United States, Canada, Singapore, Brazil, the United Kingdom, and in European markets. The company operates through the U.S. Reinsurance, International, Bermuda, and Insurance segments. RE was founded in 1973 and is headquartered in Hamilton, Bermuda.

16. IDACORP, Inc. (IDA) – Utilities

Founded in 1915 and headquartered in Boise, Idaho, IDA is a holding company engaged in the generation, transmission, distribution, purchase, and sale of electric energy in the United States. The company operates 17 hydroelectric generating plants in southern Idaho and eastern Oregon, and 3 natural gas-fired plants in southern Idaho.

17. The Toro Company (TTC) – Industrials

TTC manufactures and markets turf maintenance equipment and services, turf irrigation systems, landscaping equipment and lighting products, snow and ice management products, agricultural micro-irrigation systems, and residential yard and snow thrower products worldwide. It operates in two segments, Professional and Residential. TTC was founded in 1914 and is headquartered in Bloomington, Minnesota.

18. Hubbell Incorporated (HUBB) – Industrials

HUBB designs, manufactures, and sells electrical and electronic products for non-residential and residential construction, as well as industrial and utility applications. The company’s products include cable reels, wiring devices and accessories, junction boxes, plugs and receptacles, cable glands and fittings, switches and dimmers. HUBB was founded in 1888 and is based in Shelton, Connecticut.

19. J & J Snack Foods Corp. (JJSF) – Consumer Staples

JJSF manufactures, markets, and distributes various nutritional snack foods and beverages to foodservice and retail supermarkets in the United States, Mexico, and Canada. The company sells its products through a network of food brokers and independent sales distributors; and a direct sales force. JJSF was founded in 1971 and is based in Pennsauken, New Jersey.

Commentary

I own only two of the mid-cap stocks presented here, PNW and SNA, which are ranked #1 and #2, respectively. Both positions essentially are full positions in my portfolio (arbitrarily, about 1% of the total value of my portfolio). Both stocks are discounted relative to my fair value estimates and both have favorable CDNs. PNW has an attractive 4.01% yield, while SNA’s 5-year DGR is quite impressive at 15.6%.

In fact, PNW has the highest yield of these stocks (4.01%), followed by IDA (3.05%) and SNA (2.81%). As for 5-yr DGR, DLB has the highest (23.2%), followed by LSTR (21.5%) and SNA (15.6%). The stocks with the highest discounts are CSL (15%), SEIC (14%), and PNW, GL, and RE (all 13%).

TR, AWR, CBSH, and LANC are Dividend Kings with dividend increase streaks of at least 50 years! Those stocks, along with CSL and SEIC also are Dividend Champions (dividend streaks of at least 25 years).

Looking at the mid-caps I don’t own, DOX and CSL catch my eye. Both have favorable CDNs and are discounted at least 10% to my fair value estimates.

Below are F.A.S.T.Graphs charts of DOX and CSL, showing a general uptrend in earnings and dividends over the past 10 years and attractive prospects. DOX shows more consistency, but CSL has a higher adjusted operating growth rate.

Source: F.A.S.T.Graphs

DOX’s price line (black) is below the primary valuation line (orange) and at the stock’s normal P/E ratio (blue). The stock appears to be trading at a discount to fair value. An investment in DOX in September 2010 would have returned 9.2% on an annualized basis (with dividends included), compared with total returns of 12.8% by the S&P 500.

CSL’s price line is above the primary valuation line and at the stock’s normal P/E ratio. The stock appears to be trading at about fair value, according to F.A.S.T.Graphs. An investment in CSL in January 2010 would have returned 14% on an annualized basis (with dividends included), compared with total returns of 12.2% by the S&P 500.

Here are two charts, courtesy of Portfolio Insight, showing the current dividend yield plotted relative to the trailing 5-year average yield:

Source: Portfolio Insight

Source: Portfolio Insight

For both DOX and CSL, it appears to be a good time to consider buying shares. DOX is about 39% above its 5-year average yield, while CSL is about 17% above its average yield.

