Posts Tagged ‘stocks’

A time for year-end reckonings

Sunday, January 24th, 2010
VOX / PAST RECOMMENDATIONS
Report on Business: Globe Investor Column
A time for year-end reckonings
FABRICE TAYLOR
907 words
31 December 2009
GLOB
B7
English
2009 CTVglobemedia Publishing Inc. All Rights Reserved.

Fabrice Taylor is a chartered financial analyst. ftaylor@globeandmail.com

The Vox portfolio continues to thrive, although it is not – nor is it ever – without its blights.

In the fall of 2008 and again in March of this year we turned very bullish on big stocks. They have, of course, done well. The S&P/TSX composite index is up by more than 50 per cent since March, while the big U.S. indexes are also sitting on double-digit returns.

The analysis was complicated, technical and rigorous: Everyone is selling in a panic, so buy. How’s that for genius?

In the late spring and summer I figured the smaller stocks would have to start moving too, so I started to scan that landscape for cash. I found Mainstreet Equity, trading at $7. This real estate concern has a big footprint in commodity regions such as Alberta, British Columbia and Saskatchewan and is light in places like Ontario, where manufacturing is being decimated.

It also built up a war chest during the recession, largely by refinancing mortgages, and today has about $3 a share in cash. The stock is $11, so that was a great investment in June, up well over 50 per cent in about half a year.

I found two others, Seacliff Construction and Churchill Corp., both in the engineering and construction fields, with lots of cash and beat-up stock prices. They’re up 25 per cent and about 32 per cent, respectively, in four months so far.

Sometimes the market hands you a gift. I thought Aeroplan was one in June at $8 or so. Investors were worried about Air Canada and took it out on the frequent flyer program. Buyers of the shares at that time are up almost a third – not bad for six months of work.

My recommendation of Aastra Technologies was poorly timed if you took it right away, at around $29 a share in early May. The stock almost immediately sank to $20 (hopefully you waited a couple of weeks). That said, it’s $34 and change today so if you paid $29 and hung on – tough to do given the stock’s swoon, I know – you’re doing okay.

Ford was an eyebrow-raising recommendation in late April at $4 (U.S.), but I felt confident enough to buy some myself (after the column appeared of course). It’s $10 now, and I think the U.S. car makers are going to be way more competitive. I also think they’ll get a lot of help from governments, and Toyota and Honda et al. will pay the price.

My advice to avoid Gildan isn’t exactly aging well. It was $15 (Canadian) when I said so a year ago and it’s above $25 now. The math is clearly not working in my favour there. For what it’s worth I still don’t think it’s a great business but if you can make money on the stock then bully for you.

My call to avoid Yellow Pages Income Fund at around the same time fared better. Units were about $8 and are now $5.35. Not even a 15-per-cent yield skates you onside.

From what I’m reading I think there may be value in these sorts of companies eventually, but at lower prices and assuming they survive (they tend to have debt).

Where Vox really did well was on small caps. Wavefront Technology Solutions was 50 cents when I touted it. It’s $2.79 now, for a 450-ish per cent gain. The company’s technology, which allows oil producers to extract more from their reserves, is slowly gaining traction.

Landis Energy was another call. Trading at 40 cents at the time, the company, which has a gas storage play in Nova Scotia, has since put itself up for sale and is quoted at 75 cents.

Cyberplex was another small cap on my radar but I got to it late: It was worth $1.50 then, it’s now $1.14. But it’s still interesting and trades at seven times forward earnings (yes, it has earnings).

One of my few short recommendations appears to be starting to pay off: ZENN Motor Co., which wanted to build electric cars, was north of $4 when I cast suspicion on it at the end of April. It did go to $6 but is back below $4 now. I think it’s going a lot lower.

Bearish calls on Research In Motion, meanwhile, were looking good until it knocked out the lights in its latest quarter. On Oct. 9, I argued its best days were behind it (meaning the stock). It was quoted at $71 then, but very quickly sank to $60 before rebounding. Now, it’s back to $71.

I stand by my call, having recently upgraded some RIM software on my BlackBerry and found it way worse than the older version. Any company that allows inferior products – and I mean inferior to what it had before – to ship out the door is doomed.

