The most definitive statement I've ever seen regarding the value of sell-side research for the average investor was published Friday. Bloomberg's Matt Levine, a lawyer and former Goldman Sachs banker wrote, "If you believe that the job of a sell-side analyst is to tell people which stocks to buy and which ones to sell, you need to stop believing that right now, because it is not true."
Mr. Levine then provided a wealth of evidence that the value of Wall Street analysts to large institutional investors is to provide access to management – scheduling meetings between corporate executives. After all, large portfolio managers will calculate their own target prices and make their own investment decisions, not blindly take analysts' word for it.
For individual investors, there is value in research reports but they must remain aware of bias at all times. Research will slant toward the positive in order to maintain access to management, and companies that frequently issue debt or equity will be favoured because analysts are looking to attract business to their investment banking departments.
The issue of investment time horizons is also important. Research reports are targeted to professional investors who are judged quarterly against an index. They must be aware of every short-term change in market trends or risk dramatic underperformance of the benchmark and unemployment.
The average investor has the freedom to think longer term, and doesn't have to react to every market gyration. This is an important advantage and also means they can afford to ignore huge swathes of sell-side reports.
-- Scott Barlow
Three big numbers to note
5.80% The rise in the S&P 500 since the Nov. 8 election of Donald Trump to the close on Jan. 19, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.
-19.94% The decline in the S&P 500 between the day Barack Obama was elected and when he was inaugurated on Jan 20, 2009.
233.94% The total return in the S&P 500 since Barack Obama was sworn into office in 2009.
Stocks to ponder
Enercare Inc. This security may soon appear on the positive breakouts list, writes Jennifer Dowty. It offers investors an attractive 5 per cent yield combined with double-digit upside expectations. The stock has recently experienced a number of positive technical signals. The average one-year target price is $21.33, suggesting the shares have a potential price return of over 15 per cent over the next twelve months.
Chartwell Retirement Residences. This trust may soon appear on the positive breakouts list, writes Jennifer Dowty. It offers investors a 3.8-per-cent yield combined with 9-per-cent upside expectations. The Trust's past performance is positive. Looking at the Trust's price returns over the past three years, which does not include distributions, the unit price rallied 15.4 per cent in 2016, rose 6.6 per cent in 2015, and gained 19.2 per cent in 2014.
Emera Inc. The stock offers investors a 4.6 per cent yield combined with 15 per cent upside expectations. From a historical perspective, the stock's valuation appears to have room for multiple expansion, and as a result, for the share price to appreciate, writes Jennifer Dowty.
Three charts that show the 'Trump trade' is losing steam
The "Trump trade" – U.S. economic optimism driving the commodity, banking and transportation sectors that dominate the S&P/TSX composite higher – was great for domestic investors. The trend, however, appears to be fading fast, writes Scott Barlow. Bank stocks on both sides of the border were among the main beneficiaries of the recent rally. The relationship between economic optimism and bank stocks lies in the steepness of the yield curve. Longer-term bond yields rise along with growth expectations and this increases the difference between short-term and long-term borrowing rates. Because banks borrow funds at short-term rates, and lend them out at longer term levels, a steeper yield curve means higher profits. More recently, however, the yield curve has flattened but bank stocks have remained elevated. This increases the likelihood of a correction in bank stocks.
Why both Mexico and Russia could tantalize the adventurous investor
Donald Trump wants to change the world. For investors, he already has, Ian McGugan. Just look at the value of the Russian and Mexican stock markets since he was elected on Nov. 8, 2016. Their wildly divergent paths demonstrate how the Twitterer-in-chief has taken a hammer to global expectations – and that's even before his official inauguration on Friday. Mexico, the target of much of Mr. Trump's bombast, has watched its equities shrivel in U.S. dollar terms as investors contemplate the fresh havoc that a border wall and new tariff barriers could wreak. Meanwhile, Russian stock values have surged as punters bet that the bromance between Vladimir Putin and The Donald will bring about an easing of sanctions against Moscow.
New investment statement still won't expose billions of dollars in fees
The financial industry is promising Canadian investors clarity on fees, though the new reporting won't entirely clear the haze, writes Tim Shufelt. Many Canadian investors will soon receive their first statements under the Client Relationship Model Phase 2 (CRM2), which will disclose how much they pay to their financial advisers and their firms. Given the widespread lack of fee awareness, the price tag is sure to come as an unpleasant shock to many. But even that figure falls well short of the total costs of investing for the average investor. Among the fees and commissions required on CRM2 compliant statements, the bulk of fees Canadian investors pay on mutual funds will not be found.
Indexers take note: The Dow is now beating the S&P 500
The Dow Jones industrial average is capturing the attention of headline writers as it nears the 20,000-point milestone, but something far more interesting is going on with the blue-chip index than a lengthy flirtation with a big, round number: It is beating the S&P 500, writes David Berman. Over the past three months, the Dow has risen nearly 9 per cent, versus 6 per cent for the S&P 500 – a remarkable difference over a short time period and one that raises questions about what's driving the outperformance, how long it will persist and whether investors should pay more attention to the Dow as an investment.