Bonus Section

Below is a table presenting the tickers of mid-cap stocks with quality scores of 18 (rated Decent). These tickers are in rank order and are provided for information only, without additional details.

Rank

20

21

22

23

24

25

26

27

28

29

30

Ticker

UMBF

SWX

EMN

MGEE

RLI

POWI

BKH

ALE

NEU

CFR

ERIE

Concluding Remarks

This article presented the 30 highest quality mid-cap dividend growth stocks in Dividend Radar, based on DVK Quality Snapshots and my ranking system. I happen to own the two top-ranked mid-caps, but none of the others on the list.

One reason to consider mid-cap stocks is the strong growth potential that many of these stocks have, often with less volatility than small-cap stocks.

I’m not really looking to add mid-cap stocks to my DivGro portfolio, but there are several candidates worth due diligence research, nonetheless. I highlighted two, DOX and CSL, and the stocks I already own, PNW and SNA, are worth considering, too.

As always, I encourage readers to do their own due diligence before investing.

Thanks for reading and happy investing!

Disclosure: I am/we are long PNW, SNA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.





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Tesla: Quality Issues And Soft Demand Plague Model Y Rollout (NASDAQ:TSLA)


Tesla (TSLA) has captured the public market’s imagination in a way few companies have ever managed in history. Despite having production output that is only a small fraction of that of established automakers, such as Ford (F) and Toyota (TM), Tesla has seen its market capitalization rise to $185 billion – the largest of any automaker in the world.

Key to Tesla’s valuation is the market’s expectation of truly massive long-term growth. That growth will depend on the company’s ability to expand production of its existing lineup and rapidly scale new products. The Model Y, which is billed as a compact SUV, is Tesla’s newest vehicle to reach the market. CEO Elon Musk has promised that the Model Y will be Tesla’s best-selling vehicle and will finally allow the company to achieve sustained profitability.

Unfortunately for Tesla and its bulging market capitalization, it appears that the Model Y rollout is not going smoothly. Moreover, there are signs that demand for the company’s latest product may not be as great as Musk believed. Unless things change quickly, Tesla may find the ground fall out from under its lofty valuation.

Quality Is A Big Problem

Poor build quality was a big problem during the initial ramp of the Model 3 sedan, Tesla’s first mass market vehicle. Evidently, the same growing pains have afflicted the Model Y.

On June 8th, Musk sent an email to employees extolling them to increase Model Y production speed while reducing defects. His concern appears warranted in light of the growing number of reports of widespread build quality problems.

Source: Electrek

Even Fred Lambert, editor of Electrek and a long-time Tesla evangelist, has proven unable to ignore the issue. On June 16th, Lambert published an article detailing the Model Y’s many problems, stating that “forums are flooded with new buyers reporting issues with their new Model Y, refusing deliveries, and in some cases, Tesla proactively canceling deliveries due to issues.” His conclusion was scathing:

“I am the first to cut Tesla some slack when it comes to the quality of vehicles early in a production ramp-up, but this seems a lot worse than usual. We covered the Model 3 launch closely and it certainly wasn’t without quality issues, but it was nothing like the reports I am seeing for Model Y these days.”

Unsurprisingly, Lambert found himself inundated by attacks from Tesla fans and supporters. But he was unwilling to recant his criticism. Taking to Twitter, Lambert again blasted the Model Y’s quality, calling on Tesla to take a step back from mass production until the vehicle’s problems are resolved:

“I am aware of how hard production ramps are and I was holding off on reporting about the quality issues when it was only about paint, trims and other cosmetic problems, but now the backseat and seat belt issues are just another level and I had to report. Some of [the] cars Tesla is attempting to deliver are just in ridiculous conditions that should have never made it to customers. I hear Tesla is catching some before delivery, but too many are making their way to customers and I have to think end of quarter has something to do with it…

“I am a Tesla shareholder and 100% believe in Tesla’s mission to accelerate the advent of electric transport. It’s based on that I suggest Tesla takes a step back with Model Y, take the hit in Q2, and focuses on quality before ramping up.”