Probably our most bullish call was on natural gas this past summer, when it hit its lows. So far that’s looking good, although the weather is helping. Long term it will prove itself. You heard it here first.

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Divide and prosper; The asset classes you choose matter a lot. The individual stocks: hardly at all

Sunday, January 24th, 2010
INVESTING
Report on Business Magazine
Divide and prosper; The asset classes you choose matter a lot. The individual stocks: hardly at all
Fabrice Taylor
809 words
30 October 2009
GLOB
26
English
2009 CTVglobemedia Publishing Inc. All Rights Reserved.

“It’s a stock-picker’s market,” they always say after markets collapse and investors start hunting for individual winners. Nonsense. It’s never a stock-picker’s market, or it shouldn’t be. Sure, picking stocks is fun, but so is playing roulette, and the two have roughly equal chances of making you money.

Don’t believe me? Ask yourself: Did you see the great financial crisis coming? Some savvy investors did, and they weren’t just looking at the 20 stocks in their portfolios–wondering if they should sell Allied Apricot and buy Amalgamated Butternut. They were looking at interest rate spreads, leverage, derivatives and other macro variables, then acting accordingly.

The truth is that the vast majority of your returns–roughly 90%–don’t come from your choices of individual stocks or other securities, but from getting the big picture right. What’s your asset allocation between stocks, bonds and cash? Within these categories, how much will you put in developed and emerging markets, in real estate and natural gas, in bank deposits and gold?

Fortunately, it’s easier than ever to invest along macro lines thanks to exchange-traded funds. ETFs trade like stocks and many of them track indexes for stocks, bonds, commodities and so on, but they have much lower annual fees than mutual funds. You can invest in pretty much any sector or geographic area. Like gold? You can buy a bullion ETF or a basket of gold-company stocks–which often rise more than the metal itself if bullion prices go up. Brazilian stocks? Ditto. Emerging Asian bonds? Them too. There are about 1,800 ETFs traded around the world, according to Barclays Global Investors.

Hahn Investment Stewards in Toronto is part of the U.S.-based Jovian group of companies, which manages $2.4 billion worth of ETFs worldwide. Hahn’s ETF returns generally outpace comparable mutual funds that hold individual stocks, but Tyler Mordy, the head of research, says only part of the gap is due to lower fees.

Another reason: It’s getting harder for stock-pickers–even those who are professional money managers–to beat indexes. The old-style value investing discipline required is also very time-consuming. Given how difficult it is to understand, say, a bank’s balance sheet, aren’t you better off buying an ETF of financial services shares? Also remember that any single bank stock could plunge for reasons of its own. If you owned an ETF, you’d be cushioned by the holdings in the rest of the fund. “It’s very liberating,” says Mordy. “You don’t feel the need to react to every tick in the market. You can shut out a lot of the noise.”

Relying on ETFs also means you can concentrate more on asset allocation, and trends among asset classes. For example, Mordy says that the correlation between many different types of investments has strengthened over the past couple of decades. The traditional 60/40 stock and bond portfolio is looking less and less safe by the day, because it’s now almost perfectly correlated to the Standard & Poor’s 500 index. You may not be protecting yourself by combining stocks and bonds.

You’ll also still have plenty of choice with ETFs. Mordy and crew are currently looking at energy, niche technology companies, food and several other specialized strategies–all with ETFs.

But doesn’t Mordy miss the thrill of betting on a stock? “If you have that speculative urge, then, sure, go to Vegas or buy a junior mining play,” he says. But it’s no way to invest all your savings.

********

ETF

menu

There are now more than 1,800 exchange traded funds worldwide, and much more than plain-vanilla index funds to choose from. Here are some of the more exotic offerings and what they invest in.

