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A woman holds U.S. and Canadian flags in Ottawa. (CHRISTINNE MUSCHI/REUTERS)
A woman holds U.S. and Canadian flags in Ottawa. (CHRISTINNE MUSCHI/REUTERS)

Investor Newsletter

Why U.S. assets will outperform Canadian ones, an energy stock with growth potential, and a hot sector regardless of a Clinton or Trump win Add to ...

I wrote a column for last Thursday’s paper on the record high short positions on domestic banks. I don’t bring this up solely for the purposes of shameless self- promotion but because the pessimism regarding Canadian banks highlights a vital trend for investors – Canada and the United States are at polar opposite ends of the credit cycle. This is why, in many cases, the short positions on domestic banks are merely a source of funds to buy U.S. bank stocks.

Domestic household debt is notoriously high at 100.3 per cent of gross domestic product. South of the border, however, consumer debt levels have declined from 99 per cent of GDP at the peak of their housing bubble to 80 per cent, a 13-year low. U.S. households have ample room to borrow and spend while Canadians are tapped out.

This has numerous and important implications for equity performance and economic growth. The central business of banks is to make money by lending money and, with a three-year time horizon, it’s almost certain that credit growth in Canada, and bank profits, will slow. U.S. employment levels and wages are rising, albeit too slowly for the Federal Reserve’s liking in the latter case, which suggests that American bank lending and profitability are set to climb.

Both countries are modern, service oriented economies driven by consumer spending. Carrying oceans of debt, Canadian consumers are likely to retrench in the years ahead. This process would be particularly acute, and painful for the national economy, if interest rates and the monthly debt payments climb. The less-indebted U.S. consumer is better positioned to spend and drive gross domestic product expansion.

There is no reason to expect economic disaster in Canada and there will always be profitable domestic investments to be made. At the margin, however, assets sensitive to the U.S. economy are likely to outperform.  

-- Scott Barlow

 

Stocks to ponder

Seven Generations Energy Ltd. This is a solid performer in 2016, has 18 ‘buy’ calls and a 29 per cent upside potential forecast, writes Jennifer Dowty. Seven Generations, or simply 7G, is focused on growth from development of its Kakwa River project, a liquids-rich natural gas and light-oil project on the Montney in Alberta. Its recent results came in better-than-expected. The company doesn't currently pay a dividend. For 2016, management is guiding to total production of between 120,000 boe/d and 125,000 boe/d.

People Corp. This a human resources and employment services stock that continues to climb higher, rising 33 per cent year-to-date with analysts forecasting further gains of between 15 per cent and 20 per cent, writes Jennifer Dowty. Its latest earnings reported in July came in better-than-expected and the company recently completed a $20-million bought deal private placement. Management also holds about a 21-per-cent interest in the company. It doesn't pay a dividend and is trading at an enterprise value-to-EBITDA multiple of 11 times the fiscal 2018 consensus estimate. 
 

The Rundown

Whether it's Trump or Clinton, this sector should continue to perform well

The U.S. presidential election is, mercifully, drawing to an end – and although there’s a sense that the contest may no longer be close, it will not be until Nov. 8 that we know the victor for sure, writes David Milstead. No matter the result, though, there are winners: the U.S. defence sector and investors who have stuck with its giants. Most defence stocks have shown healthy gains this year as it became clear that the U.S. military would likely be insulated from shock regardless of which party wins the election. That has led many to question the robust valuations for the shares, wondering whether the chance to profit has passed.

What if my broker goes bust? … and other reader questions

John Heinzl answers a slew of reader questions including about what to do if your broker goes out of business, how exchange-traded funds are priced, and how much U.S. stocks your portfolio should hold.

P&G: A dividend growth powerhouse

In this Yield Hog video, John Heinzl talks about why he like Procter & Gamble in his Strategy Lab Dividend Portfolio -- it's been paying a dividend for 126 years and has boosted its dividend for 60 consecutive years.

Is Tangerine working hard for your money? Hardly

The online bank Tangerine is currently running a terrific TV commercial about how hard people work. Give it top marks for production values, emotional punch, gritty realism – and hypocrisy. “You work hard for your money,” the spot concludes. “Does your bank?” If you judge by the tiny 0.8-per-cent return on its signature product, a savings account, Tangerine doesn’t break a sweat, writes Rob Carrick. Now, a couple of credit unions are getting more aggressive by creating banking subsidiaries to serve people across the country. And they're offering much higher rates for savings accounts.

Two REITs to consider for an income portfolio

Gordon Pape says the real estate investment trust market has softened recently as investors price in the expected December rate increase by the U.S. Federal Reserve Board. The price retreat has had the effect of raising yields, creating an opportunity for income-seeking investors to establish positions or add to existing ones. Here are two REITs that Gordon Pape has recommended to readers of his Income Investor newsletter in the past and still consider to be buys: Chartwell Retirement Residences REIT and Pure Industrial REIT.