By Musk’s own admission, the troubled Model 3 production ramp nearly killed Tesla. If the company were to follow Lambert’s advice, it could cripple Tesla’s growth narrative and throw the company’s high-flying valuation into doubt. Thus, Tesla faces a hard choice between “taking a step back”, which may hobble its narrative, and pushing forward despite persistent quality issues, which may alienate its loyal customer base – especially in the Chinese market.

Demand Looks Weaker Than Expected

In January 2019, Musk boasted that the Model Y would be Tesla’s most popular vehicle by far:

“I expect the demand for the Model Y will be maybe 50% higher than the Model 3. It could be even double. The mid-size SUV segment is worldwide the most popular type of vehicle, so we will probably see higher volume of Y than 3.”

The company has repeated the same claim, highlighting that the Model Y’s addressable market is much larger than the Model 3’s, as it is a crossover rather than a sedan. The crossover market is indeed substantially larger than the sedan and sports car markets, so Tesla’s hope to open a wider market was not wholly without reason.

Source: Tesla Inc.

Yet, while the Model 3 saw a massive burst of demand and interest thanks to a vast order backlog, the Model Y’s reception since entering production in March 2020 has been notably muted. One problem appears to be a lack of differentiation from the Model 3. As I explained in an article last winter, the Model Y appears to be little more than a slightly upsized Model 3, rather than a true compact SUV as it was originally billed. Its relatively limited interior space and cramped third row reduce its attractiveness compared to its peers in the segment.

Source: Rob Forth, Twitter

Notably, there appears to be far less public interest in the Model Y compared to the Model 3. When the latter ramped up production 2018, it was met with widespread market and consumer attention. That has not been the case with the Model Y. One analyst, writing under the nom de tweet Stupid Investment Baby, found that the Model Y has failed to attract anything like the level of Google search interest compared to the Model 3, based on reviews of Google Trends and Wikipedia page views.

Source: Stupid Investment Baby, Google Trends

Other than a brief spike in March 2019, when it was unveiled for the first time, the Model Y has lagged the Model 3 in terms of public interest. This appears to have translated into weak real-world demand, as evidenced by Tesla’s surprise decision to add the Model Y to its referral list in early June. According to Electrek’s Lambert, the unexpected move is a worrying sign of soft demand:

“It’s early for Tesla to add Model Y. The automaker made it clear that it uses the program to create demand and wouldn’t use it on vehicles that already have a backlog of orders and therefore don’t need more demand. It took over a year of deliveries before Tesla added Model 3 to the program, and it only started with Model 3 Performance, the most expensive version of the car. For Model Y, it only took a few months of deliveries for Tesla to add the vehicle to the program. It could be an indication that Tesla is really having issues with demand amid the pandemic.”

Investor’s Eye View

Quality issues are hardly new for Tesla, but the scale of the problems facing the Model Y – and the willingness of even its most ardent defenders to speak out – appears to be. The company has relied on its public mystique and laudatory press coverage to maintain its growth narrative and bolster its stock price. Severe quality issues threaten to sour new and existing customers alike.

Moreover, the preponderance of evidence appears to vindicate the bearish thesis that the Model Y is both insufficiently differentiated to stand out from Tesla’s existing product lineup and lacks the specifications to meet the particular demands of the compact SUV consumer market. With demand looking soft already, the Model Y risks becoming a flop – a potentially catastrophic setback for a company already priced for perfection.

The bottom line is that Tesla is facing a reality far less rosy than it has been portraying for years. The promised explosion in demand for the Model Y has not materialized, while widespread build quality issues suggest the company has not learned from the manufacturing mistakes of the Model 3.

Investors banking on the Model Y to propel Tesla to permanent profitability might be wise to reconsider. Investors have not yet woken up to the harsh reality facing the Model Y and Tesla’s growth narrative more broadly. As that reality sets in over the coming months, I expect the share price to come under intensifying pressure.

Trade carefully!

Disclosure: I am/we are short TSLA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.





