Looking for investing ideas? Here’s your weekly digest of the Globe’s latest insights and analysis from the pros, stock tips, portfolio strategies plus what investors need to know for the week ahead.
When Algonquin Power issues new shares (like it just did), investors should buy
Algonquin Power & Utilities Corp. announced a $900-million offering of new shares this week, adding another reason to invest in this Canadian renewable energy heavyweight: Rallies tend to follow Algonquin’s share offerings, David Berman writes. While some companies issue shares to buttress their balance sheets during tough times, Algonquin tends to issue new shares to fuel growth opportunities. The latest issue is no exception.
In December, Algonquin said it would invest US$9.2-billion over the next five years, including US$2.5-billion in renewable energy, with a development pipeline of more than 1.4 gigawatts. This sort of promise of growth tended to drive the company’s share price higher after other recent share issues. Read more about Algonquin’s track record and stock action here.
More from David Berman: Warren Buffett likes pipelines. Maybe you should too
Stock analyst reports these days seem too optimistic – can I believe them?
A reader writes to Gordon Pape: I have access to different analysis on stocks. They all suggest target prices, most of the time higher than at present, and they very rarely suggest selling. These days, it is very easy to find reports suggesting returns of over 50 per cent for the next 12 months. They all seem to be based on a coming return to a normal economy and seem to forget about the risk of the current context and recession. These reports are prepared by competent and honest people, but I do not know to what extent they can be useful for investors.
He responds: There are many divergent views of stocks these days, because of the tremendous uncertainty we face. These reports can provide useful insights but read them carefully to see if they make sense in the context of your own knowledge and objectives. Forget about price targets – I think they are meaningless right now. Rather, look for references to strong balance sheets, dividend sustainability and growth potential in the current environment. That will help you to decide which reports have credibility in relation to your personal requirements. Read more of his answers to reader questions here.
It’s not the popular view, but higher inflation and higher interest rates are coming
Everyone is convinced that inflation and interest rates will remain low well beyond 2022, finance professor George Athanassakos writes. I beg to differ: Higher inflation and higher interest rates are coming.
The COVID-19 related collapse of the business cycle has pushed the real interest rate in the short run well below its long-term trend. This gives the false impression that the real rate is falling, when it is only the short-term real rate that is falling – the underlying trend is still upward.
Similarly, inflation in the short run is not going up because of COVID-19 and for reasons such as technology and corporate concentration, which limit price increases and wage growth. But the long-term trend may be more worrisome. We may be reaching a peak in productivity growth as baby boomers retire and are replaced by less-experienced workers who will nevertheless be in high demand. These workers will demand higher wages. This means higher inflation down the road. Read the full article here.
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What are dividend-adjusted share prices and how are they calculated?
Dividend-adjusted share prices control for fluctuations that are caused by dividend payments as opposed to market forces, John Heinzl writes. The best way to explain this is with an actual example. BCE is scheduled to pay a dividend of 83.25 cents a share on July 15. The ex-dividend date for this payment was June 12, meaning purchasers on or after this date will not receive the dividend.
In theory, if the dividend were the only factor affecting BCE’s share price, the stock should have dropped by exactly 83.25 cents on the ex-date. But stocks are subject to myriad other forces, and BCE’s price fell by just 56 cents that day. It’s reasonable to assume, then, that if it weren’t for the stock going ex-dividend, BCE would have gained 27.25 cents. This is the dividend-adjusted price change.
Why is this number important? Well, an investor who looked at BCE’s unadjusted price decline might have concluded that the stock had a bad day, when the shares actually had a positive return on a dividend-adjusted basis. When a stock pays an especially large dividend, the price drop on the ex-dividend date can be upsetting for shareholders who may not understand the reason. Read more, including another reader question answered here.
More from John Heinzl: A&W, Goodfood and other investing stars and dogs for the week
Bargain-hunting investors must turn sights (and dollars) away from U.S. stocks
Over the past decade, the path to market riches ran straight and narrow. It consisted of buying U.S. stocks and shunning everything else, Ian McGugan writes. Since July, 2010, the S&P 500 benchmark of large U.S. stocks returned an eye-popping average of 14.3 per cent a year, dividends included. Over the same patch, Canadian stocks generated a piddling 3.9-per-cent total return. Meanwhile, the entire group of developed markets outside the United States managed to squeak out only 5.8 per cent.
The gap in performance was remarkable – but don’t count on it continuing. Lofty valuations, toxic politics and soaring infections suggest investors should be cautious of Wall Street. Bargain hunters should start looking elsewhere. Read more about the case to diversify more widely here.
What investors need to know for the week ahead
Many market heavyweights are releasing their latest earnings in the week ahead, including Netflix, Microsoft, Johnson & Johnson, PepsiCo, Citigroup, JPMorgan Chase, Bank of America, Wells Fargo, Morgan Stanley, Goldman Sachs, Charles Schwab, Blackrock, Kinder Morgan, Alcoa, and Cogeco.
Economic data on tap include: Canada’s industrial product price index and raw materials price index for June (Monday); U.S. consumer price index for June (Tuesday); Canadian existing home sales, average prices and MLS Home Price Index for June, Canada’s new motor vehicle sales plus manufacturing sales and orders for May as well as U.S. import prices for June (Wednesday); U.S. retail sales for June (Thursday); Canada’s wholesale trade for May plus U.S. housing starts and building permits for June (Friday).
The Bank of Canada makes its next interest rate policy announcement on Wednesday.
Looking for more investing ideas and opinions?
- Top Canadian stock picks from Scotiabank
- One of Canada’s richest people invests a further $3-million in this dividend stock
- RBC’s guide to investing in Canadian bank stocks and current top picks
- A growth stock that continues to soar, rising 79% in 2020
- How long can markets and the economy move in opposite directions? These indicators hold valuable clues
- Bank of America’s top ten U.S. stock picks for growth and value investors
- The highest yielding stocks on the TSX, plus risk data
- Buffett’s Berkshire Hathaway reduces share count, suggesting possible buybacks