Is the current stock market selloff a buying opportunity?

What to consider:

    • Probability of Recession remains low
    • US Corporate Earnings and Revenue Growth expanding
    • S&P 500 Market 2018 PE at 19.5 times, only marginally higher than 17 times long term average
    • US yield curve steepening
    • US Corporate bond spreads over Treasuries remain low

Conclusion:

  • Ensure that you are well diversified by: Asset Mix, Currency, Equity Sectors
  • Always maintain a cash reserve to minimize volatility
  • Gradually use market declines to buy quality companies that have solid earnings, cash flow, dividend and revenue growth
  • Do not be tempted to buy bitcoin and pot stocks despite their price declines
  • Buy equity sectors like banks and insurance companies that benefit from rising interest rates.
  • Take your time investing your cash surplus. You will have plenty of opportunity to look at the fundamentals of companies. Do not just look at the companies’ share price.

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Reduce your portfolio’s volatility

Beta is a measure of a stock’s volatility relative to the overall market.

A stock with a beta of 1.5 indicates its share price is 50% more volatile than the market

If the market goes down by 20%, this high beta stock will fall by 30%

Recommendation:

Rotate out of high beta stocks into lower beta ones to minimize portfolio volatility

PNC Financial – Adding this large US Regional Bank

The US banking sector is operating on all cylinders and is greatly benefiting from the following:

  • Higher interest rates and steepening of yield curve
  • Wealth Management operations aided by strong equity markets
  • Rising loan demand aided by stimulative tax reform policies
  • Less Government Regulations in the financial services sector

PNC is one of the largest US Regional banks and acquired all of RBC’s divestiture of its US branches in 2008-2009.

PNC  is well positioned to benefit from the above industry trends and its equity interest in Blackrock is another positive.

Dividend growth is strong and this is expected to continue in a period of increasing profits and a low dividend payout ratio.

Sell Apple and Knowles

iPhone X sales for the first half of this year are expected to fall significantly and much more than analysts had been predicting

This is based on research obtained from interviews with its suppliers

The price of the iPhone X is just too pricey for most cunsumers

Knowles derives a large percentage of its annual revenues from Apple

My recommendation is to take profits in both Apple and Knowles at this time.

Gold Investments – Is this the time to buy?

There are several very positive developments for gold bullion as follows:

    • Continuing US $ weakness relative to Euro and Yen
    • Increasing US trade protectionist policies will lead to higher US inflation
    • Rising commodity prices – especially crude oil and base metal prices
    • Tight US labour market that should result in rising labour rates
    • Stimulative US tax reform policy passed

Recommendation : Increase your gold exposure

 

Canadian Banks – Best Performers

Based on a Total Return basis, income plus capital gains, the returns are as follows as of  the January 12th, 2018 close.

Bank

1 Yr          3yr          5yr         

10yr

National Bank

20.84

17.29 15.65

14.93

RBC

16.32

15.50 15.98

12.08

TD

13.21

16.31 16.57

12.04

CIBC

16.07

14.93 13.51

10.86

BMO

8.43

14.22 15.12

11.13

BNS

10.58

14.55 11.88

9.69

The performance numbers for periods more than one year are annualized.

The two most consistent out performers in this group are National Bank and RBC.

The two most consistent under performers over the time frames are BNS and Bank of Montreal

For a fairly cohesive group, these above performance numbers have produced wide differences over time.

In today’s world computer algorithms are frequently used to assume what investment performance is expected based on similar industry factors that affect all sector players.

These major performance differences must be explained by other factors such as:

  • Consistency and Quality of Management over time
  • Location and Performance of non domestic operations

 

 

Deleting Aphria from my model Growth Portfolio

I am advising the sale of Aphria from my Growth Portfolio.

The share price has risen by 268 percent over the last 12 months.

At the current valuation, the stock is more than discounting the upcoming legalization of recreational marijuana in 2018.

While the company has done all the right things, the industry is still in its infancy and will most definitely experience some growing pains in the future.

