WHAT ARE WE LOOKING FOR?
Technology funds that are showing signs of life again.
These were high-flying funds a decade ago before the tech bubble burst in 2000.
Tech then became a “four letter word,” RBC Dominion Securities Inc. chief strategist Myles Zyblock recalled in a report this week.
He figures it's time to look at the “underappreciated large-cap technology sector,” saying the more positive tone in key economic data these days should help lift stocks higher over the near term.
“This area of the market stands to benefit from superior profitability, an impressive five-year track record of returning cash to shareholders, hints of accelerating demand and the ability to provide a portfolio hedge against input cost inflation,” he wrote.
If commodity prices stay high or keep rising, more companies will try to improve total factor productivity – a measure that includes labour and capital – and that will include investing in technology, he suggested.
TODAY'S SEARCH
With this outlook in mind, we examined the science and technology funds in Globefund. We excluded U.S. dollar funds, and those valued weekly or monthly. We also searched for the best performers for 30 days ended Thursday, and checked out their longer-term performance.
WHAT DID WE TURN UP?
Science and technology funds have been very upbeat over the past month.
In most cases, they have performed better over 30 days than over six months or even one year.
Funds with a 10-year history, however, have been dogs. The poor performance may be partly attributable to the funds – which may hold a lot of U.S. stocks – not hedging their exposure to foreign currencies.
Studying long-term returns is a good reminder of just how risky sector plays can be. Investors are better off trading these funds versus holding them for the long haul.
Over five years ended April 30, iShares Canadian Technology Sector Index ETF has been the winner, helped by stocks like Research In Motion Ltd. The ETF garnered an average annual return of 16.4 per cent.
The TD Nasdaq Index-I fund posted an annualized return of 10.5 per cent. It tracks the Nasdaq 100 index, which includes 100 of the largest non-financial securities on the Nasdaq Stock Market. The fund is in Canadian money market investments, and uses options, futures and forward contracts whose value is based on the Nasdaq 100 index. (It is only sold through discount and full-service brokers.)
Among non-index linked funds, GGOF Global Technology Classic has the best five-year record. It posted an annualized 12.4-per-cent return.
Table: View result set 
WHAT ARE WE LOOKING FOR?
Today, let's look at the stocks trading at the greatest price-to-earnings growth, or PEG, discounts. We'll stick to companies in the S&P/TSX composite for the screen and we'll use Thomson ONE's Stock Reports Plus. This is the stock ideas feature we've been using all week that is inside Thomson Reuters' portfolio management tool used by institutional investors.
WHAT'S A PEG RATIO?
A stock's PEG tells investors how much they are paying for a stock's earnings growth. The PEG is calculated by taking the P/E and dividing it by the annual earnings growth. If a company's P/E is 20, then the earnings would have to be growing at 20 per cent for the PEG ratio to be 1. If the P/E is 10, then the PEG is 0.5. If the P/E is 40, then the PEG is 2. A lower ratio means the stock is cheaper.
Today we'll use the forward PEG, which uses earnings estimates for the next 12 months to calculate the P/E and expected earnings growth rate.
MORE ABOUT TODAY'S SCREEN
We'll look at the cheapest PEG stocks based on how great a discount they are trading at, relative to the average of the composite. As well, we'll look at the company's historical discounts or premiums to the average of the composite over the past five years. In the table, here is what Thomson says each header under “Relative to S&P/TSX composite (5-Year Range)” means:
a) The average value is the average of the weekly comparisons between the company and the index for the past five years (not merely the comparison of the company average to the index average);
b) The high value is the greatest difference between the company and the index measures in the past five years (not merely the comparison of the company high to the index high, as the highs may have occurred at different times);
c) The low value is the smallest difference between the company and the index measures in the past five years (not merely the comparison of the company low to the index low, as the lows may have occurred at different times).
WHAT DID WE FIND OUT?
Several companies are trading at significantly greater-than-usual discounts to the average composite PEG of the past five years. Companies such as Centerra Gold, Nexen and Rogers Communications are used to trading at premiums.