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Millions of people of color in the U.S. do NOT have access to running water, affordable health care and quality education


Protests across the country continued for the fifth day as several cities introduced curfews.

U.S. Democratic presidential candidate Joe Biden on Tuesday called the death of George Floyd in police custody a “wake-up call” for the country. Biden’s address comes a day after Trump threatened to mobilize the U.S. military to keep the peace across the country, following days of violent protests and minutes after federal police charged a crowd of peaceful demonstrators to clear a path for a presidential photo-op.


The causes of the unrest go much deeper than just the most recent police brutality. Income inequality has grown to its highest level in 50 years.

Meanwhile, President Trump late Monday threatened to mobilize the U.S. military to keep the peace across the nation, following days of violent protests. Speaking at the Rose Garden of the White House, Trump derided governors for not acting more harshly against demonstrators, and said he was deploying “heavily armed” soldiers and federal police in Washington to quell protests.

“I am mobilizing all federal and local resources, civilian and military, to protect the rights of law abiding Americans,” Trump said, citing the Insurrection Act of 1807. “Today I have strongly recommended to every governor to deploy the National Guard in sufficient numbers that we dominate the streets. Mayors and governors must establish an overwhelming presence until the violence is quelled.”

But the causes of the unrest obviously go much deeper than just the most recent police brutality that was caught on a smartphone camera by passersby. Income inequality grows to its highest level in 50 years. Indeed, research suggests that racial inequality runs through education, health care, and a major report released last year further concluded that race and poverty are key determinants of who even has access to clean water and sanitation.

Poor, dense neighborhoods in New York’s outer boroughs have highest rate of COVID-19 deaths, ZIP Code data shows. Canarsie-Flatlands in Brooklyn, home to four New York City Housing Authority developments, and Far Rockaway in Queens, both areas with disproportionate amounts of public housing, have been hit hardest by the virus. The worst-hit ZIP Code in Canarsie-Flatlandshas had 612 deaths per 100,000 residents — more than triple the city average and the highest rate in the city.

The number of confirmed COVID-19 cases and the number of deaths continues to rise. As of Tuesday, there are 1,812,125 confirmed cases of COVID-19 in the U.S., and 105,192 deaths, and 29,917 deaths in New York, the largest of any state in the country. Worldwide, there were 6,306,746 confirmed cases and 376,322 deaths, according to Johns Hopkins University’s Center for Systems Science and Engineering.

Black Americans face lower life expectancies

African-American COVID-19 patients have 2.7 times the odds of being admitted to the hospital compared to non-Hispanic white patients after controlling for sex, age, income and co-morbid health conditions, according to a separate study in the latest edition of the peer-reviewed journal Health Affairs conducted by researchers affiliated with Sutter Health, a nonprofit health system in northern California.

Black and Latino people in New York City are dying at twice the rate of Caucasians, data released last month by the City of New York showed. Hispanic residents were dying at a rate of 21.3 per 100,000, black and African-American people were dying at a rate of 23.1 per 100,000, other non-Hispanic/Latino, non-white races were dying at a rate of 40.2 per 100,000. Meanwhile, white people were dying at a rate of 15.7 per 100,000 and Asians at a rate of 9.1 per 100,000.

Overall, black Americans face lower life expectancies than their white counterparts and remain at greater risk for stroke, heart disease, HIV, cancer, mental illness and diabetes. Racial minorities have not received the same quality of care as their white counterparts, government research shows.

Allyson Schwartz, president and CEO of the Better Medicare Alliance, and Daniel Dawes, an attorney, scholar and educator serving as the Morehouse School of Medicine’s Director of the Satcher Health Leadership Institute, said people of color may have been less reluctant to seek help..

“Last year, we assembled key health equity leaders — including the National Minority Quality Forum, members of the Congressional Black Caucus, the NAACP, and the National Black Nurses Association — for a convening led by the Better Medicare Alliance to discuss these systemic challenges and to find a way forward,” they wrote in a recent op-ed for MarketWatch.

