Category Archives: Blog Post

Firm Capital’s Prospects

Firm Capital just announced a convertible debenture last night. Normally when a corporation has an equity or quasi equity issue in this case, the earnings per share are diluted somewhat and the share price falls. In the case of Firm Capital, the stock rose which is very interesting.

I am a shareholder in this company and also have it on my list of companies in my Model Portfolio for my monthly newsletter.

Being an analyst by training, I requested some info from the company in regards to the potential effect of rising interest rates and more stringent goverment rules regarding mortgage eligibility.

The investor relations rep said that he was not at liberty to disclose how they specifically fund their mortgages as this was proprietary information. I asked him if the company benefits like banks do from the steepening of the yield curve where long rates rise faster than short rates. He said emphatically that  the company does not factor the yield curve into their lending activities.

However he did indicate that the company is not worried about rising rates or increased government intervention in the mortgage area. He said that the company is involved more in bridge and mezzanine financing as opposed to traditional mortgages.

Currently the stock yields 6.7% and the 1 year total return is 17.5%, quite impressive from an under the radar type company.

 

Peter McMurtry

November 30, 2016

Exchange Traded Funds vs. Individual Stocks – Which is better?

Exchange Traded Funds versus Individual Stocks – Which is better?
Peter McMurtry, B.Com, CFA, Financial Writer
October 25, 2016.

 

When Exchange Traded Funds ( ETF’s) first were introduced they were compared very favourably to mutual funds. Much lower management fees, no deferred sales charges, better performance, more strategic tax efficiency were factors that investors needed to make the switch out of mutual funds.

Today there are so many types of ETF’s that many investors really do not understand what they are invested in and how much risk these investments incorporate.

The basic principle of mutual funds and ETF’s is risk reduction through diversification. The influx of sector and active ETF’s both on the long and short side of the market has materially added a level of risk that was not the case for passive index ETF’s of the overall major market indices.

New ETF’s are being created every day that supposedly satisfy client’s needs for equity participation in  sectors of the market such as biotech, pot stocks, country specific emerging markets and cyber security. The list is endless and expanding continuously.

Despite the benefits of these trends, the traditional advantage of risk reduction from market diversification is being overshadowed by the sharp increase in unique risk. This risk is not being adequately conveyed to retail investors by the creators of ETF’s who are principally driven by increasing their revenues at the expense of everything else.

Individual stock investing has unfairly received a bad rap for being too risky for many investors. However as long as one is sufficiently diversified across all eleven equity sectors, combined with spreading the risk by investing in both value, growth, small, large cap  and international companies, stock investing can produce superior returns and lower risk than many ETF’s.

Furthermore analyzing individual companies is much easier than attempting to do research on ETF’s. Lack of transparency, limited disclosure of material factors and a short historical track record make ETF investing much riskier than a disciplined investment of individual stocks. Basic fundamental stock analysis is just not possible with ETF’s. In most cases the security regulators only require the top ten holdings and this is simply not sufficient to accurately determine the level of risk assumed. Secondly the holdings can change frequently and this makes the investment analysis even more difficult.

Good fundamental stock selection on individual companies produces a factor called alpha that is the unique advantage that one company has over its peers.  Alpha is defined as the excess returns created by investing in companies that beat their benchmark indices. This is the factor that the best money managers such as Peter Lynch, John Templeton and Warren Buffet use to create their superior long term performance. An investment in an ETF largely ignores or greatly diminishes the benefits of alpha, although there are some active ETF’s with this goal in mind.

Frequently during my thirty years in this money management business, I have heard many retail client advisers belittle the benefits of stock picking. Clients deserve better. The decision to invest in an ETF that may hold a small investment in a superior stock will almost always water down the benefits of investing directly in that stock. Retail clients think they are getting superior stock picking from their adviser, but in many cases this is clearly not the case.

In conclusion, many retail investors are branching away from their investment advisers in order to improve their performance, lower their fees and lower their risk.

Investing in individual stocks is one investment approach we cannot afford to ignore.

Aritzia IPO

When Aritzia recently announced an IPO (Initial Public Offering) I was immediately interested.

Both my daughters have frequently bought clothing there and have never been disappointed with the quality of the merchandise.

My wife has worked in retail ladies fashion for the last ten years.

She has always told me the single most important factor in women’s clothing is quality.

I was able to acquire some shares at the initial offer price of $16 and it has already risen sharply. The issue was ten times oversubscribed.

Canadian pension and mutual funds expressed a strong interest in the stock as there is currently a dearth of high quality growing retailers in this country.

The company announced their quarterly earnings yesterday and the results were very strong. Comparable sales growth was up almost 17% and gross profit margins also rose nicely.

Their online presence has also shown very strong growth.

This is a classic Peter Lynch type stock. In several of his books he talks about getting his best investment ideas by watching what his children buy.

Peter McMurtry