Table: View result set WHAT ARE WE LOOKING FOR?
Today, let's look at the stocks trading at the greatest price-to-earnings discounts. We'll stick to companies in the S&P/TSX composite and we'll use Thomson ONE's Stock Reports Plus, which is a stock ideas feature inside Thomson Reuters' portfolio management tool used by institutional investors.
MORE ABOUT TODAY'S SCREEN
We looked at cheap P/E stocks earlier this week, but we'll throw some more wrinkles into this today. We'll look at the cheapest P/E stocks based on estimated earnings for the next 12 months, but we'll also look at how great a discount they are trading at, relative to the average of the composite.
As well, we'll look at the company's historical discounts or premiums to the average of the composite over the past five years. In the table, here is what Thomson says each header under “Relative to S&P/TSX composite (5-Year Range)” means:
a) The average value is the average of the weekly comparisons between the company and the index for the past five years (not merely the comparison of the company average to the index average).
b) The high value is the greatest difference between the company and the index measures in the past five years (not merely the comparison of the company high to the index high, as the highs may have occurred at different times).
c) The low value is the smallest difference between the company and the index measures in the past five years (not merely the comparison of the company low to the index low, as the lows may have occurred at different times).
WHAT DID WE FIND OUT?
A few companies are trading at significantly greater-than-usual discounts to the average composite P/E of the past five years, such as Fairfax, Yellow Pages, Lundin Mining, Teranet and Teck Cominco.
Table: View result set WHAT ARE WE LOOKING FOR?
We're spending the week looking at Thomson ONE's Stock Reports Plus, which is a stock ideas feature inside Thomson Reuters' portfolio management tool used by institutional investors.
Today we'll look at the Canadian companies trading at the lowest price-to-earnings growth ratio, or PEG ratio.
MORE ABOUT TODAY'S SCREEN
We'll screen for companies with market capitalizations greater than $1-billion. The PEG ratio is a commonly used valuation measurement that helps investors see if they are paying too high a P/E for a company's earnings growth.
The formula is to take the P/E and divide it by the annual earnings growth. If a company's P/E is 20, then the earnings would have to be growing at 20 per cent for the PEG ratio to be 1. If the P/E is 10, then the PEG is 0.5. If the P/E is 40, then the PEG is 2. A lower ratio means the stock is cheaper.
WHAT DID WE FIND OUT?
A number of companies that were on yesterday's cheap P/E list are also on today's low PEG list, including Yellow Pages, Inmet, Lundin, Rona and Nexen.
Table: View result set WHAT ARE WE LOOKING FOR?
We'll spend the week looking at Thomson ONE's Stock Reports Plus. This is a stock ideas feature inside Thomson Reuters' portfolio management tool used by institutional investors. The aim of the feature is not to provide an investable portfolio of stocks, but rather to give money managers some ideas to research further. In many ways, that makes it a perfect fit for this column.
TODAY'S SCREEN
We'll start with a fairly straightforward screen to look for Canadian-listed stocks with the lowest price-to-earnings ratios.
We'll stick to companies with market capitalizations greater than $1-billion. We'll also use forward P/Es. The obvious reason for using forward P/Es is that it gives us an idea of how much we're paying for expected future profits. But there is another handy reason.
Most company P/E ratios that you see are based on historical earnings as reported using generally accepted accounting principles. But historical P/Es can be distorted.
For instance, if a $10 stock booked profits of $2 a share last year, then its P/E ratio would be five. But what if the company actually booked $1 a share of profit from selling a division and $1 per share from ongoing operations? The operating P/E actually is 10 and the stock is more expensive than you might think if you haven't adjusted for the division's sale.
To get around this, you can look at P/E ratios based on analysts' earnings estimates. Analysts usually adjust their estimates so that they are based on continuing operations, so forward P/Es are a natural way of removing any accounting trip ups.
WHAT DID WE FIND OUT?
A lot of commodities companies are on this list, but there are also a couple of non-commodity income trusts, Yellow Pages Income Fund and Teranet Income Fund, that are worth taking a second look at given their high yields. Three of Canada's biggest six banks also pop up at the bottom of the list.
