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Investor Newsletter

What to do every time you see a scary headline; a hot dividend stock; and banks take over the TSX Add to ...

Richard Bernstein, former chief quantitative strategist at Merrill Lynch and founder of RB Advisors, wrote an entire book arguing that investors would be a lot better off ignoring day-to-day coverage in business media, the bulk of which he judged ‘noise.’ This is not, of course, a welcome sentiment here at The Globe and Mail but in straight investment terms it does have appeal. In my case, I stopped watching televised finance coverage five years ago and feel better off for it.

Working with no information is obviously a terrible idea for investors so a balance must be found. To this end I have a suggestion: every time an investor sees a headline ask the question: “Will the asset value of any of my holdings be different than it would have been 12 months from now as a result of this information?”  

There are many reasons to read a news story – I’m not about to tell anyone what they should find interesting. But mentally asking the question above provides a way for investors to allocate their finite attention spans to what really matters to future returns.

A lot of stories are interesting in one way or another but very, very few change the course of asset prices for anything longer than a week. Mr. Bernstein is right – a lot of finance media is misguided hype with some fearmongering thrown in. Many portfolio managers on television are there primarily to market themselves or their newsletters, not provide guidance.

Few reasonable people deny there is too much information available in the fake news era. A conscious focus on relevant data is becoming a necessary requirement for successful investing.    

-- Scott Barlow

Stocks to ponder

Pure Industrial Real Estate Trust. This trust yields 5 per cent and is positioned for growth, writes Jennifer Dowty. Pure Industrial Real Estate Trust (PIRET) owns a portfolio of 164 industrial properties. Its greatest geographical presence is in Ontario, where it has 74 properties, representing 35 per cent of the Trust’s total gross leasable area. The Trust’s U.S. exposure represents its second largest exposure at 31 per cent of total GLA, followed by Alberta at 18 per cent. The Trust’s largest tenant is FedEX, representing 25 per cent of revenue. There are 13 analysts that cover the Trust, of which, eight analysts have buy recommendations, three have hold recommendations, and two analysts are currently restricted on the Trust given its recent equity financing. The average one-year target price is $6.31, implying there is approximately 5 per cent upside potential in the unit price over the next 12 months.

McCormick & Co. Looking to spice up your dividend portfolio? You might consider adding a dash of McCormick & Co., writes John Heinzl. As dividend stocks go, McCormick may not enjoy the same profile as, say, Johnson & Johnson or Procter & Gamble. But in the spice rack, it’s the undisputed king. With 2016 sales of $4.41-billion (U.S.), the Sparks, Md.-based company is the largest player in the global spice and seasonings industry. Its brands – which include McCormick, Clubhouse, Lawry’s, Thai Kitchen and many others – are sold in 140 countries and command a 20-per-cent share of the consumer spice market, or about four times its next-biggest competitor. Complementing its retail business, McCormick sells its flavourings and seasonings to many of the world’s largest food producers and restaurant chains.

Enerflex Ltd. This security has sharply outperformed its sector peers as well as the TSX Index. The share price is in an uptrend and the stock may soon appear on the positive breakouts list, writes Jennifer Dowty. There are nine analysts that cover this company, and the stock has an unanimous ‘buy’ call. The consensus target price implies 19 per cent upside potential.

Canadian Western Bank. As goes oil, so goes Canadian Western Bank’s share price. But the Edmonton-based lender wants to upend this relationship with an ambitious strategy to expand into Ontario, writes David Berman. The bigger challenge may be to get investors to follow along.

Cenovus Energy Inc. Foreign-based energy companies are fleeing Canada’s oil patch and Canadian oil companies are doubling down, forcing upon investors a tough question: Who should they side with? The question has grown particularly urgent after Cenovus Energy Inc. announced a $17.7-billion deal to acquire oil sands projects from ConocoPhillips Co., writes David Berman. The deal, which drastically reduces the Houston company’s exposure to Canadian oil while Cenovus doubles its production, reinforces a trend of asset sales that is becoming hard to ignore. It’s enough to make investors in Canada’s oil patch wonder whether they should move on with foreign energy companies instead. But there are compelling reasons to stay put – at least if you have the fortitude for volatility, feel optimistic about oil prices and have a contrarian nature.

The Rundown

Ontario targets unethical financial advisers with new industry measures

The Ontario government announced new measures on Friday aimed at protecting investors from unethical advisers and enhancing oversight of the financial services industry, writes Tim Shufelt and Janet McFarland. New legislation will be proposed giving industry regulators the right to enforce disciplinary action and fines through the courts, Finance Minister Charles Sousa said in a speech at a financial advice conference in Toronto.

David Rosenberg: Here's the bullish case for the market right now

If David Rosenberg was making a bull case for equities at this juncture, here is what he would be stressing.

