Introducing the Globe Investing Club

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Writing about investing for a living can teach you a lot about the market. It can teach you even more about humility.

The big lesson that any investing writer painfully absorbs is that stocks are awfully hard to predict. We spend our days reading research reports and talking to financial pros, but all our experience just goes to demonstrate how fiendishly difficult it is for anyone – including professional money managers and hard-working financial journalists – to beat a simple index fund.

Still, those of us at Globe Investor wouldn’t be human if we didn’t try. Like many people, we enjoy chatting about promising stocks and speculating about which ones will do best.

In recognition of this tendency, we’re launching the Globe Investing Club. Think of the club as a lighthearted effort to distill our team’s collective, um, wisdom into a Hot List of stocks.

The Hot List is a checklist of ideas we consider unusually promising or interesting. If you already have a well-diversified portfolio and are looking to add a couple of individual stocks, the Hot List can offer some starting points for your own research.

Or you can see the Hot List as a fun test of how good a prognosticator you are. To add an additional bit of spice to our list-making, we are offering you the opportunity to prove you’re smarter than investing reporters.

Here is how it will work: Our Hot List is a list of stocks we think will do well over the next year. We invite you to submit your own top three ideas. (Canadian or U.S. stocks only; no short bets or commodity positions, please.)

We will collect our readers’ picks and use them to form a Readers’ List of stocks. Over the year ahead, we will deliver updates on how both lists are performing against each other and the market. In March, 2024, we will see whether The Globe and Mail’s Hot List or the Readers’ List fared better – or worse – than a simple portfolio of index funds.

What’s at stake? Bragging rights, basically. Also, a small amount of fame. Our hope is to profile individual readers whose picks do exceptionally well, so they can share their insights and strategies.

To be sure, we hope our own picks will soar to the moon, thus cementing our reputations as market sages. However, at least for now, we plan to stay humble. Experience has taught us well. – Ian McGugan

The rules of the Globe Investing Club

1) Talk about the Investing Club: We plan to deliver regular updates on the progress of The Globe’s Hot List and the Readers’ List. Feel free to cheer or jeer in your comments.

2) Join in: To help us construct the Readers’ List, please send your top three stock picks to investingclub@globeandmail.com by March 10.

3) Keep expectations in check: Please, please, don’t see our Hot List as a complete portfolio. The stocks we have highlighted are not intended to be a total strategy. Think of them instead as a list of ideas for readers who already have well-diversified portfolios and want to take a flyer on a couple of individual stocks.

The Hot List

American Express (NYSE: AXP)

Surging interest rates mean fatter profit margins for lenders, while tapping and swiping plastic has made cash nearly obsolete. Here’s a financial services stock that capitalizes on both. American Express has a multidimensional business model that includes credit card transaction fees, recurring loan interest payments and subscription fees.

In business since 1850, Amex has stood the test of time, and remains one of Warren Buffett’s largest holdings. But this is no dinosaur. Thanks in part to its exclusive events and experiences, and hard-to-replicate prestige factor, millennials and Gen Zs accounted for 60 per cent of new cardholders last year.

The profit trajectory looks sturdy: Amex forecasts 15 per cent to 17 per cent higher revenues this year alone. Loan losses are low and likely to stay that way – unlike the Canadian banks, Amex has minimal exposure to deflating housing markets. Meanwhile, the company’s expenses are falling and dividend payouts rising. Membership as a stockholder should have its privileges.

Brookfield Infrastructure Partners LP (Toronto: BIP-U)

What’s not to like about a company that invests in global infrastructure and pays out a hefty dividend? Brookfield Infrastructure Partners operates toll roads, pipelines and telecom towers on five continents, which generate income that is largely regulated and indexed to inflation. The result: BIP has raised its dividend every year since it was spun out from Brookfield Asset Management (now Brookfield Corp.) in 2009.

But this is more than a yield play: The unit price has risen by an average of 21.6 per cent a year since its IPO. Why invest now? For one thing, you’ll buy low: The units are down 20 per cent since August and are trading at prepandemic levels. For another: The rare setback has lifted the dividend yield to 4.6 per cent, which is a nice payout while waiting for a rebound.

Canadian Natural Resources Ltd. (Toronto: CNQ)

Traditional energy sources remain in high demand, even as the world transitions to renewable energy. The reason: Any hiccups in power supplies – such as in Europe in 2022 – make consumers and businesses frantic.

A play on traditional energy also rests on supply: It’s limited. Energy companies are reluctant to invest in huge new projects right now, and are using their excess cash to pay down debt, buy back shares and distribute dividends instead.

Canadian Natural Resources announced dividends that totalled $4.60 a share in 2022, when you include special dividends with regular ones, giving the stock a trailing yield of about 6 per cent. The price of oil has retreated from recent highs, to about US$77 a barrel at the start of March, as investors fret over a slowing global economy – but the company can keep dividends flowing even at this lower price.

Constellation Software Inc. (Toronto: CSU)

There are more exciting technology companies out there, but few can match Constellation Software’s stellar track record for acquiring firms, building an IT conglomerate and delivering results to shareholders.

Is it complex? Yes it is. To follow just one ownership thread, Constellation owns Vela Software, which owns Carina, which owns Geoactive, which develops “interactive petrophysical well data interpretation and correlations software.”

But complexity has not hampered big returns: Over the past 10 years, Constellation’s share price has risen by an average of 36 per cent a year. A bonus: With many small tech companies now struggling, Constellation’s acquisition hunting grounds look rich with opportunities.

