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Investor Newsletter

Stocks that crush the index, investing in video-game fanatics, and why TransCanada is a buy Add to ...

The video game industry is one I like a lot as a long-term investment but I’m a bit uneasy with it on non-financial grounds.

The video game industry is benefiting from a U.S. economic phenomenon that has seen a 10-per-cent decline in the labour force participation rate for males in their 20s, according to the University of Chicago’s Booth School of Business. The Economist’s Money Talk’s podcast  on April 18 cited research estimating that for these males, 75 per cent of the increase in leisure time is spent on video games.

The trend has help create some huge winners in equity markets. Electronics Arts, for instance, has generated a 443 per cent cumulative return for the past five years or 40.2 per cent annually. Activision Blizzard has climbed 32.3 per cent annually for the period and European-based Ubisoft has jumped 48.5 per cent per year.

I’ve played these games at times and it’s remarkable how fast four hours can disappear while playing. They are brilliant – immersive, cathartic and addictive. The development of virtual reality technology will only enhance the experience. 

Video game companies, unlike defense contractors and cigarette manufacturers, don’t kill people so I’m not suggesting they’re evil or anything. I’m just not sure how much financial support is warranted for an industry that promotes shower-free isolation from the outside world for days on end. Nonetheless, the past investment returns have been compelling and investors can decide for themselves.

--Scott Barlow

This is the twice a week Globe Investor newsletter. If someone has forwarded this e-mail newsletter to you, you can sign up for Globe Investor and all Globe newsletters here.


Stocks to ponder
 

TransCanada Corp. John Heinzl is buying more of this stock in his Strategy Lab dividend portfolio as he's let some cash build up in his portfolio. Why TransCanada? For starters, the pipeline operator and power producer has an excellent track record of dividend growth. Fuelled by its growing asset base and steadily increasing cash flow, the Calgary-based company has raised its dividend for 17 consecutive years, including a 10.6-per-cent increase announced in January. Since he “bought” the shares for his model dividend portfolio in September, 2012, he's received five dividend hikes from TransCanada and the shares have posted an annualized total return – assuming all dividends had been reinvested – of 12.2 per cent. That easily beats the S&P/TSX composite index’s total annualized return of about 8.5 per cent over the same period. TransCanada also has lots in its pipeline for the future.


Nexus Real Estate Investment Trust.
This real estate investment trust (REIT) has an attractive yield of 8 per cent and a distribution that appears sustainable with its payout ratio sub-80 per cent, writes Jennifer Dowty. The unit price has positive price momentum, rallying 11 per cent year-to-date. Analysts are forecasting the unit price will continue to increase with a further gain forecast of between 16 per cent and 18 per cent. With a market capitalization of $106-million, the REIT is below the $200-million market cap screening threshold and as a result has never appeared on the breakouts list.


Constellation Software.
Can this Canadian software firm remain a shining star? asks David Milstead. Constellation has built its business through a never-ending series of acquisitions and the stock has, mostly, remained highly valued by investors, even as some critics have questioned whether the company can continue to succeed. An emerging thesis, however, is whether Constellation is providing enough information to allow its investors to assess those prospects. The company’s boosters point to changes in its most-recent earnings report and say Constellation may have quieted at least some of those critics. However, others have yet to be convinced.


Pure Technologies Ltd.
This stock's share price has been under pressure, writes Jennifer Dowty. It is one to watch as further weakness could be a future buying opportunity. The stock has a unanimous buy recommendation from six analysts, along with a 40 per cent anticipated price return. In addition, the company offers investors a 2.8 per cent dividend yield. This stock appears to have become a ‘show me’ story with investors sitting on the sidelines waiting to see an improvement in the company’s financial results before stepping in and accumulating shares.


The Rundown

Ten TSX stocks with a stellar track record of crushing index returns

We get it: Investors can’t beat the index. So why do we keep picking individual stocks? The latest reading on the number of equity mutual funds that have outperformed Canada’s benchmark index makes for sober reading for do-it-yourself investors. If most professionals can’t succeed, retail investors must struggle even more. According to S&P Dow Jones Indices’ SPIVA Canada scorecard for 2016, which was released on Wednesday, just 17.3 per cent of active managers investing in domestic equity outperformed the S&P/TSX composite index last year. That’s less than one in five. But many investors still want to own individual stocks, so David Berman crunched some numbers to find Canadian stocks that stand up to the same criteria used in the SPIVA scorecard.


An unwelcome surprise for economic growth and equity prices

The Citi economic surprise indexes are among the most important and useful indicators developed by major research firms. The problem now is that the U.S. economic surprise index is heading lower in a hurry, signalling the distinct possibility of a slowdown and equity market weakness, writes Scott Barlow. The surprise indexes are a great exemplar of second derivative growth or “change in the rate of change,” one of the most important concepts in investing.


