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A new report from Goldman Sachs highlights the difficulty of implementing value investing or contrarian investment strategies because the recommended trade ideas are frequently off-putting, even repulsive, to many investors at first glance.

David Kostin, Goldman Sachs’ chief U.S. equity strategist, used his Weekly Kickstart report to identify three pockets of value in an American market that is, on aggregate, very expensive relative to the historical average on most valuation measures.

The first idea is U.S. small cap stocks, an asset class that has been significantly more volatile than the S&P 500 in the past. Investors may not want to sign up for added volatility when the past 24 months has seen sharp ups and downs in equity markets, but Mr. Kostin estimates that attractive valuations in the small-cap space, combined with a healthy economic growth outlook, implies a Russell 2000 return of 15 per cent in the next 12 months. This is well above the 8 per cent Goldman Sachs forecasts for large caps.

The second recommendation for value investors is to own stocks with weak pricing power during periods of inflation. This seems nonsensical on its face – why wouldn’t investors prefer companies that can raise prices if their input costs rise? But Mr. Kostin notes that companies with weaker pricing power outperform during periods when profit margins are broadly improving, a trend they expect to happen this year as inflation pressures fade.

The third recommendation is to own consumer staples stocks over utilities. This is the most palatable of the ideas as both sectors exhibit low volatility under most market conditions. Goldman Sachs economists are forecasting rate cuts in mid-2024 and the strategist reports that U.S. staples have outperformed utilities 75 per cent of the time for the 12 months after the first cut occurs.

I’m not suggesting that Canadian investors implement these ideas – I’m certainly not in a hurry to increase portfolio volatility with small caps. They may, on the other hand, turn out to be effective ways to turn value investing practices into big returns. Either way, Mr. Kostin’s ideas for value investors provide an excellent example of the difficulty and counterintuitive nature that often accompanies value investing.

-- Scott Barlow, Globe and Mail market strategist

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The Rundown

Dividend stocks should recover this year. Here are some ways to profit

If all the portents are right, 2024 should be a good year for dividend stocks, says Gordon Pape. It’s about time. These normally dependable low-risk securities were savaged during the sharp run-up in interest rates as the central banks fired all their guns at the inflationary genie. So, how can you take advantage of this situation? Gordon Pape has some stock and ETF recommendations.

Also see: Investors are seeking high-dividend paying stocks in China

The hot ETF trend that isn’t your friend

Actively managed ETFs were so hot last year they took in larger inflows of money than passive index-tracking funds in many months of 2023. But before adapting to this new trend, Rob Carrick has some suggestions.

The Magnificent Seven are cheaper than you might think

The outlook for global stock markets in 2024 rests to a surprising extent on seven U.S.-based businesses. These companies – Alphabet Inc., Inc., Apple Inc., Meta Platforms Inc., Microsoft Corp., Nvidia Corp. and Tesla Inc. – are commonly known as the Magnificent Seven. Over the past decade, they have provided massive payoffs for investors. However, their success has reached the point where even optimists have to wonder how much juice can be left in the can. Here’s something for the bulls: the more columnist Ian McGugan looked at the Magnificent Seven, the more rationally priced they appear to be.

Red Sea tensions put focus on struggling U.S. energy stocks

A recent rally that has boosted nearly every corner of the U.S. stock market has left energy shares behind. Reuters reports that bullish investors are betting upcoming earnings reports and rising geopolitical tensions could spark a rebound for the struggling group.

Others (for subscribers)

The most oversold and overbought stocks on the TSX

Monday’s analyst upgrades and downgrades

Canadian ETFs: Investors warmed up to U.S. stocks in December; eight funds terminated

Ted Dixon: Fiera Capital insiders buy as distribution model takes shape

Globe Advisor

Understanding a company’s executive incentive compensation can highlight investment dangers

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Ask Globe Investor

Question: Recently I liquidated all our managed portfolio (USD and CAD equities) with a Canadian bank and bought a self-managed CAD portfolio of ZEB and HCAL ETFs plus a couple of Canadian bank stocks. Am I too overweight on Canada bank stocks? I have 20 per cent in BCE stock as the only countervailing balance.

Am I risking all in Canada bank stocks? I got in at the right time at the end of October and the dividend yield is about 6.6 per cent. What would you suggest? Partha T.

Answer: Let’s begin by stating the obvious. You are grossly overweighted in the banking sector. ZEB is the symbol for BMO Equal Weight Banks Index ETF while HCAL is Hamilton Enhanced Canadian Bank ETF. Plus, you have a couple of Canadian bank stocks and a 20 per cent position in BCE. No one would view this as a balanced portfolio!

Presumably, you did this deliberately, anticipating a turnaround in the banking sector. So far, it’s worked out well. As of the close on Dec. 27, the S&P/TSX Capped Financials Index was up 11.55 per cent for the fourth quarter. If we begin to see rate cuts in 2024, that should further strengthen the banks.

It seems a relatively safe bet. But if something goes wrong – such as a recession – you are very exposed. The answer is greater diversification, but presumably that’s what you had in the portfolio you liquidated. Are you looking for third party vindication of your moves? If so, you’ve come to the wrong place. I have always been a strong believer in the need for a diversified portfolio. It’s okay to overweight a sector – but not to put almost all your money there.

You asked what I would suggest. I would gradually start taking bank profits and redeploy the money to other sectors. This would include selling HCAL, which is underperforming ZEB by a considerable margin.

I would also reduce the 20 per cent position in BCE and add a bond ETF – either XBB (a universe bond fund from BlackRock) or XLB (a long-term bond fund from the same company). XBB is the more conservative.

In short, build a more broadly based portfolio. But since that’s what you had before, you may want to continue making big bets and accepting the accompanying risk.

--Gordon Pape (Send questions to and write Globe Question in the subject line.)

What’s up in the days ahead

Jennifer Dowty probes the mind of Benjamin Tal, the deputy chief economist of CIBC World Markets, to see what may be ahead for markets and the economy. Plus, David Berman will look at the latest investment prospects for Capital Power.

Click here to see the Globe Investor earnings and economic news calendar.

Your chance to participate

Investment reporter Jennifer Dowty will be speaking with PIMCO economist Tiffany Wilding regarding her six-to-12 month economic outlook. If you have a question for Ms. Wilding that you would like asked, please email Jennifer at and put in the subject line, “question for Ms. Wilding.”

The Globe and Mail regrets that your question may not be asked given the limited space for questions.

Compiled by Globe Investor Staff

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