Investors rediscovering the merits of value stocks
Value investors finally have something to cheer about, writes Ian McGugan. Their favoured investing style roared back into fashion in recent months after a long, painful period of underperformance. Such shifts in style often persist, so fans of bargain equities may have much more to crow about in the months ahead. The value school of investing emphasizes buying stocks that are cheap in comparison to fundamentals. It surged from "worst to first" in U.S. markets in 2016, and also rebounded strongly in Canada, according to Bernie Nelson, North American president of Style Research, a London-based firm that tracks how various investing styles are faring in markets around the world.
Looking for income? Here are the top 10 dividend payers in the Dow
The Dogs of the Dow is an investing strategy that traces its origins back to the early 1950s. The idea is simple: invest your money each year in the top 10 dividend payers in the Dow Jones industrial average and sit back and wait for the profits to roll in, writes Gordon Pape. The theory is that these companies have been oversold and will snap back to outperform the overall Dow in any given year. Each Jan. 1 you adjust the list to add new high dividend payers and drop off those that have seen their yields drop out of the top 10. Does it work? Sometimes. However, as a strategy to build a high-yielding U.S. stock portfolio, the Dogs are worth a look.
This is one kind of diversification you definitely don't need
A reader recently asked for some feedback on his approach to diversification. Rob Carrick gives it a thumbs-down as a classic case of di-worsification. It's not that this person owns too many funds or stocks, which is the classic definition of di-worsification. Rather, the issue is that he has two investment advisers. Another person asked me this week whether multiple advisers makes sense, so I figure I should speak out. The answer is no.
A starting point for successful portfolio management
With the start of a new year, investment strategists and Bay Street analysts are releasing their top stock picks and recommendations for 2017. Fourth-quarter earnings are also starting to flow briskly, writes Jennifer Dowty. This makes it a good time for investors to review their portfolio holdings to assess if they should increase, decrease or even eliminate positions. Here are four key factors to look at in order to assess the quality of a company's management.
An overlooked investing story: The rebound in preferred shares
A happy but overlooked investing story of the past year is the rebound in preferred shares, writes Rob Carrick. The S&P/TSX preferred share index was up 18.4 per cent for the year to Jan. 13, a good start on erasing a few years of pure misery for the sector. The cumulative three-year loss for the index was 15.7 per cent, even after the rally of the past 12 months.
The amazing power of long-term dividend growth
January is barely half over, but already John Heinzl has already received dividend increases from two of the stocks in his Strategy Lab model dividend portfolio. And there are more to come. He says he loves getting dividend increases. They put more money in his pocket and confirm that his investing strategy is working. But to really appreciate the power of dividend growth, you can't look at dividend increases in isolation. You have to look at the cumulative impact of dividend increases over many years, he adds.
Trump's tantrums signal bumpy road for Canadian auto parts stocks
The U.S. Supreme Court did not say "the power to tweet is the power to destroy," but investors are finding that the country's president-elect is particularly adept at wiping out shareholder value with his periodic blurts, writes David Milstead. The latest victims, this time from an interview with Donald Trump, are Magna International Inc. and Linamar Corp., which fell nearly 4 per cent Monday, and failed to recover Tuesday, after Mr. Trump unleashed yet another attack on foreign automobile imports.
Grab-bag of risks halt energy's stock-market gains
Euphoria that gushed into the oil patch as 2016 drew to a close is sure subsiding quickly, writes Jeffrey Jones. The Organization of Petroleum Exporting Countries's renewed discipline on production accelerated gains in Canadian energy stocks, as investors grew hopeful – after long last – of an end to the downturn that has wrought so much pain on companies and governments that rely on their success. Indeed, in the last quarter of the year, the Toronto Stock Exchange's capped energy index rocketed up 20 per cent. Top gainers included such big names as Encana Corp., Suncor Energy Inc. and Imperial Oil Ltd. But since then, the index has tailed off by 5 per cent. What gives?
What do the Golf Town troubles say about retail investment prospects
Is Golf Town's plunge due to the sport's decline in popularity or does it suggest a larger trend in the outlook for retail? Or is the sector still a good investment for pension funds? This article takes a hard look.
Ask Globe Investor
Since I don't own any bank stocks, which one would you recommend?
It's hard to go wrong with a Canadian bank stock over the long term. Over the past decade, a period that includes the financial crisis and recovery, the S&P/TSX commercial banks index has delivered a total return of 55 per cent. That's about triple the gain for the S&P/TSX composite index over the same period.
The stellar group return suggests that buying a mutual fund or exchange-traded fund that holds all the big banks is a good way to approach the sector.
Admittedly, though, some banks perform better than others, raising the potential for scoring bigger gains with individual picks. While it might be tempting to pick the stock with the biggest dividend yield or lowest valuation, there's a simpler approach that tends to deliver outsized gains: Buy last year's laggard.
A lagging bank stock tends to rebound with impressive gains the following year as investors pounce on a turnaround story. This approach worked with Bank of Nova Scotia last year, when the stock surged 34 per cent. If it works again in 2017, then CIBC is the stock to buy.
-- David Berman
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What's up in the days ahead
In Saturday's Globe Investor, David Rosenberg shares his views on the investing landscape now that Donald Trump has been sworn in as the most powerful person on the planet. David Berman will take a look at the investment case for railways after a very volatile week for the sector. And on Monday, Norm Rothery looks at the few remaining stocks on the TSX that could still be considered value stocks.
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Compiled by Gillian Livingston