 

Best Projected EBITDA Growth – Cdn. Pipelines

Pembina Pipeline is expected to grow its EBITDA by 73% from 2017 – 2019

Inter Pipeline  is only expected to grow its EBITDA by 3.3% over the same period

Enbridge is expected to grow its EBITDA by 25% over the same period

Trans Canada Pipeline is expected to grow its EBITDA by 29% over the same period

Conclusion

Pembina’s cash flow is clearly growing the fastest which will lead to solid dividend growth.

Enbridge and Trans Canada will have sufficient cash flow growth for continuing dividend growth.

Inter Pipeline’s weak cash flow growth will result in little dividend growth

US flattening of yield curve – Is a recession imminent?

Spread between 2 and 10 year US Treasury yields has narrowed to 55-60 basis points

Historically a negative yield curve, where 2 year rates exceed 10 year ones, leads to an economic recession  within six months

However this time things are quite different.

Demand for US treasury bonds is very strong in a world where global rates remain very low

Chinese Government continues to invest in mid to long treasury bond maturities and this has led to yields on longer term maturities coming down

US Federal Reserve has begun increasing short term rates exacerbating the flattening of the yield curve

Current flattening of the yield curve is more a result of the current supply / demand picture for US Treasuries and not a predictor of an impending recession as has been the case historically

Investment Grade US Corporate Bond Spreads remain historically low, indicating a strong economy with no signs of a recession

Inflationary expectations remain historically low as a result of many factors including technological improvements in all industries leading to automation, deflationary pressures from Amazon and food price deflation

Should US Corporate Tax Reform be approved by both houses, this will provide a long term economic stimulus.  It is too early to tell at this moment if tax reform will lead to a pickup in inflation.

Conclusion

The probability of an impending US recession remains low at this time

How have some of my stock picks performed over the last 12 months?

As my newsletter has been going for over a year, I would like to point out how some of my picks have performed.

Most of the following companies and ETF’s I have recommended for the entire time, while some have been added later.

If the companies had been held for at least one year, the total return (income plus capital growth)  would have been as follows:

Security 1 Year Total Return
Shopify 142.9%
Nvidia 130.7%
Aphria 67.7%
Apple 59.0%
Facebook 48.9%
Amazon 47.2%
Centennial 40.3%
Stanley Works 39.7%
T.Rowe Price 35.9%
Pure Ind 35.9%
Home Depot 34.4%
Alphabet 34.0%
Bank of America 33.3%
Blackrock 31.5%
Visa 30.7%
JP Morgan 28.5%
XEC 28.4%
Cdn. Apt. 27.6%
Canadian Tire A 24.6%
JNJ 24.0%
Freehold 23.7%
WSP Global 23.6%
Fortis 21.6%
ZEQ 20.8%
HPR 20.7%
TD 20.0%
Pembina 19.6%
General Dynamics 19.6%
Manulife 16.6%
Sleep Country 15.8%
RBC 15.6%
Emera 12.5%
CP 10.8%
Chartwell 10.1%

I also took profits during the last year in both Dollarama and ZCL Composites with returns far exceeding the TSX Composite.

In regards to my sector bets, I have been overweight Financials and Technology and underweight Energy for the entire time.

Both Financials and Technology have sharply outperformed their respective benchmark domestic indicies, while Energy has under performed for the entire period.

I have also been overweight Industrials for the last year with Canadian industrials outperforming the TSX while US Industrials marginally under performing.


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Add Abbott Labs and Guggenheim US Industrial ETF RGI

Adding two new US equity positions to both my Income and Growth Portfolios

Abbott Labs, symbol ABT,  is a well diversified health company with exposure to medical devices, nutrition, diagnostic and pharma areas.

It has recently acquired both St. Jude Medical and Alere and expects these acquisitions to be accretive to earnings.

Abbott is experiencing strong growth in earnings, operating and free cash flow.

In addition the company has a very long history of increasing dividends. Currently its cash dividend payout is just under 54%, well down from the 90% a few years ago.

