We are just over one-third done with U.S. earnings reporting and results have been stronger than expected and encouraging, but with one big caveat – inflation pressure is increasingly visible as a threat to profit margins.
BofA Securities U.S. quantitative strategist Savita Subramanian’s Earnings Tracker publication noted that with 35 per cent of companies having reported, profits are coming in at a pace 72 per cent higher than in the second quarter of 2020 and 16 per cent higher than in 2019. Fully 83 per cent of companies announced profits above consensus estimates.
The problem is inflation - specifically wage inflation. BofA monitors the text of all management conference calls and it found that mentions of inflation rose over 1,000 per cent year over year. Within the separate categories of cost pressure, wage inflation showed the biggest year-over-year jump at 107 per cent. The increase was only 12 per cent during the first quarter reporting season.
Rising labour costs are the main reason Ms. Subramanian remains cautious regarding consumer discretionary and industrial stocks, where employment costs are higher relative to revenue.
The strategist also notes that mentions of price on conference calls, historically an indicator of the corporate ability to raise prices to customers, rose only slightly (18 per cent).
Worker shortages will no doubt subside as emergency government subsidies fade in September. Still, rising wage costs are likely to be a profitability-crimping feature of many earnings seasons to come.
Goldman Sachs chief U.S. equity strategist David Kostin provided a potential portfolio antidote to inflation pressures in July 15′s Where to Invest Now? report. He presented a list of stocks representing both high and stable profit margins relative to their sectors. (Posted on social media here). He believes these characteristics equate to pricing power – the ability to pass rising costs on to consumers.
With more than 50 members, the list is too long to recount here. Notable names for Canadian investors include Activision Blizzard Inc., Under Armour Inc., Williams-Sonoma Inc., Dollar General Corp., Colgate-Palmolive Co., Hershey Co., Zoetis Inc., Danaher Corp., Dover Corp., Adobe Inc., Verisign Inc., Proofpoint Inc., PPG Industries Inc. and Vulcan Materials Co.
-- Scott Barlow, Globe and Mail market strategist
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Stocks to ponder
Restaurant Brands International Inc. (QSR-T) The stock remains in a wait-and-see mode until investors see an improvement in operational results from its Tim Hortons brand. Year-to-date, the share price is up just 6 per cent, underperforming the broader market. As such, the stock is trading at a reasonable valuation and there are 19 analysts with buy recommendations. Jennifer Dowty looks at the investment case for buying its shares.
Want to gamble on beating the TSX? These higher-risk ETFs are possibilities
There are some ETFs out there that have returned significantly higher gains than the TSX or the S&P 500 to date. They are sector funds so, by definition, higher risk. But if you want to roll the dice with some of your money, they are worth a look. Gordon Pape tells us about the ETFs.
Value stocks’ time may be now for nervous investors
Investors searching for shelter from a turbulent financial market may want to take a fresh look at value stocks. These shares, which trade at low prices compared with their underlying sales and earnings, have not been a great buy in recent years. With the exception of a brief burst earlier this year, value strategies have lagged behind the broad market for much of the past decade. But right now they may be just what nervous investors need. Ian McGugan tells us more.
CIBC launches depositary receipts for shares in U.S. companies on Canada’s Neo Exchange
Canadian Imperial Bank of Commerce is launching Canada’s first depositary receipts linked to U.S. stocks, creating a new way for retail investors to trade in large American companies without the foreign currency risk inherent in buying those shares directly. James Bradshaw tells us all about it.
Law without order: Investors grapple with China’s regulatory risk
Western investors are wrestling with the risks of investing in U.S. listed stocks of Chinese companies after Beijing embarked on a regulatory crackdown on large swathes of its economy, from the internet sector to private tutoring. Beijing’s recent moves are unsettling even seasoned investors who are otherwise used to navigating corporate China’s murky auditing and poor governance in order to chase growth in the world’s second-largest economy.
A painting or an NFT of it: Which will be more valuable?
NFTs, or non-fungible tokens, rely on blockchain technology to designate an official copy of a piece of digital media that would otherwise be cheap or free. Is it better to keep the NFT or the physical artwork? Which will be the more valuable investment? It is hard to know. Certain NFTs are fetching large sums of money, but not all of them are. As with any new art form, what happens over the next few years is hard to predict. And anyone investing in NFTs with an eye on earning investment-like returns needs to understand the risks. Paul Sullivan of The New York Times explores the issue.
Others (for subscribers)
The Financial Times: COVID-19 wobble punctures calm markets
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Ask Globe Investor
Question: Is there a good book you recommend for retail investors? I have read several that explain how markets and trading work, but I have found very few that discuss the strategies one should use to invest profitably. One of the hardest decisions I have is when to sell, since if I don’t have extra cash the only way to buy another stock is to sell something first.
Answer: When I was starting out, one of the most influential books I read was Lowell Miller’s The Single Best Investment: Creating Wealth with Dividend Growth. It is an engaging and accessible read that will not only give you the tools to identify great dividend stocks, but will help you deal with the 24/7 onslaught of market noise that often leads small investors astray.
I’m not exaggerating when I say the book might very well change how you think about investing.
As Mr. Miller, the founder and now-retired chief investment officer of Miller/Howard Investments, writes in the book’s introduction:
“Investing isnʼt some athletic event where agility and flashes of virtuosity are the secrets of success. Rather, investing really is investing – the methodical accumulation of capital through a sensible and disciplined plan which recognizes that ‘shares’ are not little numbers that jump around in the paper every day.
“They represent a partnership interest in a real and going business. Your plan, very simply, must recognize that you will manage your investments by actually being an investor – a passive partner in a real and going business.”
Even though it’s a U.S. book and the latest edition was published in 2006, the principles are still relevant to Canadian investors. Here’s the best part: The book is now available as a free PDF download from Miller/Howard’s website at: bit.ly/SingleBestInvest.
Prefer a hard copy? Check online or at your local library.
What’s up in the days ahead
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Compiled by Globe Investor Staff