Banks, not commodities, now steer Canada’s market trends

A funny thing happened in the Canadian stock market through the latest commodity dip: nothing. Or close to it, writes Tim Shufelt. As metals and crude oil prices stumbled through late winter, the S&P/TSX composite index was uncharacteristically composed for a market heavily concentrated in natural resources. As a consequence of the oil crash and the multi-year decline in the price of everything from aluminum to zinc, the resource sectors that have long-steered Canadian equity trends now occupy a somewhat diminished role. In their place have stepped the mighty banks.

How Warren Buffett broke my heart

Like a lot of folks, Ian McGugan writes that he sometimes checks on how his former crushes are doing. What saves this from being utterly creepy is that his past flames are money managers. They’re the deep thinkers whose opinions once made him — and the market — quiver with excitement. These beautiful minds include: Warren Buffett, Bill Miller, Mason Hawkins and Francis Chou. In early 2007, before the financial crisis struck, he devoured every word they uttered. They were the dream team of the investing world, and for good reason. Each had compiled a stunning record of success. Ten years later, these gentlemen are looking more and more ordinary. Still, he gives them credit for ingenuity. Each of them has let him down in a different way. By doing so, they’ve made him think more deeply about this treacherous investing landscape.

How former Dragons' Den star Arlene Dickinson invests her money

Arlene Dickinson has a different take on diversification than most investors. Instead of putting her money into a broad range of businesses, the chief executive officer of Calgary-based Venture Communications and former Dragons’ Den star is focused entirely on Canadian-based food and health companies, writes Brenda Bouw. It’s a strategy that works for the marketing communications entrepreneur and venture capitalist, given her background and beliefs. Ms. Dickinson is behind District Ventures, Canada’s first “accelerator program” for packaged-goods companies in the health and wellness sectors, and recently launched District Ventures CPG, her first venture-capital fund to invest in early-stage companies in those sectors.

Investors have it wrong. The Barrick-Goldcorp-Kinross deal is a smart move

The three-cornered deal announced on Tuesday by Barrick Gold Corp., Goldcorp Inc. and Kinross Gold Corp. is better than the market thinks it is, writes Ian McGugan. While investors’ reaction was immediately and uniformly negative – Goldcorp stock plummeted and Barrick and Kinross shares both lost ground – the shuffle of assets seems like an eminently sensible transaction. The agreement, which centres on the Cerro Casale gold and copper project in northern Chile, gives each of the companies something it values highly: cash for Kinross, new reserve potential for Goldcorp and a low-cost way to move forward a shelved project for Barrick. It also allows Goldcorp and Barrick to share the risk of developing a swath of Chile’s Maricunga gold belt, while letting the two companies spread expenses among a number of nearby projects.

Gordon Pape: My High-Yield Portfolio continues to exceed expectations

In March 2012, Gordon Pape created a High-Yield Portfolio for those seeking above-average cash flow and who are prepared to accept a higher level of risk. This month marks its fifth anniversary. Since this portfolio invests all its money in stocks, it is best suited for non-registered accounts where any capital losses can be deducted from taxable capital gains. Also, a high percentage of the payments from this portfolio will receive favourable tax treatment as eligible dividends or return of capital. The fund’s initial value was $24,947.30, and I have a target average annual rate of return of 7 per cent to 8 per cent annually. Here is a review of the securities we own and how they have performed in the six months since our last review in September.

How TD Bank just missed an open goal with its managed ETF portfolios

TD has the ball in front of an open goal. The goalie lies on the grass, enjoying a sandwich break. TD just needs to shoot. But then, the big green player decides to get fancy. TD pulls the ball onto its foot before bouncing it up and down. Of course, that sounds foolish. But Toronto-Dominion Bank just did something similar, writes Andrew Hallam. They recently launched some Managed ETF Portfolios. Each fund contains individual ETFs. TD’s Managed Portfolio prospectus says, “The portfolio adviser uses strategic asset allocation to seek to achieve the fundamental investment objective of the Portfolio.” It’s unclear how much TD will alter the allocations, year to year. But any amount of strategic allocation would be like dancing with the ball when the net is clearly open.

These TSX stocks have the best profit growth prospects

The approaching end of the first quarter of 2017 is a good time to identify stocks with the greatest increase in profit expectations. There are currently eight S&P/TSX composite stocks companies representing both rapidly improving earnings outlooks and attractive valuation levels. The search for TSX stocks with the fastest-improving profit outlook began by ranking all benchmark stocks by percentage change in 2017 earnings estimates. To assess valuations, Scott Barlow tossed out all companies with trailing and forward price earnings ratios above the S&P/TSX composite average. Eight stocks made the cut, and the names are listed in this story.

Q&A: Odlum Brown's Stephen Boland on stocks with upside potential

Jennifer Dowty had an online chat with Stephen Boland about some of the stocks he covers. The full online discussion can be read here.

Two U.S. dividend ETFs that offer low costs and good diversification

In this video, John Heinzl looks at two Vanguard ETFs that are low cost, well diversified and show good dividend growth.