Table: View result set WHAT WE'RE UP TO
Let's call this a “where are they now?” exercise involving the Canadian income trust fund category. Seven years ago, this category did not even exist. Then, income trusts hit the big-time and all sorts of fund companies were creating products to capitalize on the trend. Income trusts lost much of their appeal when the federal government announced they'll be subject to a new tax in 2011. However, the income trust fund category soldiers on. Let's see how it's doing these days.
TODAY'S SEARCH
We've ranked all funds in the Canadian income trust category by assets and then displayed their returns in the short and medium term.
SO WHAT DID WE TURN UP?
Modest returns that show us why no one talks much about income trust mutual funds any more. No question, the average Canadian equity fund would have done better over the past three years than the average income trust fund. But take a close look at the past year – income trust funds made 5.4 per cent on average, while Canadian equity funds averaged a loss of 0.2 per cent. This is reminiscent of the market downturn that began this decade, where trusts far outperformed the stock market.
An interesting oddity here is that the two best-performing funds over the past year have among the highest and lowest fees. Investors Income Trust Fund has the highest management expense ratio on our chart at 2.77 per cent, yet it has been a very strong performer. Top returns have also been generated by the iShares Cdn Income Trust Sector Index Fund, which has a low MER of 0.55 per cent. The iShares fund is an exchanged-traded fund, or ETF, which means it trades like a stock, and it delivers the returns of the S&P/TSX capped income trust index. The low fees of index-tracking ETFs are a definite advantage for investors seeking exposure to stocks, bonds and, yes, income trusts.
Your next step: Globefund's database has all the facts and figures on Canadian income trust funds.
Table: View result set WHAT ARE WE LOOKING FOR?
After a month away, quantitative strategist Yin Luo is back, having switched to a new firm, Macquarie Capital. For the month of May he recommends a strategy of buying low-risk stocks and selling short high-risk stocks.
PAST PERFORMANCE
Mr. Luo has been a monthly guest contributor to this column since it started a year ago. He didn't get a chance last month to update his performance in March until now, but his long/short portfolio based on value and momentum stocks did well. The long side was down 2.4 per cent, while the short side fell 13.3 per cent. Therefore, the strategy generated a return of 10.9 per cent in March. Since he started to contribute to the column, his strategy has outperformed the benchmark in 10 out of 11 months.
THEME FOR MAY
Mr. Luo has found that low-risk stocks in Canada have performed better than high-risk stocks by more than 10 per cent a year over the past 20 years. For this month, he suggests going long on a group of low-risk stocks and going short on a group of high-risk stocks. The long basket contains stocks with attractive valuation, solid momentum, and low risk (low historical volatility of monthly returns); and vice versa for the short side. He also tried to maintain a sector balance, in order to mitigate having too much exposure to one sector.
DEEPER EXPLANATION
The following section is a bit complex and is more for students of finance theory. But here it goes. As Mr. Luo explains, traditional finance theory divides a stock's total risk into market-related risk and stock-specific risk. When portfolio managers try to determine how much to pay for a stock based on expected returns, they have to take risk into consideration. The theory is that investors need to be compensated in two ways: time value of money and risk. Or in other words, high-risk stocks demand higher returns to compensate for the extra risk taking.
“Our empirical testing, however, suggests something very different,” Mr. Luo said. “We found that low-risk stocks actually have been consistently outperforming higher returns in Canada.”
Why is this? Well, it has to do with how value investing tends to outperform growth investing over the long term.
“We found the phenomenon of low risk/high return consistent with the traditional value investing philosophy,” he said. “In other words, low-risk stocks are more likely to be value stocks, and therefore tend to produce higher returns.”
Table: View result set WHAT ARE WE LOOKING FOR?
Canadian stocks have had a nice run the past six weeks, bouncing about 10 per cent from a March low. It might be a good idea to take some profits and one way to decide which stocks to sell is to check moving averages.
