“Returns are best where capital is scarce” is one of my favourite bits of investing advice. The idea was popularized by Richard Bernstein, former chief quantitative strategist at Merrill Lynch and founder of RB Advisors. Rarely has so much investing knowledge been packed into seven words.
The capital Mr. Bernstein refers to includes investor funds allocated to stocks but also investment banking activity – debt issues, initial public offerings and secondary offerings of stocks. In the latter case, if investors are scrambling to take part in new issues in specific market sectors, and the deals are hugely oversubscribed, these are the sectors that longer term investors should avoid.
To identify where capital is scarce, investors should look for market sectors where no investment banker in their right mind would ever consider trying to stickhandle a new issue of debt or equity because no one would buy it.
CNBC’s Jim Cramer called U.S. financials "by far and away the worst performing sector" in the U.S. market, so that’s one place to look in the current environment. Domestically, consumer discretionary stocks have been the second weakest sector (health care was worse, but in terms of market capitalization that index is basically only one stock, Valeant Pharmaceuticals International Inc.), so there’s another area for investors to go bargain hunting.
Mr. Bernstein’s statement is probably best applied as a way of thinking, rather than a stock-picking tool, however. Investors should always be looking for opportunities where companies are starved for cash to generate the best long-term returns.
Stocks to ponder
ZCL Composites Inc. A manufacturer and supplier of primarily underground fuel storage tanks servicing pipeline and oil and gas exploration companies, ZCL has shown a commitment to returning capital to investors. It's increased its quarterly dividend nine times since 2012 and announced a special cash dividend this March, writes Jennifer Dowty.
Franklin Financial Network Inc. Validea's pick of the week is a financial holding company that includes a commercial bank. It passes several tests, including having a P/E ratio favoured by the Martin Zweig-based model, the equity/assets test within the Peter Lynch-inspired model and comfortably beating the profit margin in the Motley Fool-based model.
TIO Networks Corp. A cloud-based technology company operating in the bill payment industry, the company reported that third quarter revenue was up 32 per cent year-over-year. All seven analysts who cover this stock have "buy" recommendations. This small-cap stock can be volatile and the share price can experience significant daily moves, writes Jennifer Dowty, but this stock is one to keep on the radar in future positive breakouts lists.
Stantec Inc. Investors face a classic dilemma with this solid infrastructure stock, says David Milstead. There’s a case to be made that today’s share price represents a compelling entry point for those who believe in the company’s long-term prospects. At the same time, however, the upside may be limited, and the short-term offers the prospect of a reversal if the company’s issues remain.
A great way to find value in a stock
Jennifer Dowty shows you how to look for details about insider buying or selling in a stock to determine if insiders are positive on the company.
Why stocks aren't overvalued right now
Sentry Investments CIO Gaelen Morphet doesn't see U.S. stocks as too expensive, given the backdrop of low rates. But, she says, "Nobody can time the market."
Sell-off could be ahead say Merrill Lynch analysts
Merrill Lynch strategists presented a compelling argument that investors' desperations for yield, combined with equity market complacency, sets the stage for a sharp spike in volatility and a painful equity market sell-off, writes Scott Barlow.
Humans are beating the market – and robots
The proportion of quantitative funds whose return exceeds their benchmark has dropped to 28 per cent since July, data from JPMorgan Chase & Co. show. Over half of fundamental equity managers, on the other hand, are outperforming the market.
The fun of the oil price roller coaster
One young investor has turned to exchange-traded notes to leverage the volatility of the fast-moving oil market in a year in which prices have flipped five times between bear and bull markets as investors weighed how quickly a global supply glut might ease.
Fifteen large cap stocks that show momentum
Ian Tam goes looking for large-cap stocks on the move outside of the materials and energy sectors and finds 15 that make the cut.
Don't save enough to retire? Just work longer
That's quietly becoming the default solution for those nearing retirement age but don't have enough savings, writes Rob Carrick. A survey found the number of Canadians who estimate they would retire past age 70 has gone from 5 per cent four years ago to 21 per cent now. This has companies with defined contribution plans worried.
Bondholders could get burned by higher interest rates
Merrill Lynch's chief investment strategist said investors are hardly positioned for a more hawkish Fed, which would likely favour the U.S. dollar, value stocks, cyclicals, banks and European equities. Bonds, on the other hand, are a cause for concern, writes Tim Shufelt.
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What’s up in the days ahead
Scott Barlow looks at why investors are shorting Canada's banks; David Milstead examines diamond miners; Rob Carrick looks at how the conversation about personal finance is being poisoned by people slamming others as being "entitled"; Larry Berman asks, "If volatility is so low, why is portfolio risk so high?"; and Thane Stenner examines why, at big companies like Warren Buffett's Berkshire Hathaway, cash is king right now.
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Compiled by Iain Boekhoff and Gillian LivingstonReport Typo/Error
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