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Jack Welch earned the nickname "Neutron Jack" for how he cleared out underperforming businesses.
Jack Welch earned the nickname "Neutron Jack" for how he cleared out underperforming businesses.

Investor Newsletter

Why you should ignore CEO personalities, payout ratios explained, and the 'permanent portfolio' Add to ...

I’ve never spent much time assessing the personalities of CEOs and corporate executives and suggest most investors adopt this policy. Projecting confidence, likability and stability is a primary job for public-facing executives and this is the case no matter how well the company is performing. Some CEOs are better at it than others but investors should keep in mind that there’s no correlation between the charisma of a CEO and the quality of a company as an investment.

This is not to suggest that management skill doesn’t matter – far from it.  The place to assess management skill, however, is not in public appearances but in financial data. Multiples like return on equity and operating profit margins are a much better indication of management performance than how brightly they smile for the cameras or how funny their press conference asides are (although admittedly Goldman Sach’s successful CEO Lloyd Blankfein seems like a very funny man.) 

Former General Electric CEO Jack Welch is a telling example. There were managers at one of my previous employers who hand wrote Christmas cards because that was what Mr. Welch did, as if copying his affectations would translate into better executive performance.

But Mr. Welch was not a great CEO because he hand wrote greeting cards, it was because he was utterly ruthless. Mr. Welch’s early nickname was ‘Neutron Jack,’  because when he was done with efficiency measures, entire office buildings were empty as if they’d been hit with an atomic weapon. These drives for efficiency quickly became evident in GE profit growth.

It is completely understandable for investors to associate a leader’s personality to a company but I think it’s unwise. It gives the illusion of understanding the company when financial data would accomplish this task a lot better. 

-- Scott Barlow


Stocks to ponder
 

Postmedia. Postmedia’s problems are piling up with print revenue declining. David Milstead examines the state of the company after its 2016 restructuring. He says that less than six months after the plan was completed, the continuing deterioration of the company’s financials suggest Postmedia may yet face another reckoning.


AbbVie Inc.
Gordon Pape says he likes this stock because it's an international giant, employing 30,000 people in 70 countries, with 21 research and manufacturing facilities in the United States, Europe and Asia. The company focuses mainly on oncology, immunology, virology and neuroscience. The company’s bestselling drug is the anti-inflammatory Humira, which is used to treat such illnesses as rheumatoid arthritis, psoriasis and Crohn’s disease. It’s a huge money-spinner, generating almost $4.3-billion (U.S.) in sales in 2016. Some experts have estimated that might not be until 2027 before anyone can challenge Humira. In the meantime, AbbVie is developing an impressive pipeline of new products. This is an impressive company, with the one negative (a significant one) being its current overreliance on one product to drive its business.


The Rundown
 

A potentially lucrative (and high-risk) strategy

Betting on a turnaround at Valeant Pharmaceuticals International Inc. comes with a lot of uncertainty, writes David Berman. But what about diversifying your risk and betting on a bunch of Valeant-like stocks that are priced for failure? Buying one or two beaten-up stocks comes with a lot of risk. But spreading out your bet among a number of stocks is more compelling because it reduces the downside risk while preserving much of the reward should a few of these dogs survive. He looks at this strategy in hindsight of the financial crisis, and then looks at Canadian stocks that fit the bill now.


Great news for the loonie and TSX: The global driver of commodity demand has re-emerged

China’s demand for resources is such a dominant driver of commodity prices that it’s almost not worth looking at anything else to judge the future course of asset prices. The current spike in China’s imports is great news for Canadian equities and the loonie, writes Scott Barlow. Most investors are aware that the Chinese economy is the world’s largest driver of commodity demand but the sheer scale is still astonishing. A 2016 report from the Financial Times noted that China accounts for half of the entire planet’s demand for aluminum, nickel, copper and zinc.


For Canadian investors, the permanent portfolio is worth considering

Investors rushed to rediscover the permanent portfolio after suffering from painful losses caused by the crash of 2008. It promises a soothing combination of relative safety and reasonably good returns, writes Norman Rothery. The portfolio is the brainchild of Harry Browne, who passed away in 2006. Mr. Browne was an investment adviser, prolific author and Libertarian candidate for president of the United States in both 1996 and 2000. His permanent portfolio is easy to describe. It invests equally in stocks, long-term government bonds, cash and gold. The idea is to use simple low-fee index funds (or exchange-traded funds) to gain exposure to the different asset classes, where applicable, and to rebalance once a year.


Here’s why value investors find spin-offs so intriguing

Value investors, following the Ben Graham approach to investing, like to invest in companies that are obscure and undesirable which, because of that, tend to be mispriced by the markets. These are small-cap companies that are not covered extensively by analysts and tend to have low price-to-earnings or price-to-book ratios. In general, this is common knowledge. What is less known, however, is that value investors additionally have an interest in spin-offs, which also create mispricing due to a supply-demand imbalance, writes George Athanassakos.