The company is trading at a reasonable valuation of just under 20 times 2018 earnings taking into consideration its solid and well diversified growth prospects.

I am also adding Guggenheim equal weight US Industrial ETF to increase my exposure to the industrial sector that is a beneficiary from strong global growth.

Guggenheim’s Industrial US ETF, symbol RGI, has holdings in Textron, Rockwell Automation, Parker Hannafin, W.W. Grainger and Robert Half International.

 

Adding Shopify back to my Growth Portfolio

As a result of the recent 20% plus correction in share price, I am adding Shopify back to my Growth portfolio.

The stock now trades at a 12 times Enterprise Value / 2018 Projected Revenues, more comparable to its peers

However it is growing its revenues at a rate of 2.5-3 times faster than its peers.

The upcoming third quarter is expected to be very strong and will most likely result in short covering

Citron’s short recommendation was not based on fundamentals, but more on valuation.

Taking into account the high price volatility, I recommend only a small position not exceeding 1.5 – 2% of one’s total equity holdings.

Need to Diversify Equity Holdings

Yesterday Shopify was the target of a vicious and largely  unproven negative report about its supposedly aggressive sales practices.

This report was written by a well known US short seller, Andrew Left and his website Citron. It is obvious that this report was written to make the stock go down in order to make a fast buck. It should be mentioned that short sellers frequently focus on high valuation stocks that are vulnerable to a price correction.

Hopefully in future short sellers like Mr. Left and others will be investigated for slanderous research with the sole intent of making a profit.

However the lesson we can all learn from this is the following:

Never have too large an investment in any one stock. Diversify your holdings.

For high valuation stocks like Shopify, Amazon, Nvidia and others it is even more important to properly diversify by having no more than 1.5 – 2% in any one security.

When high valuation stocks experience disappointing earnings, the share price falls based on both lower earnings and a lower PE ratio.

In conclusion own at least 30-35 names in your equity component of your portfolio with any one stock representing no more than 3% of the total. In this regard you will never get into trouble and the volatility of your investments will be much lower.

 

Canada cannot give in to the Americans on renegotiating NAFTA

Canada has no choice but to fight back the recent protectionist policies of Donald Trump and his bouncer, Wilbur Ross.

Both men have achieved business success by being bullies. We all know about Donald Trump’s behaviour.

Wilbur Ross made his fortune by buying bankrupt US domestic steel companies and encouraging the president at that time, George H. Bush, to impose massive steel import tariffs directed at  Chinese steel companies. One year later US domestic steel prices rose 20% and Ross sold his company two years later for $3.5 billion.  You talk about a conflict of interest!

The more the US plays hardball in terms of trade the more other countries will be encouraged to seek  global trading partners.

Ultimately the US will not benefit from its protectionist policies. The end result is higher domestic prices combined with a loss of US jobs as international countries including Canada strike separate international trade deals and close US plants.

Yesterday the massive 219% tariff imposed on Bombardier is absurd taking into account that Boeing is also heavily subsidized by the US government and does not even offer a comparable plane to Bombardier’s.

Canada must not allow any changes to the Chapter 19 dispute resolution mechanism . The US want this clause eliminated which would result in any disputes going forward not being reviewed by an impartial panel.

Canada and Mexico are currently negotiating new trade deals with China, India, the UK and the EU.

Adding Rio Tinto PLC – ADR US$ RIO

I am adding Rio Tinto  US $ ADR to my both my Income and Growth portfolios under the Materials Sector.

Rio is a major global mining company based in the UK with operations in Australia, North and South America, Europe and South Africa.

Its production includes the following:

  • copper, aluminium, diamonds, and  iron ore
  • coal and uranium
  • borax, titanium dioxide and salt

The company offers a strong balance sheet, rising operating and free cash flows.

The current dividend yield is 4.9% and the free cash flow is more than sufficient to cover the dividend with a payout of 55%.

The company has recently decided to sell its thermal coal operation and expects to receive proceeds of $2.45 billion.

Rio is a conservative way to participate in  rising commodity markets with its strong dividend and healthy balance sheet.