Which Cdn. insurance company is the best investment?

Over the last 12 months Industrial Alliance has gone up by almost 55% on a total return basis, compared to 34% for Manulife, 24% for Sun, 10.5% for Great West life and 17.5% for Power Financial.

If one were to ask me which company is a better company, the answer is not simple. Great West and Sun Life have the most conservative management and did not get into financial trouble in 2008 as Manulife did.

Often the best companies are not always the best investments. It is really all about what specific factors will drive this sector higher and which companies offer the most upside under that scenario.

Power Financial is really a holding company that owns Great West Life, Investors Group and Mackenzie Financial. If you want a pure play in insurance from the Power Group companies you need to play Great West Life directly.

Manulife has a much larger presence in Emerging Markets than the others and that combined with its large wealth management business has helped propel the stock higher.

Industrial Alliance is not as globally diversified as the others, but offers the most positive interest rate sensitivity. This is the main reason why this stock has sharply outperformed its peers.

My decision to invest in one or another is largely dependent on the economic outlook and how one company reacts differently to its peers.

Freehold ups dividend by 25% after strong quarter

My last blog on February 9th stated the high probability of Freehold increasing their dividend.

Tonight the company just announced a strong 4th quarter earnings report and announced a 25% increase in their dividend.

The 4th quarter saw revenues and funds from operations up 18% and 19%  respectively year over year. In addition average daily production rose 6% over the same period.

This represented the 12th consecutive quarterly production increase.

After the dividend increase, the adjusted payout ratio will be at 65%, at the lower end of the 60-80% range.

In addition, the company also announced an accretive acquisition in February of this year of $34 million of royalties and title lands in Saskatchewan.

Should I continue to overweight Banks and Insurance stocks?

  • US Federal Reserve much more hawkish about rising rates
  • Financial Deregulation still in the limelight
  • Possible repeal of Dodd Frank including Volcker rule
  • Much Lower bank fines expected
  • Higher Net Interest Margins from rising interest rates
  • Improving Wealth Management Fees from rising equity markets

Recommendation : Continue to Overweight Banks, Insurance and Asset Management Companies.

Freehold Royalties – Possible Dividend Increase

Freehold is in a very enviable position relative to many of its peers.

  • Its net debt to cash flow is 0.8 times, very low
  • It operates principally as a royalty play and thus has virtually no operating costs
  • Its stated cash dividend payout is 60-80% of cash flow
  • At current prices, its payout is just over 50%
  • At $60 WTI its payout would be just over 40%
  • The company has the flexibility to increase dividends and / or acquire more royalty properties

Key Factors To Invest In Energy Patch Today

  • OPEC and their latest production cutback agreement-   positive
  • Weaker OPEC member countries production difficulties – positive
  • Russia cutting production in line with OPEC agreement – positive
  • US Shale Production increasing production  – negative
  • US Dollar Strength  vs. Global currencies – negative
  • Global Economic Growth Improving – positive
  • Trump induced possible global trade war – negative

Conclusion : Crude prices in a trading range between $50 – $55 WTI

Should current politics play a major role in your investment decisions?

It is so easy to blame politicians for our poor investment performance.

While the recent political elections in both the UK and the US  produced shocking results, investors still need to focus on making good investment decisions. We simply have no other option but to play with the hand we have been dealt.

We all know that uncertainty produces volatility, but it also provides great investment opportunities.

Most Canadians agree that free trade is a good thing for all countries, and that protectionist policies really do not work over the long term. However to our amazement, citizens in the UK and the US have rejected this idea, opting to focus more on the loss of jobs and some issues with immigration.

Once again we should all know that we need immigrants to sustain our long term economic growth. Historically immigration has always provided long term benefits. We should also know, but many of us choose not to, that the loss of jobs to lower paying Emerging Market countries was largely a result of technological innovation and not simply a short term cost cutting measure.

Taking all this uncertainty from both the Brexit vote and the US election, we still need to uncover the best companies and sectors to invest in, just like we have always done.

We must also be careful not to take every Trump twitter as government policy. Donald Trump is clearly trying to run the country like a private owner of a business. He acts impulsively, often childlike at times. If someone disagrees with him, he goes into a tirade comparable to a tot having temper tantrums.

Despite all this political  upheaval, there is still lots of money to be made. While most of us will never agree with Trump’s most controversial policies regarding immigration and trade restricting ideas, we can still make solid investment decisions.

All we really need to do is to determine what industries will do better than others  and what the economy wll do from his proposed policies.

Lower corporate taxes, less financial services regulations, revision to Obamacare, repatriation of foreign cash of US companies at a low or zero tax rate and an increase in infrastructure spending will provide quite a bit of fiscal stimulus. This will hopefully lead to stronger corporate profit growth and solid investment returns.

However we must also assess the negative repercussions of a possible US trade war with China, Europe, Mexico and possibly Canada. Negotiating better trade deals with the rest of the world by threatening to impose high import tariffs and a border tax is a dangerous game and can result in retaliation from the other country.

Despite this risk, investors cannot assume that all of Trump’s proposed policies will be implemented exactly as he wants. This is very unlikely.