Dividend increases set to return at Canadian oil sands producers

Dividend growth is back on the table for some of the biggest oil sands producers, even as crude prices struggle to top $50 (U.S.) a barrel, writes Jeff Lewis. Stung by more than two years of slumping oil prices, several bitumen producers cut or scrapped payouts to investors or halted share buybacks to conserve cash. Now, some of them are signalling that payments may be on the rise if and when a commodity rebound takes hold. Companies seen as best-positioned to return more cash to shareholders as oil prices rise are Imperial Oil Ltd., Suncor Energy Inc., Canadian Natural Resources Ltd. and even Husky Energy Inc. The latter eliminated its cash dividend in 2015.

Why this earnings season may not be kind to Canadian insurance stocks

Earnings season is poised to test what has been one of the hottest segments in Canadian stocks over the past three months, writes Tim Shufelt. Life insurance stocks are on their best run in more than three years – a stretch of time that has generally been fruitless for lifeco shareholders. But while investor enthusiasm is running high, the group’s quarterly financial results are shaping up to be “unspectacular,” according to Canaccord Genuity.

The great short-the-TSX-banks strategy is on the wane

Short positions on Canadian bank stocks ramped to record highs beginning in early 2015 after Merrill Lynch strategist Michael Hartnett listed “short Canadian banks, and buy U.S. bank stocks” among his top trading ideas, writes Scott Barlow. Pessimism on domestic bank stocks remains high, but at least the number of investors shorting them has, in most cases, levelled off. There is also a sense that, with a longer-term perspective, shorting Canadian bank stocks was “fighting the last war” – the outperformance of U.S. banks was largely over just as short positions on domestic bank stocks starting climbing.

$50 could be cap for oil prices, says hedge fund manager

Perhaps peak oil is a credible theory, after all. Not in its original prediction of declining global supply, but rather as an outlook for a structural demand shock, writes Tim Shufelt. Due to disruptive technologies like the electric vehicle, which claims a growing share of the automobile market, projections for long-term oil demand are increasingly constrained. And the industry’s transformation is not likely to relent, said Anna Nikolayevsky, who runs New York-based hedge fund Axel Capital Management. As a result, the Street’s average forecast for oil prices is overly optimistic, Ms. Nikolayevsky said. “Rather than expecting a bottom at $50, like many on Wall Street do, we believe that $50 is the current [cap].”

Two words that can crimp investors’ returns: Undue influence

As investors, we’re trying to buy assets at prices that will generate an attractive return. A return made up of interest, dividends and capital gains. It sounds simple enough, but there’s plenty of things preventing us from making sound, rational decisions, writes Tom Bradley. There’s the challenge of assessing, prioritizing and assimilating the unrelenting flow of news on currencies, interest rates, economic growth and companies. There’s central bank pronouncements, takeovers and new products. And, of course, elections. There are also some powerful factors that have a recurring and predictable influence on what investors hold, and I would suggest they lead to suboptimal portfolios. Call it undue influence.

Tesla Motors’ visionary management offers lesson in long-term growth

Almost three years ago, Chris Umiastowski added shares of Tesla Motors to his Strategy Lab model growth portfolio. The price per share has grown nicely from about $120 (U.S.) back then to about $200 today, making for an impressive return on investment. It has also been fascinating to follow the wild ride. Tesla stock, just like a Tesla electric car, is exciting. If you are going to pick your own stocks, you may as well pick stocks that are personally interesting so you remain well-informed. Mr. Uniastowski says he has been positively surprised by how the Tesla story has expanded well beyond his line of sight back in 2013.

What Sionna Investment's Teresa Lee has been buying and selling

Some people look at small caps as high-risk, low-visibility stocks that can be difficult to buy and sell as needed, writes Brenda Bouw. Teresa Lee sees opportunity. The co-chief investment officer at Toronto-based Sionna Investment Managers specializes in managing smaller-sized company investments for a broad range of clients. Ms. Lee spoke to The Globe and Mail recently about a few of her favourite names, including one iconic Canadian name her firm reluctantly sold recently after it was taken over by a larger company.

Ask Globe Investor

The Question:

How much importance do you put on price-to-earnings ratios? And which one do you prefer -- the trailing P/E or the forward P/E?

The Answer:

The price-to-earnings multiple is a useful tool but it shouldn't be looked at in isolation; it is just one of the many metrics an investor needs to consider. Higher-growth stocks will typically have higher P/Es and lower-growth stocks will have lower P/Es, but there is no magic number to look for. As a dividend investor who owns a lot of mature companies, my stocks tend to have P/Es in the low to mid teens -- sometimes higher. Anything higher than, say, a P/E of 25 makes me nervous because it implies that the market is expecting earnings to grow at a rapid clip. High P/E growth stocks can produce some heady returns, but they can also plummet if growth fails to live up to the market's lofty expectations. Rather than look at the P/E based on trailing 12-month earnings, I prefer to focus on the P/E based on expected earnings for the current year and the next fiscal year. As long as you have confidence in the earnings estimates, these are more useful measures, in my opinion, because they are forward-looking rather than backward-looking. I also like to flip the P/E on its head and look at the expected earnings per share as a percentage of the stock price. This is what's known as an "earnings yield" and, generally, the higher it is, the better.

--John Heinzl

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

Jennifer Dowty will take at look at Empire Co., Robert Tattersall examines investing decision-making pitfalls, and Andrew Hallam explains factor investing. 

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

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Compiled by Gillian Livingston

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