An investor in a hurry to place assets in a hot market theme is likely already too late. That’s only one of a few important insights in a recent paper by asset management firm RB Advisors, founded by former Merrill Lynch chief quantitative strategist Richard Bernstein.
The main thrust of “Innovation” and “Disruption” are “BS” is that the first two terms have been “hijacked by marketers ready to sell the latest overvalued IPO, raise the largest venture capital fund, or gather exchange traded fund assets.” In actual fact, innovation and disruption have been a feature of capitalism for hundreds of years.
Mr. Bernstein argues that future returns for stocks is often relatively predictable over longer time frames. In the late 1990s, for instance, much of what was promised during the late 1990s tech bubble did come to pass - internet and cell phone usage, for example, did grow exponentially from 2000 to 2010.
Most investors that owned technology stocks at the end of the millennium, however, lost money during the following decade. After rushing madly into tech stocks at ludicrous valuations at the end of the ’90s, including a large number of IPOs of steadily declining business quality, investors saw the value of technology and telecom stocks underperform dramatically in the early 2000s.
The report argues that markets have become Darwinistic – only the strongest see rising stock prices when the profit cycle declines. Global profits began declining in 2018, and the pandemic further reduced the number of companies capable of generating earnings growth. Slowly but surely, investor assets gravitated towards the large cap technology stocks that were still growing and market leadership narrowed to extremes last seen in early 2000.
The report is cagey about recent government gestures toward imposing anti-trust legislation on the largest tech companies. The author doesn’t want to declare a political opinion, but he notes that it seems odd that a sector so full of innovation has such a small number of dominant companies.
Mr. Bernstein expects a new profit cycle will begin in 2021 in part because year-over-year growth rates are almost certain to be high after 2020′s lockdowns. This is good news for value investors: “Investors can comparative shop for growth because earnings growth is everywhere. A comparison shopper within the stock market is called a value investor.”
As someone who worked at Merrill Lynch during Mr. Bernstein’s tenure, I can confirm that his message has been consistent over time. He believes investors should always be careful about the stock prices they pay, avoid being affected by meaningless buzzwords and follow the profit cycle closely.
-- Scott Barlow, Globe and Mail market strategist
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Stocks to ponder
Profound Medical Corp. (PRN-T) Year-to-date, this small-cap health care stock has rallied 55 per cent. The stock has a unanimous buy recommendation with an average one-year target price implying a potential gain of 37 per cent over the next 12 months. But as Jennifer Dowty tells us, this is a stock best suited for consideration by longer-term investors. The company is in the infancy stage of its commercialization strategy and is not yet profitable. Successful execution by management on its commercialization strategy will be a key driver for the stock price. (for subscribers)
BlackBerry Ltd. (BB-T) The company’s stock price is still struggling, despite its shift out of the smartphone arena. But The Contra Guys are reverting their recommendation to a buy from a hold, believing a tripling in the stock lies ahead. They explain their rationale. (for subscribers)
Vitalhub Corp. (VHI-X) Shares in this health-care information systems provider have rallied over 60 per cent year-to-date. On Tuesday, its share price plunged 14 per cent on high volume after the company announced a bought deal financing with an offering price significantly below the previous day’s closing price. Given this correction, this is a stock that investors may want to put on their radar screens, especially as heightened volatility reduces the stock’s valuation. The stock has a unanimous buy recommendation from four analysts with an anticipated one-year return of 37 per cent. Jennifer Dowty has a full profile of the stock. (for subscribers)
Short sales on the TSX: What bearish investors are betting against
Short sellers have raised their bets against a number of retail, solar energy and cannabis companies. On the flip side, they retreated from some beleaguered sectors – particularly energy companies. Bank exchange-traded funds also got some relief. Larry MacDonald reviews the latest bearish bets on the TSX. (for subscribers)
TSX dividend yields haven’t looked this attractive relative to bond payouts in at least three decades
If the Canadian stock market isn’t doing much for you because of its lacklustre performance and heavy exposure to commodity-sensitive natural resources, then consider its ability to generate income. Lots of income. The S&P/TSX Composite Index is packed with stocks that have strikingly high dividend yields right now. Not only are these dividend yields remarkable on their own, they stand out in today’s environment of ultra-low yields on guaranteed investment certificates (GICs) and government bonds. As David Berman tell us, some market watchers believe that there is an opportunity here. (for subscribers)
Top stock picks in health care, cannabis and clean energy from StoneCastle’s Bruce Campbell
Investors should brace for more bumpy days ahead in the markets with the pending U.S. presidential election, a surge in COVID-19 cases and the usual October volatility, says Bruce Campbell, president and portfolio manager at StoneCastle Investment Management. Mr. Campbell, who oversees about $100-million in assets under management, is keeping his focus on sectors and stocks he expects to benefit from current economic trends in health care, cannabis and clean energy. Brenda Bouw tells us about his picks in these areas. (for subscribers)
Finally, GIC investors get their own online broker to shop the market for top rates
Investors who like the safety of guaranteed investment certificates have been largely ignored in the tech revolution that has transformed do-it-yourself investing in the past 20 years. An online GIC broker called GIC Simple is trying to fill this gap. It offers access to GICs from 21 different issuers, none of them Big Five banks (the rates at these banks are just too low to bother adding them). There are also tools for building laddered-GIC portfolios while staying within deposit-insurance limits. Rob Carrick tells us more about it. (for subscribers)
Oil patch consolidation leaves investors with little to cheer about
If oil patch mergers were such a great deal for investors, you would think that oil patch stocks would be on a tear. The reality of the situation: Canadian energy stocks remain deeply depressed, suggesting that all the chatter about cost savings and buttressed balance sheets are relatively meaningless against a backdrop of weak oil prices and faltering demand for energy. The latest deal - Cenovus Energy’s deal to takeover Husky Energy - in a continuing period of consolidation appears unlikely to alter this perception. David Berman shares his thoughts (for subscribers)
Fidelity’s Mark Schmehl on why he owns Peloton, Zoom and, yes, even cruise line stock
Mark Schmehl is not your conventional fund manager. He owns richly priced growth stocks, unloved value stocks and pre-IPO companies. It’s an opportunistic strategy that has bolstered returns in the three funds he runs—Fidelity Global Innovators, Fidelity Canadian Growth Company and Fidelity Special Situations—with total assets of $16 billion. And the eclectic mix in the Global Innovators fund has been a big winner lately, outpacing even the red-hot Nasdaq Composite Index in Canadian dollars. We asked the 48-year-old manager what he likes about spin-bike maker Peloton Interactive, and why he owns airline and cruise line stocks despite the COVID-19 pandemic. (for subscribers)
Others (for subscribers)
Number Cruncher: Twenty U.S. stocks that can withstand market turbulence
Others (for everyone)
What’s up in the days ahead
Ian McGugan will explain why dividend investors need to stay on guard over possible future cuts to payouts.
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Compiled by Globe Investor Staff