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An evaporation pond used to measure lithium and other mineral levels sits in the Uyuni salt desert in Bolivia in this 2010 file photo. Lithium is enjoying its moment in the spotlight – and at least some of the enthusiasm is solidly grounded in reality. (Dado Galdieri/AP)
An evaporation pond used to measure lithium and other mineral levels sits in the Uyuni salt desert in Bolivia in this 2010 file photo. Lithium is enjoying its moment in the spotlight – and at least some of the enthusiasm is solidly grounded in reality. (Dado Galdieri/AP)

Investor Newsletter

A growth sector to avoid, three stocks to soon hike dividends, and why oil prices are going nowhere Add to ...

The growth in electric car sales is about as certain as things get in business and investing, and, at first glance, this would seem an ideal time to buy the lithium miners that provide the main ingredient in the batteries that will power these cars. It’s not, and the situation provides a good example of the dangers of investing in early stage growth stories.

In February of 2016, Bloomberg released a special report forecasting that annual global sales of electric vehicles would rise 90 fold to 41 million cars by the year 2040. Each of these vehicles, given the slow development of new energy storage technology, is expected to carry a lithium-based battery.

This makes lithium miners sound like a tremendous investment. The problem, however, is that the mining industry themselves realized this first, and raced to invest in new production capacity. The result is an expected ocean of new lithium supply that will keep the commodity price low, according to a Report on Business feature by Ian McGugan,

“If all the new entrants that are vying to come onto the market succeed in financing their ventures … global production of lithium could rise to around 800,000 tons by 2025, far above projected global demand of around 400,000 tons.” 

There will be a time when lithium miners are a promising investment, but that is likely a long way into the future. The boom in lithium consumption hasn’t even started yet and, for at least a while, the investment theme seems already over.

No matter what the market sector, investors should assess every investment idea to uncover where the industry is in its growth cycle. The odds are highly stacked in favour of someone else realizing the opportunity first.    

- Scott Barlow

 

Stocks to ponder

Air Canada Investors may have been unprepared for Air Canada’s recent liftoff. In 11 trading days since late September, it’s up by more than a third, hitting a new 52-week high of $12.70 late last week. The company has only provided an innocuous, but positive, announcement on debt restructuring during this time, writes David Milstead. As it turns out, a fair amount of the gain may be coming because big investors, particularly in the United States, are warming to the Air Canada thesis.

Stingray Digital Group Inc.  This consumer stock appeared on the breakout list earlier this week, says Jennifer Dowty. The company broadcasts music and video content to an estimated 400-million television subscribers in 152 countries. The stock debuted on the Toronto Stock Exchange in June, 2015, at $6.25. In August, it reported better-than-expected results with rising revenues and adjusted earnings. it pays a dividend of 16 cents a year for a yield of about 2 per cent. There are four "buy" and one "hold" recommendation on the stock. The average one-year target price is $9.70, which implies 24 per cent upside potential over the next 12 months.

StorageVault Canada IncThis small-cap industrial stock, which operates storage centres across the country, has recently gained coverage from analysts who are forecasting solid potential returns, writes Jennifer Dowty. The company has been growing through acquisitions and posted strong second-quarter results in August. It pays a dividend of 1 cent annually for a yield of 0.8 per cent. It is covered by two analysts, one with a "speculative buy" recommendation and the other has an "outperform" recommendation. Target prices of $1.50 implies there is 24 per cent potential upside potential.

Loblaw Companies Ltd. Its share price is potentially exhibiting a bearish technical signal in the future – a “death cross,” writes Jennifer Dowty. A “death cross” is a potentially bearish signal for a stock that occurs when a shorter-term moving average, like the 50-day moving average, crosses below a longer-term moving average, such as the 200-day moving average. When this occurs, it marks a potential negative signal confirming the downtrend in the price action may have traction. The relative strength index is at 25, suggesting the shares are in oversold territory. Generally, a reading of 30 or below indicates an oversold condition. However, from a fundamental perspective, analysts see significant upside potential for this stock.

Cargojet Inc. The provider of time sensitive air cargo services was one of the picks of stock picks of Brian Pow, an analyst from Acumen Capital Finance Partners. He joined Jennifer Dowty for a live chat with readers on Thursday. According to Mr. Pow, Cargojet has several advantages, including the security of long-term contracts, a high barrier of entry for potential competitors and a lack of significant commodity risks. They're  now entering a seasonally strong period.

 

The Rundown

Fund management performance in Canada hits a new low
Tim Shufelt looks at a new report that shows that no Canadian funds focused on U.S. large-cap stocks outperformed the index over the past five years. "There numbers are ugly," said one executive.