“Throughout the gathering, we heard common refrains: people of color often feel disconnected from their primarily white health-care providers and there is woeful under-representation of minority providers in health care,” they added. The Affordable Care Act, however, created new health coverage options that helped to narrow racial disparities in health-care coverage.

Still, “most groups of color remained more likely to be uninsured compared to whites,” according to the nonprofit Kaiser Family Foundation. “Moreover, despite the larger coverage increases for groups of color, the relative risk of being uninsured compared to whites did not improve for some groups. For example, blacks remained 1.5 times more likely to be uninsured than whites from 2010 to 2018, and the Hispanic uninsured rate remained over 2.5 times higher than the rate for whites.”

Also see:Stimulus checks are a mere Band-Aid for Americans — amid fears of an even bigger economic crisis than the Great Recession

‘Closing the water access gap’

More than 2 million people in the U.S. lack running water and basic indoor plumbing, according to that report by the human-rights nonprofit DigDeep and the nonprofit U.S. Water Alliance. This is all the more concerning during a pandemic. “A hundred years ago, water-borne illnesses such as cholera were a leading cause of death in the United States. Recognizing the threat to public health, our government invested in modern systems that extended safe and reliable drinking and wastewater services to nearly every American,” the report said.

“Today, however, federal funding for water infrastructure is a small percentage of what it once was, and communities that did not benefit from past investments have a harder time catching up. Some communities even report that they are losing access to services they once had, suggesting that fewer people tomorrow will have a working tap or toilet than do today,” it added.

“Closing the water access gap in the United States is difficult because no one entity — whether a federal agency or research institution — collects comprehensive data on the scope of the problem. Though many other countries track their progress towards universal water and sanitation access, data sets in the United States are incomplete, and official data-collection efforts under-count vulnerable populations like communities of color and lower-income people.”

Native Americans are 19 times more likely to lack indoor plumbing than their white counterparts, putting them in the worst spot of any group, and African-American and Latinx households lack indoor plumbing at almost twice the rate of white households, the report found.

Higher educational attainment and income in African-American and Latinx households, for example, was positively associated with complete plumbing access. (Complete plumbing refers to running water, shower or bath, tap and flush toilet, though the Census Bureau eliminated the toilet question in the 2016 ACS.) Whole communities — often clustered in specific areas — experience lack of access to complete plumbing, they added.

Less educated workers hardest hit by COVID-19

Gallup data released Monday data add more support to previous research that less-educated workers in low-wage, blue-collar roles have been hardest hit by COVID-19, and suggests the pandemic is exacerbating the income inequality that existed before its arrival.” Some 95% of workers in low-income households — making less than $36,000 per year — have either been laid off as a result of the coronavirus (37%) or have experienced a loss in income (58%).

The lack of access to education for people of color in the U.S. tie back to America’s history of systemic racial discrimination, experts suggest. “Black students are three times more likely to be suspended or expelled than white students, according to the Education Department’s Office for Civil Rights, and research in Texas found students who have been suspended are more likely to be held back a grade and drop out of school entirely,” the Justice Policy Institute reported.

“While black children made up 16% of all enrolled children in 2011-2012, according to federal data, they accounted for 31% of all in-school arrests. The disparity begins in preschool: 48% of preschool children suspended more than once are black. And students with disabilities are also suspended more frequently than students without disabilities,” the Justice Policy Institute, a research group dedicated to reducing incarceration and promoting policy reforms in criminal justice, added.

That history has also limited the resources black families have to pay for college, made it more likely that black students will attend colleges with limited resources and be targeted by predatory colleges, while still facing barriers to entering wealthy, elite higher education institutions. They’re also more likely to struggle to repay the debt after they leave school.

In fact, 12 years after entering college, white men have paid off 44% of their student-loan balance on average, according to an analysis released last year by Demos, a left-leaning think tank. For white women, that share drops to 28%. For black borrowers, the picture is even bleaker. Black women see their loan balances actually grow 13% on average, 12 years after leaving school, while black men see their balances grow 11%.