Dream Industrial REIT (Toronto: DIR. UN)

The logistics corner of the real estate world is booming. E-commerce growth went on steroids during the COVID-19 pandemic, and as companies move to own and control more of their supply chains, they continue to pay top rent for warehousing and distribution facilities.

As a pure-play industrial REIT with considerable scale and geographic reach across Canada, the United States and Europe, Dream Industrial is a well-diversified way to invest in the sector. Its tenant occupancy rate – at 99 per cent – is enough to make any landlord jealous.

And it’s getting a lot more for those leases, too. This past fourth quarter, Dream signed 1.5 million square feet of renewals and new leases at terms averaging nearly 60 per cent more than prior rents.

Growth? This company’s got it, too. Dream and a deep-pocketed Singapore sovereign wealth fund just completed their acquisition of competitor Summit Industrial Income REIT.

Dream’s exposure to Europe dented investor sentiment for a while last year, but fears are subsiding as the continent’s economy proves surprisingly resilient to the war in Ukraine and inflation. Still, the REIT’s trading price remains below the highs of 2021. The juicy yield and potential for capital gains should mean sweet dreams for unitholders.

First Quantum (Toronto: FM)

First Quantum is global copper miner operating in China, India, Africa and Latin America. The company is currently in contentious negotiations with Panama’s government over a sizeable copper deposit in that country.

The price of copper has been buoyant, boosted by low inventories and investor hopes for a Chinese economic recovery. Over the longer term, the price is expected to benefit from global decarbonization as demand for electric vehicle batteries, and electric engines generally, climbs.

iShares MSCI Japan ETF (NYSE: EWJ)

A broad bet on Japan’s stock market looks attractive right now because of three factors. Start with China. The Asian giant’s decision to abruptly reopen its economy after nearly three years of rotating lockdowns should jolt economic growth in its surrounding region. The most direct benefit to Japan will come in the form of increased Chinese tourism. Prepandemic, Chinese tourists accounted for just under a third of Japan’s foreign visitors.

Increased demand for Japanese consumer goods should boost Japan’s economy as well. And that bodes well for Japan’s reasonably priced stocks, which trade for a mere 13 times forecast earnings for 2023, according to Citigroup.

Also noteworthy is the potential for currency gains on the iShares Japan fund. The yen is roughly 40 per cent undervalued versus the U.S. dollar, according to The Economist magazine’s Big Mac Index.

Plug Power (NASDAQ: PLUG)

Power Plug is a speculative U.S. stock representing a company that produces clean hydrogen, which is rapidly gaining traction as an alternative energy source. The company sells complete hydrogen plants (including power generation) and related equipment such as electrolyzers.

Revenue growth for full-year 2022 was 40 per cent, and Plug Power is expected to generate US$1.4-billion in revenue in 2023, double the total last year. The company faced production delays in late 2022 but retained an extensive order backlog.

Richelieu Hardware Ltd. (Toronto: RCH)

To mangle a Mark Twain quote, never let a bad story get in the way of the truth. For Richelieu, a Montreal-based manufacturer and distributor of home finishings and components, there is a lot of negative sentiment shrouding a good investment.

The market consensus for the stock looks like this: It was a clear pandemic beneficiary as homeowners renovated on an immense scale. Then soaring mortgage rates crushed the housing market and the boom times were over for Richelieu.

But spending on remodelling is surprisingly resilient. It has grown at an average of 8 per cent a year during recessionary periods in Canada over the past seven decades. When you consider Richelieu’s long-term track record – both its management and stock performance – it’s hard to ignore at a 20-per-cent discount to its peak.

Telus Corp. (Toronto: T)

You know those companies you don’t like giving your money to, but you do it anyway, because you have no choice? Canada is the land of oligopolies, where several consumer industries are dominated by a handful of giants with incredible pricing power. Think of the big banks, the big grocery chains and the big telecoms. One way to wrest back some gains, moral and otherwise, is to invest in those companies to which we are all more or less captive.

Telecom stocks all got smacked last year alongside other bond proxies as interest rates took off. But with recession replacing inflation as the primary worry, the defensive attributes of a telecom are starting to make sense. Telus stands out for its double-digit organic growth and rising free cash flow, now with the rollout of its expensive fibre optic network largely complete.

Warner Bros. Discovery Inc. (NASDAQ: WBD)

When Discovery Inc. acquired WarnerMedia from AT&T Inc. last April, it created a sprawling TV, movie and video game empire spanning everything from CNN and HBO to the Food Network and DC Comics. Unfortunately, the new empire also faced a heavy debt load and vicious competition for streaming audiences. Warner Bros. Discovery saw its share price shrivel by more than 60 per cent in 2022.

The stock has rebounded strongly in the new year. The release of Hogwarts: Legacy, a new video game set in the Harry Potter universe, has helped. So has the company’s plans to prune assets – such as regional sports TV networks – that no longer make financial sense. Also encouraging is a proposed new streaming service that will combine HBO content and Discovery’s reality shows.

In February, Warner Bros. Discovery reported quarterly and full-year results for 2022, and revenue and cash flow were roughly in line with expectations. Wall Street is slowly coming around: 14 out of 27 analysts now rate the stock as a buy. Big challenges remain, especially paying down debt. But it’s hard to bet against a company with such an impressive set of evergreen entertainment properties, ranging from Game of Thrones to a stake in the Lord of the Rings franchise.

Hot List picks by Scott Barlow, David Berman, Darcy Keith, Ian McGugan and Tim Shufelt. Some of the authors hold stocks on the Hot List in their personal portfolios.