Financial market volatility is slumping across the board to historically – or, dangerously – low levels, potentially fanning the flames for a repeat of February’s “volmageddon” explosion that sparked a 10-per-cent correction in U.S. and world stocks.
Then, major bond and currency markets remained reasonably insulated from the turmoil that swept through equities. They may not be so lucky next time around, because positioning in some cases is even more extreme than it is in stocks.
A breakdown of how speculative investors such as hedge funds are positioned across U.S. futures markets shows that short VIX positions as a share of overall open interest are higher now than they were just before that record surge in February.
The net short position in 10-year U.S. Treasuries as a share of total open interest is the highest since 2010 and close to a record high, while specs’ net long U.S. dollar bet as a share of open interest is the highest since May last year.
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Stocks to ponder
AG Growth International Inc. (AFN-T). This stock has rallied 8 per cent over the past 10 trading sessions, ahead of its upcoming second-quarter earnings announcement. If the share price can maintain this positive price momentum, the stock may soon appear on the positive breakouts list. The company is scheduled to report its second-quarter financial results before the market opens on Thursday. The stock has seven buy recommendations with the average target price suggesting the share price may rally 17 per cent over the next 12 months. In addition, the company offers its shareholders an attractive dividend, currently yielding over 4 per cent, and has a conservative payout ratio. Winnipeg-based AG Growth manufactures agricultural equipment used for grain handling and storage such as grain storage bins, augers and belt conveyors. The company has manufacturing operations in six regions: Canada, the United States, the United Kingdom, Brazil, South Africa, and Italy. Jennifer Dowty reports (for subscribers).
Maxar Technologies Ltd. (MAXR-T). Maxar – the former Macdonald, Dettwiler & Associates Ltd. – tumbled Tuesday as a U.S.-based short-seller published a report arguing the company is hiding the evidence of a declining business by using aggressive profit-boosting accounting. Spruce Point Capital Management LLC – which has previously targeted Intertain Group Ltd. and Just Energy Group Inc. – also notes the biography of company chief executive Howard Lance omits his board service at a company that restated its financials and misstates his role at past employer NCR Corp. David Milstead reports (for subscribers).
How different are value investors from other investors?
While the technical aspects of value investing – screening for and valuing low price-to-earnings ratio (P/E) or price-to-book ratio (P/B) stocks – are well understood and documented, there has been no attempt to understand the role that an investor’s individual character plays in investing success even though anecdotal evidence does point to the importance of character and temperament. George Athanassakos explains his research into this area.
In investing, you need to understand the importance of time
When people talk about investing in stocks, a comment often heard begins with: “The most important thing is …" How the sentence is completed, however, varies greatly. We have heard that the most important thing is “the price paid,” “knowing when to sell,” “avoiding risk,” “having a margin of safety,” “diversification” and so on. All of these factors are important, but only up to a point. In our view, the first step to successful investing is recognizing the role of time. This is important because to do so is extremely difficult. Time is the fourth dimension. It cannot be seen or touched. Although we live in time, in much the same way that a fish lives in water, we almost never think about it. Biff Matthews and Doug McCutcheon explain.
CI Financial slashes dividend, unveils $1-billion share buyback
CI Financial, one of the country’s largest investment managers, is slashing its dividend nearly in half in a move it said will improve flexibility amid intense competition across the Canadian wealth management industry. The company announced the surprise cut in an earnings release on Thursday morning, while also saying it plans to buy back up to $1-billion of its own stock over the next 12 to 18 months. Tim Shufelt reports (for subscribers).
Others (for subscribers)
Others (for everyone)
Number Crunchers (for subscribers)
Ask Globe Investor
Question: What is your opinion of Just Energy Group Inc. (JE) as a dividend investment? The 10-per-cent yield looks very tempting.
Answer: When a stock has a double-digit yield, it’s imperative to dig deeper. In Just Energy’s case, the yield is high because the share price has plunged about 50 per cent since the end of 2015. Another concern is that the company – which sells electricity and natural gas contracts and energy efficiency products to homes and businesses – has a history of dividend cuts, having chopped its payout by 32 per cent in 2013 and 40 per cent in 2014.
Clearly, this is a company that has faced some challenges. In March, Just Energy named a new chief executive as part of a senior management shakeup and, in May, the company announced disappointing earnings for its fiscal fourth quarter as unfavourable weather, intense competition and other factors hit its results. Just Energy is aiming to transform itself from a retail energy provider to a more broadly diversified consumer company, but the languishing stock price suggests investors are skeptical.
When the latest results were released, the company said it is committed to its dividend. However, the dividend payout ratio is high: For the fiscal year ended March 31, the payout ratio soared to 95 per cent of “base funds from operations” (essentially operating cash flow minus certain capital expenditures). That’s up from 60 per cent in fiscal 2017. The company says its goal is to reduce the payout ratio to 75 per cent by the end of fiscal 2019.
Despite Just Energy’s challenges, analysts are generally positive on the shares, with five buy recommendations, two holds and no sells. The average one-year price target is $5.91. The shares closed Friday at $5.01 on the Toronto Stock Exchange.
Just Energy’s supersized yield is telling you that the market perceives some elevated risk with the stock, which is not surprising given the company’s history. Perhaps Just Energy will turn things around and this will prove to be a good entry point. But as a conservative investor, I look for companies that have a history of raising their dividends, not cutting them.
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What’s up in the days ahead
David Milstead takes a look at Tesla and suggests investors stay far away from the stock gives his view of the company. Rob Carrick examines market-linked GICs.
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Compiled by Gillian Livingston