Some Trump-inspired investing ideas (and what you should do about them)

The market falls, and the headlines suggest investors now have some doubt about the “Trump trade.” Gee whiz, who could’ve thought? Sarcasm aside, there’s a real irony in the market’s nearly unchecked rise even as the least-popular President in postwar history continues his amateur-hour chaos, writes David Milstead. For how long have we been told investors crave certainty, only to watch them pile into the market in the past four-plus months in the face of unprecedented instability in the White House? It’s not to say, of course, that there aren’t certain “Trump themes” in investing today. Here are a few of them, for your consideration. If you think we’re in the early days of a paradigm-shifting presidency, by all means consider these as recommendations. On the other hand, this could also be a nifty list of stocks to avoid – or even short, if you share his views of Mr. Trump’s incompetence and the frothiness of the Trump bump.


Dividend payout ratios don’t have to be so perplexing

A reader asked John Heinzl this question: Where can I find accurate dividend payout ratios for companies? The numbers I see on investing websites don’t always agree. Finding information about a company’s payout ratio often requires some digging. If you can’t find it in the company’s annual report, quarterly results, investor presentation or elsewhere on the company’s website, try checking transcripts of quarterly conference calls. Some companies post conference-call transcripts, but for others you might have to go to a website such as seekingalpha.com. A Google search is another way to find transcripts, he writes. If all else fails, he suggests you e-mail the company’s investor-relations department and ask what the payout ratio is and how it is calculated. Most companies will be more than happy to help. If you’re considering a dividend stock investment, the payout ratio is a critical piece of information to know.


This bond ETF is the master of disaster

Bonds are insurance against disaster in either the economy or the stock market, and bond ETFs are a good way to get bonds into your portfolio, writes Rob Carrick. But in the eyes of one investing veteran, there’s a particular bond ETF that stands out for providing disaster insurance. It’s the iShares 20+ Year Treasury Bond ETF, traded on NASDAQ under the ticker symbol TLT. “The U.S.-dollar long bond is the ultimate store of value when things go awry,” Bernard Leahy, former chief investment officer for the Hydro Quebec pension fund and currency manager at the Caisse de dépôt, said in an e-mail.


Where a big-picture investor is placing his bets now

D.H. Taylor takes a “big-picture” approach to investing, writes Larry MacDonald in this week's Me and My Money column. He evaluates economic data to form a view on the direction of interest rates, currencies, commodities and stocks. Then he takes positions in stocks, bonds and options to capitalize on the trends.


Ten companies with recent insider buying activity

Jennifer Dowty outlines 10 companies that have experienced recent insider buying activity in the public market through their direct and indirect ownerships. Many purchases are relatively small with insiders making modest investments.


Ten stocks insiders are selling

Several of the stocks listed in this article are trading near multi-year highs or record levels, writes Jennifer Dowty. Insiders are trimming positions and locking in attractive profits. The 10 companies listed have experienced recent insider selling activities in the public market through their direct and indirect ownership positions.


Others

Video: Carrick Talks Money: Three ways retirees can defend their savings against a stock market

Gordon Pape’s mailbag: RRIF withdrawals, investing in India and other questions


Number Crunchers

Ten Canadian REITs with attractive yields and valuations

 


Ask Globe Investor


Question:
Many authors compare India's booming markets to what happened in China some years ago when their valuations were growing exponentially. How can we invest to participate in this?
I heard about Goldman Sachs ActiveBeta Emerging Markets Equity ETF (GEM-N). Part of this ETF is invested in India. How would you rate this?


Answer:
This ETF is coming off a strong year, with a gain of 25.6 per cent (market price) over the 12 months to the end of February. However, you’re not getting much exposure to India here. It represents just 9.7 per cent of the fund’s assets, less than China (27.1 per cent), Korea (15.4 per cent), and Taiwan (10.8 per cent).

There are many ETFs that invest exclusively in India. The largest is the iShares MSCI India ETF, which was showing a year-to-date return of 16.1 per cent as of March 27. There are also some India small-cap funds, which have been shooting out the lights recently. Look at the VanEck Vectors India Small-Cap Index ETF (SCIF-N), which is ahead 27.2 per cent this year.

But India funds can be very volatile – SCIF lost almost 5 per cent in 2016 and shows a cumulative loss of 44 per cent since it was created in 2010. Be sure you understand the risks before you invest.

-- Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters.

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

John Heinzl will update his Strategy Lab portfolio in Wednesday's Yield Hog column (hint: he's been smiling a lot around the office of late). And coming up this weekend, look for the third installment of Rob Carrick's ETF Buyers' Guide. This time he spotlights some of the best U.S. equity funds to consider.

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


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Compiled by Gillian Livingston

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