(Meera Jagannathan, Mike Murphy and Jillian Berman contributed to this story.)



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Direxion S&P 500 High Minus Low Quality ETF: Quality Is Down, But Not Out (NYSEARCA:QMJ)


Quality is a relative term, the same way that beauty is in the eye of the beholder. In my All-Equities SRG portfolio, I usually look at the resilience of the business model to make a quality assessment. Recurring or predictable revenue streams, cycle-agnostic demand and industry dominance are the three key factors that I pay most attention to.

Direxion defines quality from the perspective of ROE, net operating assets and financial leverage. At least this is the key criteria that the ETF manager uses to select stocks for the Direxion S&P 500 High minus Low Quality ETF (QMJ).

This fund starts from the assumption that “higher quality companies outperform lower quality ones over the long term”. To get the desired exposure, QMJ goes long high-quality and short low-quality stocks at a ratio of +150% and -50%, respectively. Below were the ETF’s top positions in May.

Long holdings:

  • Apple (AAPL): +8.4% allocation
  • Johnson & Johnson (JNJ): +8.3% allocation
  • Visa (V): +7.9% allocation

Short holdings:

  • Home Depot (HD): -2.8% allocation
  • McDonald’s (MCD): -2.3% allocation
  • JPMorgan (JPM): -2.2% allocation

The quick rise (and fall) of quality

QMJ is a new fund launched in early February 2020. Right out of the gate, the ETF experienced the most vicious bear market and one of the fastest recoveries in recorded history. The good news is that it has come out of the storm looking good.

Below is the performance of QMJ (blue line) against the S&P 500 (orange line) since February 19, the peak of the stock market. First, notice that the ETF has outperformed the equities benchmark by quite a bit – the dotted gray line helps to visualize the difference. The more nuanced observation is that the outperformance of quality happened mostly in the first three weeks of March, when panicked investors headed for the exits.

But as of late, QMJ has started to lose its edge.

Source: DM Martins Research, using data from Yahoo Finance

The fund peaked against the S&P 500 on March 19, immediately prior to the bottom of the COVID-19 bear market. Since then, quality has fallen out of favor. The trend has been accelerating in the past few days. This is probably because the US has started to reopen its economy, boosting consumer confidence and investor morale.

Take a look at the graph below. It compares the performance of the S&P 500 (darker blue line) in the past two weeks against riskier and highly pro-cyclical sectors that I would be very cautious buying into at this moment: airlines (JETS), leisure and entertainment (PEJ), US regional banks (IAT), energy (XLE), REIT (VNQ) and small cap stocks in general (VB). These stocks are generally more sensitive to economic activity. They also boast weaker balance sheets in many cases and produce more erratic financial results.

Source: Yahoo Finance

Notice that “low quality” has been on the rise in the past few days. This is happening alongside optimism over a coronavirus vaccine and the reopening of businesses, but also at the same time that the economy continues to show signs of weakness.

Weekly unemployment claims continue to hit the seven digits. GDP contraction in the first quarter has been revised down to -5%. New home prices have been falling sharply (although demand for cheaper real estate has surpassed expectations). Now, add to the list of concerns the trade war with China, which has been picking up steam.

Down, but not out

The revival of low quality during a market rally can be luring. But I bet that the trend will reverse again in favor of high-quality stocks, once the equities market is finally viewed as fully valued by investors.

When the COVID-19 dust settles, what will be left is a more fragile economy, including lower growth and much higher unemployment. For times like these, I would much rather hold a portfolio of high-quality stocks than one of more speculative names.

For this reason, and over a longer-term horizon, I expect to see QMJ shine once again. In my view, this is a matter of time and patience.

I use an approach that favors predictability of financial results and broad diversification when choosing stocks for my All-Equities Storm-Resistant Growth portfolio. So far, the small $229/year investment to become a member of the SRG community has lavishly paid off, as the chart below suggests. I invite you to click here and take advantage of the 14-day free trial today.

Disclosure: I am/we are long AAPL, V. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.





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