An example of this is that many professional and retail investors have sold a substantial amount of their Canadian energy holdings in order to switch into US ones. They have assumed that the proposed border tax will be very damaging to Canadian companies. This is probably an overreaction to what will actually happen and creates a buying opportunity for Canadian oil and gas stocks.

Canada remains a strong ally of the US. NAFTA has benefitted Canada, US and Mexico and this is clearly evidenced by the 30-35 US states that do not want to see a trade dispute with our country.

Another investment opportunity has developed by the uncertainty created by the possible revocation or revision to Obamcare. Despite some fundamental flaws with the implementation of Obamacare, both parties agree that it is critical to ensure that all the recently insured  maintain their insurance coverage. Currently US healthcare stocks are currently trading at some of the lowest valuations in many years. This creates a long term buying opportunity.

In conclusion, investors need to be aware of the current political environment, but it need not interfere with their investment returns.

My recent switch from Bristol Myers into Merck looks even better

On January 11th I sent out a blog recommending a switch out of Bristol Myers into Merck, based on the latter’s fast track FDA approval for its lung cancer drug, Keytryda.

Yesterday afternoon Bristol Myers indicated that it will not continue to pursue an FDA fast track approval for its first time lung cancer combination of its Opdivo and Yervay drug.

The share price of Bristol Myers dropped nearly 10% on this news, while Merck’s climbed over 2%.

This news makes Merck look even better as it now will have a significant advantage over its competitors in the very lucrative lung cancer area.

Switch from Bristol Myers into Merck

As a result of the recent FDA acceptance and priority review of Merck’s lung cancer drug Keytruda, the sales growth outlook has materially turned in their favour at the expense of  Bristol Myers’ Opdivo. As Bristol Myers  was already trading at a premium valuation to Merck, this announcement  will make it look even more expensive.

Taking into account that Merck’s earnings growth rate should start to accelerate with Bristol Myers’ growth slowing somewhat, I am recommending a direct switch out of Bristol Myers into Merck.

Peter McMurtry, B.Com, CFA

Financial Writer

January 11, 2017

PE Ratio – Based on Trailing or Projected EPS?

Peter McMurtry, B.Com, CFA, Financial Writer

Strategies For Do-It-Yourself Investors™

Many financial databases and retail investors use trailing twelve month (TTM) earnings when evaluating a company’s PE ratio. Are they correct?

My thirty years of experience as a portfolio manager and investment analyst makes me question this logic. I have always preferred using projected earnings as a more useful indicator.

The stock market anticipates the future, rightly or wrongly. It is an estimate, but still the best and most informed outlook available at the time. I use projected earnings based on the consensus of all the analysts covering the stock.

The problem with using past earnings only is that it is a very poor indicator for companies experiencing a major change in direction either positive or negative.

For a company about to register a strong earnings uptick, using past earnings for the PE calculation really will miss this turnaround until much later.

For a company that has performed very well recently, but is about to face some stiff competition or changes in government regulations going forward, using trailing twelve month earnings will be a poor indicator of the future earnings of the company.

The advantage of a PE ratio based on projected earnings is that both the share price and earnings will move accordingly, which is exactly as it should be.

This is comparable to passive ( strategic) asset allocation strategies versus active or tactical ones. Passive strategies do not attempt to predict the future and only react after markets move. Active asset mix strategies attempt to predict the future by estimating one year future returns for every asset class.

Historical fixed income returns over the last many years have been excellent. However if an investor simply used past performance as an indicator of future returns, they would be sorely disappointed with fixed income returns in the current environment of rising interest rates.

My recommendation is to use projected earnings when calculating the PE ratio of a company.

Interest Rates Will Go a Lot Higher Than Most Expect

Today Janet Yellen finally relented by increasing the US Federal Reserve’s fed funds rate by 0.25%. This was completely expected with the US 10 year Treasury yield having already moved up sharply after the Trump victory.

Despite all the attention with US Central Bank Policy, historically they have tended to lag what the bond market does.

What took the markets by surprise was that Janet Yellen was much more hawkish than previously and that she now expects at least three more increases in the fed funds rate in 2017.

The weak areas of security markets since the Trump victory continue to be the bond market, high dividend interest sensitive stocks and both gold bullion and gold shares.

My recommendation remains the same. Rotate out of mid and long bonds, interest sensitive stocks and both gold bullion and gold shares into more cyclical areas of the market like financial and industrial stocks.

Dollarama vs. Canadian Tire – Best Investment Idea

Canadian Tire has a much lower valuation than Dollarama which gives one the impression that it is a better company to invest in. This is clearly a false assumption.

 However here are the relevant numbers below as follows:

 3 year Annualized                    Cdn Tire            Dollarama

 Revenues                                       2.43%                      12.55%

 Net Income                                   9.74%                     20.34%

 EPS                                                12.21%                       26.41%

 The Total Return over the last three years for the two stocks is:

 Canadian Tire                +52.66%

 Dollarama                       +142.1%

It is obvious to me that Dollarama is a better company to invest in despite the higher valuation.

 Peter McMurtry

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