"If there were ironclad investing rules, we would all be following them."
I like quoting Ritholtz Wealth Management CEO Josh Brown because unlike most finance writers he gets irritated publicly and bluntly says what he believes. In the midst of the early-February market volatility he wrote,
"You may end up conversing with a person swearing by some rule of thumb or another as though any kind of constant can be applied to a complex, adaptive, biological system like the investment markets … [but] If there were ironclad rules, we would all be following them. If there were inter-market relationships we could set our watches by, everyone would always know what time it was. If there were immutable formulas, we'd all have adopted them a long time ago. If there were an answer, we'd have all had the whisper of it imprinted on our very souls."
I entirely agree with Mr. Brown's inference that biological systems, not physics, are the more accurate metaphor for markets. I can't imagine the frustration of an investor who treated 'low price to earnings stocks outperform' as an immutable law of physics similar to gravity or Einstein's relativity. The value investment style has significantly underperformed growth and momentum styles for almost the entirety of the post-crisis time frame.
Much like an ecological environment, market returns are the result of the relative strength and interaction of different forces. In the real estate investment trust (REIT) sector for instance, profits are the residual of the financing costs of owning properties – a function of bond yields and interest rates – and rental income. When bond yields and borrowing costs rise, the company will attempt to adapt by raising rents to compensate, and the wealth of their tenants will determine whether that is successful.
There is, in this example, no law of physics that says 'if bond yields do this, then REIT profits do this'. If their tenants are growing income quickly, they can grumble but accept rent increases and little changes. In other words, the hypothetical REIT profits will depend on the relative strength of the negative effects of higher borrowing costs and the growth rate (or rate of decline) in tenant cash flow.
This is a simplified case. In the real world there are numerous forces affecting companies at any given time. Management effectiveness and corporate culture, overall economic growth rates, wage costs, technology, exchange rates, government regulation … the list is endless. The success or failure of a company, and their stock price, is the result of the tug of war between all of them, not a single equation.
-- Scott Barlow, Globe and Mail market strategist
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Stocks to ponder
Chorus Aviation Inc. (CHR-T). This dividend stock is approaching an oversold level. Its share price has fallen sharply due to an equity financing, which is intended to help finance the company's growth. The stock is trading at a reasonable valuation, in-line with historical levels. Analysts are forecasting 30 per cent upside potential, including the 5.6 dividend yield. Halifax-based Chorus Aviation owns Jazz Aviation LP, Air Canada's regional airline that provides services to many smaller communities. Jennifer Dowty reports.
Waste Connections Inc. (WCN-T). Waste Connections Inc. picks up trash, but investors have been more impressed with what the company delivers: Market-beating returns, impressive cash flow and a sound acquisition strategy. Will the good times persist through rising interest rates? The company, the combination of Texas-based Waste Connections Inc. and Toronto-based Progressive Waste Solutions Ltd. following a 2016 merger, operates in 39 U.S. states and six Canadian provinces, removing solid waste and providing recycling services for residential, commercial and industrial customers. David Berman reports.
Goodfood Market Corp. (FOOD-T). The growing popularity of meal-kit delivery services has helped to drive up the share price of Goodfood Market Corp., one of Canada's largest and fastest-growing companies in the nascent sector – but there are risks ahead, including intensifying competition from large retailers. Shares of Montreal-based Goodfood are up about 40 per cent since it went public at $2 on June 7. Both analysts who cover Goodfood, currently Canada's only publicly traded meal-kit delivery provider, have a "buy" on the stock with an average 12-month target price of $3.13, or about 12 per cent above its current price around $2.80. Brenda Bouw reports.
Black Box Corp. (BBOX-Q). What should one do when a stock is purchased and there is a quick realization that the buy was either a complete screw-up or very, very premature? This is what happened to The Contra Guys when they acquired digital-services provider Black Box Corp. for their personal accounts at around US$3.60 a share in November. Today, it trades at around US$2.10. Oopsie. They explain what went wrong, but why they aren't throwing in the towel yet.