- Claymore S&P Global Water Index ETF

Utilities, water treatment companies, pump manufacturers and more

- Emerging Global Shares DJ Emerging Markets Financials Titans Index Fund ETF

Large banks and insurance companies, about two-thirds of them in China and Brazil

- iShares iBoxx £ Corporate Bond Ex-Financials ETF

Sterling-denominated bonds in non-financial sectors such as consumer goods

and health care

- iShares MSCI Turkey Investable Market Index ETF

More than 20 large caps and mid caps, including Turkiye Garanti Bankasi

(banking) and Turkcell Iletisim Hizmet (cellphone service)

- Van Eck Market Vectors Brazil Small-Cap ETF

Companies that earn most of their revenue from Brazil’s growing domestic

economy, rather than volatile international trade

- State Street SPDR S&P Oil & Gas Equipment & Services ETF

U.S.-listed suppliers of extraction equipment, including Diamond Offshore Drilling and Halliburton

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The upside of down; How can you tell when the stock market has hit bottom? Ask Warren

Saturday, January 23rd, 2010
INVESTING
Report on Business Magazine
The upside of down; How can you tell when the stock market has hit bottom? Ask Warren
Fabrice Taylor
717 words
24 April 2009
GLOB
34
English
2009 CTVglobemedia Publishing Inc. All Rights Reserved.

As the joke goes, you’ll know stocks have hit rock bottom when they hit zero. No one can predict what the low point will be, of course, and many fortunes have been lost trying to nail the bottom. Not even Warren Buffett pretends to know. He’s been avidly buying U.S. stocks for several months now, and encouraged others to do the same last fall. He’s deep under water on some investments, along with most other investors, who have lost a total of $8 trillion (all currency in U.S. dollars) on U.S. stocks in the market meltdown.

But Buffett doesn’t care. Nor should you. Investing isn’t about what happens in six months–it’s about where your portfolio is in a decade. If you take that approach, you can easily make the argument that stocks are at or near the bottom.

Keep in mind that by “bottom,” I mean plus or minus a reasonably big range. When economist John Maynard Keynes quipped that the markets could stay irrational longer than he could stay solvent, he meant they could remain absurdly expensive or absurdly cheap long enough to wipe him out. Keynes was a successful investor, but not even he could pick the bottom clean. There are lots of signs, however, that we’re close, so it won’t matter if shares fall another 10% or 15%, because they’ll likely make up that difference quickly.

What are those signs? The first and simplest indication is that stocks have fallen a lot. The Dow Jones industrials are down roughly 50% from their peak. Emerging markets have plummeted even more. Stocks rarely fall that much. At some point, they have to stop falling. To sharpen this argument, some analysts use a rolling average of the return on large-capitalization stocks over the previous 10 years (see the chart above). Over the past century, this average has bounced back every time the 10-year return neared zero, as it recently did.

What makes share prices stop falling? Buyers, clearly. What will coax buyers into shares? Valuation, for starters. The Standard & Poor’s 500 index has been trading at about 13.5 times its earnings per share lately. The average during most bear markets is about 14 times. We’re not much below that, but remember that we’re also in an era of very low interest rates. Price/earnings multiples don’t have to decline very far before the forecast return on stocks becomes competitive with yields on bonds. In the market trough of the early 1980s, the S&P plunged to just 10 times earnings, but bond yields were in double digits. They’re about 3% today.

Stocks look cheap by other yardsticks, too. The total value of U.S. stocks recently has only been about 60% of the nation’s gross domestic product of $14 trillion, the lowest percentage since the early 1990s. But the ratio should be a lot higher than it was back then, because U.S. companies now earn more money abroad.

That’s all very well, you say, but no one has any money to buy stocks. Wrong. There’s $4 trillion parked in U.S. money market funds, earning nothing. (The U.S. market is still a global leader. Where it goes, other indexes, including the TSX, will follow.) Cash loses money when you factor in inflation. Eventually, it will seek better returns, and it won’t wait until stocks hit zero.

***

Rolling 10-year returns from U.S. large-cap stocks

The Panic of 1857:

It started with the failure of an Ohio bank, then spread to engulf railroads

The Panic of 1873,

which ushered in the six-year Long Depression in the U.S. and Europe

The Great Crash of 1929:

The Dow Jones industrials plunged from a pre-Crash peak of 381 to a bottom of 41 in 1932

The punishing 1970s bear market:

The Dow broke through 1,000 in 1972, then declined to 578 in 1974

The meltdown of 2008:

The Dow peaked at 14,165 in 2007.

The bottom (so far): 6,547

Illustration

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