Intriguing new way to read GDP growth gives mining investors reason to rejoice

China’s economy is growing even faster than official figures claim, according to a new study that uses satellite observations of nighttime lighting to measure the country’s expanding prosperity, writes Ian McGugan. It’s a finding that will surprise many Sino-cynics and it should come as good news to anyone who invests in mining companies or emerging markets. To be sure, estimating Chinese growth remains more an art than a science. Still, the research by economists Hunter Clark and Maxim Pinkovskiy of the Federal Reserve Bank of New York and Xavier Sala-i-Martin of Columbia University offers a fresh and intriguing way to gauge the Asian giant’s progress.


Take note of this new line of sophisticated ETFs

Imagine an investing strategy so intelligent, so sophisticated, that it’s difficult to explain to anyone who doesn’t have an afternoon to spare, writes Ian McGugan. That is the challenge facing Dimensional Fund Advisors, a firm with a couple of Nobel Prize winners on its payroll. For decades, the Austin, Tex.-based company sniffed at the notion of letting just anyone buy its funds. It answered the door only for institutional investors and a select group of financial advisers trained in its proprietary approach. Beginning this week, however, anybody with a few dollars to spare will be able to buy products in Canada that at least somewhat resemble a DFA fund. Manulife Financial Corp. has launched four exchange-traded funds (ETFs) designed by the high-powered intellects at the Texas firm. The new products, which trade on the Toronto Stock Exchange, cover a quartet of categories – large Canadian stocks, large U.S. stocks, mid-sized U.S. stocks and stocks in the developed world outside of Canada and the United States.


The Globe and Mail quick guide to cost-free ETF investing

There’s one small flaw in the argument that ETFs are the last word in low-cost investing, writes Rob Carrick. Because they trade like stocks, investors must generally pay commissions to buy and sell exchange-traded funds. That means a charge of roughly $5 to $10 per transaction for mainstream investors, depending on which online brokerage firm they use. To deke around these costs, consult The Globe and Mail Quick Guide to Cutting Your ETF Trading Costs.


Gordon Pape: My Conservative Portfolio has doubled its target

Gordon Pape writes that his Conservative Portfolio was created in September, 2011, for investors who are willing to accept reduced returns in exchange for lower risk. The goal is to preserve capital while earning a target return of two percentage points more than the yield on a five-year GIC from the major banks. The current RBC five-year rate is 1.6 per cent so we are aiming for gains of 3.6 per cent per year. The portfolio gained 3.9 per cent in the latest period, thanks mainly to the price surge in the units of the Brookfield LP. The rest of the portfolio was more or less flat.


Think twice before replacing your bonds with stocks

Bond yields have been characterized as “historically low” for many years – yet have fallen with few interruptions. Since the financial crisis, however, yields have been super skinny and have continued falling. Razor-thin yields challenge traditional balanced portfolios. So many are dumping some or all of their bonds for higher-yielding and higher-returning investments, writes Dan Hallett. But investors have been adding this extra yield (and total return) in exchange for increased exposure to stocks and treating them as bond replacements because of the associated income. Many have enjoyed the upside of this strategy but are likely unaware of the risk this involves. When (not if) the next bear market occurs, don’t expect these riskier bond replacements to offer any protection. He outlines some popular investments or strategies that many have used as bond substitutes.


Yield hunters, don’t take your recent success for granted

In case you haven’t noticed, interest-sensitive securities have staged a big comeback in recent weeks. After being bloodied in the wake of Donald Trump’s election victory, they have turned around and are once again making nice profits for investors, writes Gordon Pape. The numbers tell the story. As of the close of trading on April 20, the S&P/TSX Capped REIT Index was up 4.2 per cent for the month of April, after a flat first quarter. What’s going on? The answer is simple: Investors are becoming disillusioned with the prospects for the U.S. economy.


The best way to diversify your portfolio

The only free lunch on Wall Street is diversification. Putting assets in your portfolio that can help reduce your risk is the prudent thing to do, writes Larry Berman. For 15 years, analysts and strategists have been telling you to be bearish on bonds - that prices would fall and yields would rise. Until the election of Donald Trump, the reality is long-term bonds have outperformed stocks for the past decade. While that suggests the best of the bond market rally may be behind us, the same could be said for the equity market rally, given lofty valuations. Larry explains why long-duration bonds may be the way to go right now for proper diversification.


Others:

Ten stocks insiders are selling

Five stocks with dividend yields over 5 per cent

The week's most oversold and overbought stocks on the TSX


Number Crunchers

Earnings season: Six Canadian companies with potential to surprise on the upside

Ten Canadian consumer staples stocks showing safety and value

Six stocks for staying calm and cool in a red-hot housing market


Ask Globe Investor

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

In Saturday's Globe Investor, look for the next installment of Rob Carrick's ETF Buyer's Guide. This time around, he looks at global and international exchange-traded funds. On Monday, look for a Q&A with Brian Belski, chief investment strategist at BMO Nesbitt Burns, on where he sees markets heading from here (hint: those heavily invested in equities are going to like what he's going to say.)


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


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Compiled by Gillian Livingston

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