Rob Carrick's 2018 ETF Buyer's Guide: Best bond funds
Bond ETFs are not at their best in a rising interest rate world. And yet, the case for filling up the bond side of your portfolio using exchange-traded funds instead of bond mutual funds or individual bonds and guaranteed investment certificates remains strong. You get low-cost diversification in a liquid investment that you can trade any time, unlike GICs. Rob Carrick takes a look at some bond ETFs for your portfolio.
Will these new products finally get the mutual-fund industry to lower fees?
Canada needs a bigger selection of mutual funds like it needs an extra month of winter. And yet, some good for investors may come from the four actively managed mutual funds that Vanguard, the U.S. investing giant, is preparing to launch in the Canadian market. Expect fees for these funds to be dramatically lower than what our domestic fund companies charge. Rob Carrick takes a look.
Ezra Levant's Rebel fund with a cause: What could go wrong?
If you're concerned that the far right isn't generating enough xenophobic content, then Ezra Levant has a deal for you: Invest your savings in the Rebel Freedom Fund and watch the anger flow. The pitch: You get a stable source of income and he gets some much-needed funding to keep the lights on at The Rebel, his floundering online hub for Islamophobes and climate-change deniers. And hey, it's also eligible for registered retirement savings plans. But be warned: Even acolytes of the far right may find the fund has less substance than Mr. Levant's famously shrill videos. David Berman reports.
These dividend stocks are sending a 'bad news' buy signal
Investors seeking high-yielding dividend income may want to defy the distress signal flashing on some blue-chip utility stocks. Rising interest rates have pushed the price of electrical utility stocks down in recent months, and this has in turn send their dividend yields higher. The combination of falling prices and rising yields suggest a stock is falling out of favour with investors, which makes sense as far as utility stocks go. They're classic rate-sensitive stocks and could remain under pressure until rates stabilize and move lower. But that's a one-dimensional view. If you consider dividends as well as share price, the current weakness in utility stocks could be a buying opportunity for long-term investors seeking dividend income. Rob Carrick reports.
Miners, pot stocks help reward TSX Venture Exchange investors
Investors that bet on a handful of Canadian junior-resource, marijuana and technology stocks were rewarded with big triple-digit returns last year, far outpacing the double-digit gains on the broader U.S. markets and the more mediocre result of Canada's benchmark index. The average share price of the Venture 50, the TSX Venture Exchange's annual list of the top 50 performing companies across five sectors, was up a whopping 279 per cent in 2017. That compared with a 19-per-cent increase in Wall Street's S&P 500, a 28-per-cent jump in the Dow Jones industrial average and a 6-per-cent rise in the S&P/TSX Composite index last year. Brenda Bouw reports.
When it comes to investing, there's safety in simplicity
It's easy to make investing overly complicated. Every day, nearly 10,000 U.S. mutual funds and exchange-traded funds compete for investor dollars with thousands of listed stocks, not to mention a dizzying array of options, futures and derivatives and trillions of dollars of bonds. Every day, fund managers are trying to lure investors with new strategies to make money. As investing greats Warren Buffett and Peter Lynch will tell you, simpler is often better. In fact, Mr. Lynch put it this way: "The simpler it is, the better I like it." John Reese looks at three stocks that score well with simple models inspired by some of the greatest investors.
Ask Globe Investor
Question: What's your opinion of Keg Royalties?
Answer: I don't own it, but the units have tumbled about 8 per cent in the past month, which may appeal to bargain hunters. In a report this week, analyst Elizabeth Johnston of Laurentian Bank Securities noted that Keg Restaurants Ltd., the operating company, posted strong same-store sales growth of 4.8 per cent for the quarter ended Dec. 31. Ms. Johnston has a "buy" rating on Keg units and expects distribution increases of about 2 per cent in each of 2018 and 2019.
-- John Heinzl
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What's up in the days ahead
Rob Carrick provides the next instalment of his ETF buyers guide, Clare O'Hara takes a look at the active ETF industry, and Jennifer Dowty chats with an analyst from National Bank.
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Compiled by Gillian Livingston