Feeling pressure to buy investments? Try this

A strategy for investors who want advice without a sales pitch to buy products: Partner a fee-for-service financial planner with a robo-adviser, writes Rob Carrick.

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

The S&P/ TSX Composite had a strong week, rising 1.1 per cent as of Thursday’s market close. The benchmark is in technically neutral territory according to Relative Strength Index (RSI) with a reading of 52 that is about halfway between the buy signal of 30 and the RSI sell signal of 70, writes Scott Barlow. There are only two index constituents trading at oversold levels implying a stock price bounce in the near term – Klondex Mines Ltd. and Element Fleet Management Corp..

Number Crunchers

Looking beyond North America: Three stocks in attractively valued sectors

Morningstar strategy targets less-familiar stocks outside the S&P/TSX composite


Ask Globe Investor

Question: I read your recent article on the spice maker McCormick & Co. Could you please explain to me how you can keep recommending U.S. stocks that I, as a Canadian, must purchase at about a 33-per-cent premium in price (because of the currency exchange rate) before I earn dividends that my wife and I need to survive in retirement? And then I get hit again with U.S. withholding taxes. I simply cannot get over the reality of handing over $1.33 to receive $1 in spendable value where I live.

Answer: First, let me address your comment about U.S. withholding tax. If you hold your U.S. dividend stocks in a an account that is specifically for retirement purposes - such as a registered retirement savings plan or registered retirement income fund - you will be exempt from withholding tax under the Canada-U.S. tax treaty. Be careful, though, because U.S. shares held in a tax-free savings account or registered education savings plan are not exempt from withholding tax.

Now, let me respond to your objection with respect to the currency. Your contention that a Canadian investor has to "hand over $1.33 to receive $1.00 in spendable value" is incorrect and appears to be based on a misunderstanding of how the exchange rate affects the value of a U.S. investment.

I’ll illustrate my point using McCormick (MKC-N) as an example.

MKC recently traded at $98.43 (U.S.) and it pays an annual dividend of $1.88 (U.S.). The yield is therefore 1.91 per cent ($1.88/$98.43) (I'll come back to the yield in a moment).

At the current exchange rate $1 (Canadian) = 75 cents (U.S.), as a Canadian if you want to purchase 100 shares of MKC it will cost you $9,843 (U.S.) or $13,124 (Canadian).

Say you later decide to sell your 100 MKC shares. Assuming the value of the Canadian dollar and the price of MKC have not changed, you could sell your MKC shares for $9,843 (U.S.) and receive $13,124 (Canadian) - which is exactly what you paid for them. (I'm ignoring currency conversion costs here to keep things simple, but they would amount to about 2 to 3 per cent in total over the two trades.)

So, apart from the currency conversion cost, you would not have lost anything, because you are not actually "handing over $1.33 to receive $1 in spendable value". You are handing over approximately $1.33 (Canadian) for an investment worth $1 (U.S.), but again, you can convert that $1 (U.S.) back to $1.33 (Canadian) at any time and come out (roughly) even.

Now, if you were going on a trip to the U.S., then yes, you would have to pay $1.33 (Canadian) for every $1 (U.S.) that you spend there, but even then it does not necessarily mean that you would be paying 33 per cent more for everything, because $1 (U.S.) and $1 (Canadian) do not necessarily have the same purchasing power in their respective countries. What's more, buying a U.S. investment and paying for a U.S. hotel room are two very different things. You can always sell the U.S. investment and recoup the value in Canadian dollars, but the money spent on a hotel room is gone.

Now let's look at MKC’s dividend.

On 100 shares of MKC you will receive $188 (U.S.) in dividends. If you take your dividends in Canadian dollars, you will receive $250.67 (Canadian), minus currency conversion costs.

Your yield in Canadian dollars would therefore be the dividend of $250.67 (Canadian) divided by the purchase price of $13,124 (Canadian), which equals 1.91 per cent. Notice that this is exactly the same yield that a U.S. investor would make. The fact that the Canadian dollar trades at $0.75 (U.S.) does not change the yield you would get.

Don’t get me wrong. I agree that there are legitimate reasons to think twice before investing in a U.S. stock. Currency conversion costs are one factor to consider. Future movements in the exchange rate are another. If the Canadian dollar rises after you buy the U.S. shares, then the value of your U.S. investment - and the value of the U.S. dividend it pays - will both fall when converted to Canadian dollars. That would obviously be bad for you.

On the other hand, if the Canadian dollar falls after you buy the U.S. shares, the value of your U.S. investment - and the U.S. dividend - will both rise in Canadian dollars. That would be good for you.

But if the Canadian dollar remains at its current level, the currency will not affect the value of your U.S. investment or the U.S. dividend when converted to Canadian dollars.

Bottom line: The fact that the Canadian dollar trades below par with the U.S. dollar does not, in and of itself, put you at a disadvantage.

-- John Heinzl

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