TODAY'S SCREEN
A moving average is the average price of the stock over a period of time, such as 50 or 200 days. When a stock is trading well above a moving average, it can be a sign that it is overbought and due for a pull back. It may be a good time to take some profits. Conversely, if a stock is trading well below a moving average, it may be oversold and worthy of a closer look as a bargain.
Today we'll look at Canadian stocks and trusts that are trading well beyond their 200-day moving averages. Companies and trusts must have a market capitalization of more than $200-million and trade on the Toronto Stock Exchange to qualify for this screen.
WHAT DID WE FIND OUT?
Not surprisingly, coal and energy companies dominate the top of the list. If you think commodity prices have to take a breather here, then it may be a good time to take some money off the table.
Table: View result set WHAT ARE WE LOOKING FOR
Good solid dividend-paying U.S. stocks. Yesterday, we zeroed in on Canadian dividend payers. Today it is the U.S.'s turn.
Both screens arise out of the system employed by BMO Nesbitt Burns chief economist Sherry Cooper's latest book, New Retirement, How It Will Change Our Future. She believes dividend- paying stocks should be part of a long-term investment portfolio, including during retirement. She particularly favours “those with an attractive yield, a history of steady dividend growth above the rate of inflation, a low payout ratio, and an improving position in the marketplace.” Such stocks, in her view, are safer than corporate bonds.
TODAY'S SCREEN
Today, we will update a screen of stocks in the Standard & Poor's 500-stock index that Ms. Cooper used in her book. She specifically looked for stocks that have a dividend yield of more than 2.5 per cent, a five-year dividend growth greater than 10 per cent annualized, a dividend payout ratio of less than 60 per cent, a positive 10-year trend in pretax margins, and beta of less than one. (Beta is a measure of risk.)
The screen was originally run in July which, as it turned out, marked the peak for many global markets. Things have changed significantly since then.
WHAT WE FOUND
Financials dominate in Canada, but only two of the issues on the U.S. list were financials. Three were consumer issues, and the rest were a mix of other industries.
Table: View result set WHAT ARE WE LOOKING FOR?
Canadian stocks that are good solid dividend payers. These are just the ticket for many investors in times of market turmoil, and that is certainly what we have had so far this year.
But Sherry Cooper, who has been chief economist at BMO Nesbitt Burns Inc. since 1983, recommends such stocks at all times, not just times of volatility. In her latest book, New Retirement, How It Will Change Our Future, she spells out the value of good dividend stocks – and contends that such stocks are arguably safer than bonds.
Dividends have a lower tax rate, at 25 per cent, but that doesn't mean they should be limited to taxable accounts. “Blue-chip dividend-paying stocks should be considered in a long-term investment portfolio, including during retirement,” she said. “The most favourable are those stocks with an attractive yield, a history of steady dividend growth above the rate of inflation, a low payout ratio, and an improving position in the marketplace.”
TODAY'S SCREEN
Today, we update a stock screen that Ms. Cooper presents in her book. She screened for Toronto Stock Exchange-listed stocks that have a dividend yield of more than 2.5 per cent, a five-year annualized dividend growth greater than 10 per cent, a dividend payout ratio of less than 60 per cent, a positive 10-year trend in pretax margins, and a beta of less than one. (Beta is a measure of risk.)
WHAT DID WE FIND?
The screen for the book was done in July, which was just before global markets, and financial services stocks in particular, turned decisively southward. Those good times are just a distant memory in most cases for investors. The dividend stock list, however, is still dominated by financial services stocks, accounting for nine of the 11 stocks. The only exceptions now are a retailer and a utility.
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An investment column about screening for stocks and funds.
| Market | Change | Value |
|---|---|---|
| Data delayed 20 minutes | ||
| S&P/TSX | -86.80 | 14,521.19 |
| DJIA | -120.90 | 12,745.88 |
| S&P 500 | -9.40 | 1,388.28 |
| Nasdaq | -5.72 | 2,445.52 |
| Stock Profile | Sponsored by: |
|---|---|
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Scott Adams has been a business journalist for more than 10 years, worked as an associate analyst on Bay Street and been the Globe & Mail Investment Editor since spring 2007.
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