What not to buy for 2010: Shares of companies with minimal profit growth, or no profits at all.
Small, unproven stocks.
Volatile stocks.
In other words, all the stuff that worked so amazingly well in 2009. This year, do the opposite. Look for larger-size companies with strong profit growth and less volatility. Lower risk plus higher growth? Can you get the two together?
“This is what the market's offering today,” said Chris Guthrie, president of portfolio managers Hillsdale Investment Management. “It's pretty rare, and that's the cool thing. You can't usually get it.”
If you've got cash piled up because you lacked the confidence to buy into the rally of 2009, here's a potential road map for getting back into the market. Same goes for cautious investors seeking ideas for their registered retirement savings plans and tax-free savings accounts.
Hillsdale's outlook for 2010 is based on an analysis of 20 different measures of size, risk, growth, profitability, valuation, indebtedness and other factors. The biggest stocks were compared with small stocks, the most volatile stocks were compared with the most stable names and so on.
The data used by Hillsdale stretched back to 1986, which means some patterns emerged to help explain what happened in 2009. First off, the various indicators were largely unanimous in highlighting how small, speculative stocks without solid profits did best last year. “We've just had a rally in no-growth, high-volatility stocks,” Mr. Guthrie said. “In the U.S., they're calling it the dash to trash.”
The other message sent by the various indicators is that a dramatic surge of small, speculative stocks like we saw last year is rarely repeated. One of the risk measures used by Hillsdale showed a pattern where a year in which investors embraced risky stocks was typically followed by one or more years of risk aversion.
Herein lies a key investing theme for 2010: Do not expect what worked last year to repeat. It's not just Mr. Guthrie and his firm saying this, either. In my Thursday column (read it here: http://tgam.ca/Hjf), Bob Gorman, chief portfolio strategist at TD Waterhouse, argued that dividend stocks will work better this year than the speculative stocks that led in 2009.
This is the year where this pattern works to the advantage of the gun-shy investor who views that 33-per-cent rise by the S&P/TSX composite index as an indication that stocks have rallied excessively and are risky. Yes, some stocks went crazy last year. But others, including many familiar names, are still worth a look.
For this column, Hillsdale created a list of 20 stocks it describes as offering good growth prospects with low risk, and a list of 20 no-growth, high-risk stocks. As a portfolio manager, Hillsdale mixes long positions in stocks (a bet on a rising share price) with short positions (you profit when a stock falls in price). The latter list of stocks would be candidates for short selling.
The lists were created from a starting point of 1,200 stocks listed on the Toronto Stock Exchange and the TSX Venture Exchange. Stocks with a market float (total of all their shares) of less than $200-million were eliminated, and the remainder ranked according to their recent earnings and cash flow momentum. Earnings are like overall profit, whereas cash flow reflects money actually coming into the business.
Stocks were then given a score out of 100 to reflect their growth potential. The best growers with low-risk ratings make up the first list, while the worst growers with high risk make up the second. Risk is defined as the extent to which prices bounced up and down over the past 180 days.
The names on the “good-growth, low-risk” list are a mix of the familiar and the unexpected. Along with Royal Bank of Canada, Bank of Nova Scotia, Rogers Communications and Tim Hortons, you'll find income trusts such as Rogers Sugar Income Fund and medium- to smaller-size companies like Stantec, Equitable Group and Home Capital.
