The paradox of the information age is that a combination of greed, for money and influence, and political advocacy might be leaving us worse-informed than our parents' generation. Like most trends, this problem has spread to finance and investment.
We'd think that the hard sciences would be relatively immune from questionable, incentivized research but biotechnology giant Amgen Inc found that's not the case. In three different studies, Amgen researchers attempted to replicate foundational biochemical experiments and found that the result weren't replicatable. In addition, right-leaning Commentary Magazine strongly implies that politically-driven reluctance to study biological gender differences may have played a role in numerous female deaths where the sleep aid Ambien is concerned.
The trick underlying question is: if we can't trust the research, can we trust the rebuttals either? We are simultaneously drowned in information and left to fend for ourselves.
Chris Dillow, an economist with a previous long tenure with one of Japan's largest banks, addressed this crisis (and I do believe it's a crisis, albeit a slow-moving one) as it applies to investors,
"How can we protect ourselves from being misled by spurious [financial] research? I'd do so by asking two questions. One is: does this finding fit with other evidence we have? The notion that there are dozens of ways to beat the market fails this test. If this were the case, we could expect to see most fund managers beat the market … My second test is: is there a plausible mechanism to explain why this finding exists, and why it might persist? The easy part of this is finding a cognitive bias to explain it. For example, momentum investing might work because investors underreact to good news, and defensive investing might succeed because investors neglect defensive stocks in favour of glamorous growth ones. The trickier job is to explain why the smart money doesn't exploit the mispricing and so eliminate it."
Mr. Dillow's column is well worth reading. The one thing I would add is that if any investor is asked to pay money for a trading system with a 'proven track record' of making everyone who buys it rich, they should run away immediately. Unless they're already wealthier than Bill Gates.
Stocks to ponder
Artis Real Estate Investment Trust The REIT offers its unitholders one of the highest yields of all members in the S&P/TSX composite index real estate sector. Its 8-per-cent yield is eye-candy to income investors. While the REIT offers investors an attractive yield, over the past few years the unit price has languished, trading down from the high teens to the low teens. The downside unit price risk appears to be contained given the REIT's current valuation, writes Globe Investor equities analyst Jennifer Dowty.
Industrial Alliance Insurance and Financial Services Inc. Industrial Alliance is a leading insurance and financial services company in Canada, and its stock is technically breaking out positively on the charts, writes Jennifer Dowty. In February, many analysts lifted their recommendations. The consensus target price is $61.56, implying 5-per-cent upside potential for the share price over the next 12 months.
McCoy Global Inc. Last year was a tough one for oil service companies and McCoy Global saw revenues collapse from $82-million to $27-million. Cost of sales actually exceeded revenues, so the income statement showed a $6-million operating loss even before restructuring charges, impairment charges and other losses drove the final comprehensive loss to $38-million, or $1.30 a share. None of this was good news, but the balance sheet paints a more robust picture because many of these charges were non-cash in nature. If you are a value investor with a focus on balance-sheet items in your search for bargain, this could be a stock for you, writes Robert Tattersall.
Pollard Banknote Ltd. This is an undiscovered small-cap consumer discretionary stock that's breaking out positively on the charts, says Jennifer Dowty. Winnipeg-based Pollard Banknote is a leading provider of lottery products. In the company's annual information dated March 13, the company estimated its market share at around 85 per cent of all instant tickets sold in Canada. The company has achieved steady sales and earnings growth.
Income stocks are falling out of favour
The sharpest rise in Canadian bond yields since the outset of the oil crash has made laggards of dividend stocks and bond proxies. The recent upswing in long-term rates lifted the benchmark yield on five-year Government of Canada bonds over the 1.3-per-cent mark this week for the first time since late 2014, when energy prices were in free fall in the lead-up to a Bank of Canada rate cut. Predictably, income-related stocks have not fared well in the rising-rate environment. As yields have increased in recent months, rate-sensitive sectors such as utilities, telecoms and real estate have all materially underperformed the rest of the Canadian market. It's a trend that looks set to continue, writes Tim Shufelt.