These three stocks are poised to raise dividends
John Heinzl looks at three stocks that he expects will raise their dividend payments in the next three months including, uniform supplier Cintas Corp., telecom operator Telus Corp., and Canadian Tire's real estate investment trust, CT REIT.

Don't fear REITs
Having failed to fully rebound from the taper tantrum of 2013, the Canadian real estate investment trust sector is under pressure once again. Scott Barlow thinks those fears are not only overdone, but he also believes the sector is as attractive as its been in recent years

Four things people get wrong about housing
Rob Carrick looks at four major misconceptions about the housing market as regulations increase on one of the biggest investments most people make in their lives.

Credit Suisse reveals its top stock picks
If you want to beat the market, you need to diverge from consensus, writes Tim Shufelt. Contrarian investors seek to exploit inefficiencies by positioning themselves against the market’s popular sentiment. To that end, Credit Suisse has offered up its best ideas for betting against the Street. It lists five stocks to buy, and five to avoid.

Here's why oil and oil stocks are going nowhere
Futures markets indicate that bullishness on the price of oil is reaching 12-month highs, a surprising development when most signs point to minimal upside for the commodity’s price, writes Scott Barlow. Hopes for a OPEC oil deal are driving optimism but the cartel's production hit a record in September.

Four stocks to buy as cyclicals take market leadership
The shift in U.S. markets toward stocks of companies that are more sensitive to economic growth is sending a mixed message to investors, writes John Reese. On the one hand, uncertainty about growth and also the U.S. presidential election in November should argue in favour of investors continuing to embrace the defensive stocks in the utility and telecommunication sectors they favoured earlier in the year. But it’s clear, based on the past few months in the market, those stocks are falling out of favour and being replaced with financials, energy and technology stocks.

First-half leaders turn to laggards
Stock investors flipped the script when they passed the year’s halfway point – bad became good and good became bad, writes Tim Shufelt. The reversal has held across sectors and individual stocks since the end of June. First-half laggards have led and leaders have lagged. The market’s transformation can broadly be characterized as a rotation out of defensive pockets and into riskier ones.

 

Ask Globe Investor

The Question:

I am constantly hearing about selling short, sometimes as large as 25 to 30 per cent of the outstanding shares. My question is: why would anyone who owns a stock lend the shares to another person who has the intent of driving down the value of the owner’s investment?  I would think the small amount that they get would not offset the reduction in the value. Further to this, can my shares be lent by my broker without my approval?

The Answer: (By Nancy Woods)

Shorting a stock is not quite as simple as it sounds. If you want to short sell a stock, your broker needs to call his or her firm’s loan desk to see if the shares are available for lending. Shorting is more typical with higher priced and more liquid securities, and less frequently done for speculative penny stocks. If the firm does not own it in their own portfolio they have to attempt to borrow the stock from other firms. There is a lending fee charged by the lending firm and the cost varies based on a number of factors. Only if the shares can be borrowed can you, the client, short sell the stock. If you short sell a stock you do not have the influence to “drive” the stock price down, other than putting selling pressure on that security. It is typically that you are of the view that a stock is overvalued and will decline in price creating the opportunity for you to buy the shares back at a lower price than what you sold it at. This in turn is how you make a gain. If the stock you short sell pays a dividend, you are responsible for paying the dividend rather than if you owned the stock and received it.

As a client of a firm, your shares cannot be lent out to someone who is looking to short sell. Shares are held in trust for each client and are kept on separate books.

The most significant risk to a short-seller is that a stock, theoretically, can go up to an infinite price. Your risk then is infinite; whereas if you buy, or go long, a stock, your maximum loss is only what you paid for it.

If you are interested in capitalizing on a stock that you believe will go down in value, I suggest you further educate yourself with trading options. Options are derivatives that may be a suitable alternative to short selling. Options are complex and I only usually suggest them for the most experienced investor.

--Nancy Woods is an associate portfolio manager and investment adviser with RBC Dominion Securities Inc.

Do you have a question for Globe Investor? Send it our way via this form. Questions and answers will be edited for length.


What’s up in the days ahead

Norm Rothery debunks the so-called 4 per cent rule - the long-standing guideline that suggests you should count on a 4 per cent withdrawal rate from your retirement savings. Gordon Pape profiles a stock that can turn wine connoisseurs into winning investors. And we're going to hear how the new Dragons' Den star, Joseph Mimran, actually invests his own money.

Click here to see the Globe Investor earnings and economic news calendar.

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