Skip to main content
investor newsletter

In my first year on a Bay Street trading floor, I would frequently ask dumb questions like “Should this stock really be up this much?” and be told immediately that “The market’s never wrong.”

This was a useful reminder that I had nowhere near the experience necessary to question market moves at that point. Even when I did have more experience, it became apparent that there were so many potential factors affecting asset prices that it was more likely that I was missing something than correctly finding a mispriced security.

With this in mind, BofA Securities chief investment strategist Michael Hartnett was well aware that he was going out on a limb by calling his most recent research report The price is wrong. Clearly, he thinks stocks are overvalued in light of the market backdrop that is forming.

Mr. Hartnett believes we have already entered a stagflationary environment in which rising corporate prices are slowing economic growth. He notes, for instance, that the cost of shipping a 40-foot container from Los Angeles to Shanghai has climbed to between US$10,000 and US$14,000 from US$2000 18 months ago.

He expects the trend of rising input costs and general producer price inflation will result in sharply lower corporate profit growth. The firm’s global profit model indicated that earnings growth peaked in June at 39 per cent, and was set to fall to 15 per cent in October, thanks largely to slower economic activity in Asia.

Inflationary environments are usually characterized by rampant economic growth but the strategist emphasizes that the reverse appears to be happening. He writes, “45 per cent of US consumers [are] saying “it’s a bad time to buy” cars, houses, durable goods due to higher prices, the highest since 1970s”. In Asia, Chinese industrial production data for July released after the BofA report was published was a huge disappointment at 6.4 per cent when 7.8 per cent was forecasted.

If the question is “Which assets classes outperform during stagflation?” the answer is “very few of them.” The stagflationary 1970s saw a sharp decline in the value of the U.S. dollar and this, combined with the period’s geopolitically-caused oil crisis, helped commodities outperform. The global economy now, however, is much more interconnected and a weaker greenback is not assured. A slowing Chinese economy is definitely not good news for resources in any event.

Mr. Hartnett recommends defensive market sectors – he was not specific but industries like health care and consumer staples are usually listed among examples of defensive market areas – with the highest quality balance sheets.

-- Scott Barlow, Globe and Mail market strategist

This is the Globe Investor newsletter, published three times each week. If someone has forwarded this e-mail newsletter to you or you’re reading this on the web, you can sign up for the newsletter and others on our newsletter signup page.

Stocks to ponder

Home Capital Group Inc. (HCG-T) For all the upbeat numbers in its second-quarter financial results on Friday, one detail stood out: The alternative mortgage lender’s pile of cash has grown to eye-popping levels, raising questions about whether dividends, buybacks and another jump in the share price might be coming, according to David Berman.

LifeSpeak Inc. (LSPK-T) It’s a newly listed growth stock that may surface on the positive breakouts list in the future if analysts are correct. This small-cap stock has a 12-month forecast return of 48 per cent. Jennifer Dowty examines the cloud-based provider of well-being content.

Starbucks Corp. (SBUX-Q) Some industry players say accelerated North American store closings are a concern, and the ambitious growth plans are risky in the intensely competitive coffee marker, reports Brenda Bouw.

The Rundown

Canadian bank ETFs are attractive investments, but not all are created equal

Prompted by a reader question, Gordon Pape takes a look at two more options available to investors. They’re good and are currently generating outstanding returns.

A skeptical stock analyst wins big by seeking out frauds

Last month, federal authorities charged the founder of the electric vehicle manufacturer Nikola, which had gone public in the summer of 2020, with defrauding investors. They were led there partly by the work of a little-known Wall Streeter named Nathan Anderson. A stock researcher and investor, Anderson and his upstart firm, Hindenburg Research, are having a moment, write Matthew Goldstein and Kate Kelly.

Others (for subscribers)

Monday’s analyst upgrades and downgrades

The Globe’s stars and dogs for the week

Back with a bang, share buybacks offer boost for Europe Inc

U.S. investors lean on blank-cheque firms in search for energy transition targets

Others (for everyone)

Decentralized finance: Latest front in crypto’s hacking problem

Valuing China assets no easy task after $1-trillion wipeout

Globe Advisor

Are you a financial advisor? Register for Globe Advisor (www.globeadvisor.com) for free daily and weekly newsletters, in-depth industry coverage and analysis, and access to ProStation - a powerful tool to help you manage your clients’’ portfolios.

Ask Globe Investor

Question: I see that you hold SmartCentres Real Estate Investment Trust (SRU.UN) in your model Yield Hog Dividend Growth Portfolio. While doing some research online, I noticed SmartCentres has a price-to-earnings ratio of more than 60, which seems ludicrously expensive. Am I missing something?

Answer: I have often warned readers not to rely on third-party websites for financial measures such as the price-to-earnings multiple. For one thing, the published P/E doesn’t always indicate whether it is based on past earnings, which may have been affected by one-time items, or on analysts’ estimates of future earnings. Moreover, the P/E can be misleading for some industries.

In the case of real estate investment trusts, traditional earnings isn’t an appropriate measure because it includes accounting charges such as depreciation that don’t affect a REIT’s cash flow or ability to pay distributions. The real estate industry therefore uses alternate measures – typically funds from operations (FFO) and adjusted funds from operations (AFFO) – to gauge a REIT’s financial performance.

FFO is essentially a REIT’s net income, with adjustments that include adding back depreciation and amortization. AFFO is a more stringent measure of performance that deducts capital expenditures required to maintain the REIT’s buildings.

For the current year ending Dec. 31, analysts estimate that SmartCentres will generate AFFO per share of $2.02, according to Refinitiv. Based on the REIT’s trading price of about $30.50, its price-to-AFFO multiple is 15.1 ($30.50/$2.02), which is a lot more reasonable than the P/E of more than 60 that you quoted.

Similarly, using earnings to calculate a REIT’s payout ratio can make the distribution look riskier than it actually is. In SmartCentres’ news release announcing its second-quarter results this week, it used a measure called adjusted cash flow from operations (ACFO), which is similar to AFFO, to calculate its distribution payout ratio of 84.5 per cent. That’s down from 106.2 per cent in the second quarter of 2020, when the COVID-19 pandemic was wreaking havoc on retail REITs, suggesting SmartCentres made the right call to maintain its distribution even as other REITs were cutting their payouts.

-- John Heinzl

What’s up in the days ahead

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

More Globe Investor coverage

For more Globe Investor stories, follow us on Twitter @globeinvestor

You may also be interested in our Market Update or Carrick on Money newsletters. Explore them on our newsletter signup page.

Compiled by Globe Investor Staff