Rumours of tax hike on capital gains stoke investor anxiety
Speculation that Ottawa will hike capital-gains taxes in next week's budget is spreading fear among Canadians sitting on large paper profits in stocks, real estate and other investments. Rumours have swirled since last year's budget that the Trudeau government might raise the capital gains inclusion rate to three-quarters or two-thirds, taking in billions of dollars a year in extra revenue, mainly from wealthier Canadians. Ottawa currently taxes half of the profits Canadians earn on the sale of capital property, such as real estate, stocks, bonds or a business. Even the whiff of a possible change has triggered a blowback on Bay Street and in the business community, where the capital-gains issue is seen a measure of the Liberals' willingness to tax the rich. Larry Berman is even suggesting investors short the TSX if there is indeed a move to tax capital gains and dividends in the budget.
U.S. market exuberance on 'America First' platform turns to skepticism
Donald Trump was elected on the premise that an "America First" economic platform would improve U.S. job creation and economic growth at the expense of trading partners, including Canada, where he believed trade deals put his country at a disadvantage. According to one measure, things are not going as planned for the new President and for now, the market appears to be losing faith in the bold reflationary experiment, writes Scott Barlow.
Why Bill Ackman's Valeant exit is not a sell signal for investors
Investors widely interpreted Bill Ackman's abrupt exit from Valeant Pharmaceuticals International Inc. this week as a loss of faith – and, therefore, yet another sell signal for the beleaguered shares. But there was a compelling reason for the trade, regardless of the company's prospects: The tax benefit to Mr. Ackman's hedge fund greatly exceeded what it would likely gain by sticking it out with the company. That means the news of Mr. Ackman's sale means little for whether bottom-fishing investors should pick up the shares, which are now testing remarkable new lows, writes David Milstead.
Concordia International is the real lead in destroying shareholder value
Valeant Pharmaceuticals International Inc. gets the headlines, but the real leader in the race to the bottom among debt-heavy, acquisitive pharmaceuticals is Concordia International Corp. The company posted another disastrous earnings report this week, but equity investors barely blinked – ignoring the risk that this $2 stock could soon be worth nothing, writes David Milstead.
The week's most oversold and overbought stocks on the TSX
There are three stocks in oversold, technically attractive territory according to the Relative Strength Index, led by TFI International and Dorel Industries. But Scott Barlow picks Canadian Utilities as the focus this week in part because he was surprised that an allegedly boring utility stock was overbought. Also, after an initial glance it looked like RSI has been successful in finding effective buy and sell prices for the stock over the past two years.
Ask Globe Investor
What is the difference, if any, between the adjusted cost base for a stock investment and the book value that is reported on my discount brokerage statement? Can I use the broker's book value for calculating my capital gains?
Book value, or what some brokers call "average cost," is another name for the adjusted cost base (ACB) of an investment. It represents the total amount invested – including commissions, less any return of capital distributions – divided by the number of shares or units.
I have checked my discount broker's average cost against my own ACB per share calculations and, while they generally match up, there have been exceptions. For that reason, brokers typically include a disclaimer telling clients not to rely on the financial institution's calculations.
As my broker states: "Calculating average cost for the purposes of income tax is the responsibility of the client. The average cost is provided for informational purposes only and BMO InvestorLine cannot guarantee the completeness or the accuracy of the information."
One reason brokers can't guarantee accuracy is that a client may also hold shares of the same security at a different financial institution. Those shares would affect the client's ACB, but the broker would have no way of knowing about them and would not include them in its own ACB calculation.
What I always suggest is that you keep your own detailed records and calculate the ACB yourself, then compare it with the broker's ACB (assuming all of your shares are with the same broker). If the numbers match up, you can be fairly certain they are accurate. If not, you may want to double check your math or contact the broker for an explanation.
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What's up in the days ahead
Tempted to warm up your portfolio by buying into Canada's hottest IPO of the week, Canada Goose? David Milstead this weekend weighs in with his advice. And remember the investment adviser who borrowed $250,000 to invest in the depths of the financial crisis? He has sized up the current financial environment and decided it's time to sell. Rob Carrick will tell us all about it in Monday's Globe Investor
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Compiled by Darcy Keith