The Toronto Stock Exchange will open for trading today below 13,000 for the first time since mid-October. The losses were widespread yesterday. One outlier was the energy group. It snapped a four-day losing streak even as crude languishes around $38/ barrel. But make no mistake – with the TSX down five per cent this month alone, oil has been the culprit.
Prominent U.S investor Jeff Macke has a unique perspective on retail stocks. His father was Kenneth Macke who, as CEO of Dayton Hudson Corp. in the 1980s and 1990s, steered the company into a U.S. retail behemoth before it changed its name to Target Corp.
Mr. Macke is active in retail stocks but I personally avoid them like the plague. For me, the recent plunge in Under Armor Inc.'s stock is just another example of how fickle consumers make profit growth in the sector impossible to predict. I mentioned my misgivings to Mr. Macke and he more or less agreed, noting that "specialty retail is where [investor] love goes to die."
Amazon.com, who reported somewhat disappointing earnings this week, nonetheless appears to be the future of retail and one of the main reasons to avoid the stocks of traditional shopping mall occupants. But when asked about what the future would look like, Amazon CEO Jeff Bezos had a fascinating response:
"I very frequently get the question: 'What's going to change in the next 10 years?'… I almost never get the question: 'What's not going to change in the next 10 years?' And I submit to you that that second question is actually the more important of the two … you can build a business strategy around the things that are stable in time. … we know that customers want low prices… they want fast delivery; they want vast selection. It's impossible to imagine a future 10 years from now where a customer comes up and says, 'Jeff I love Amazon; I just wish the prices were a little higher.' "
There is of course a limit to Amazon's growth potential. Few people, for example, are willing to buy denim jeans without trying them on first so there will always be malls. But new technology, and Mr. Bezos' relentless focus on price and service is likely to make life difficult for traditional retailers for decades to come.
Amazon's success is both a lesson in business management and, for investors, a chance to apply the old trader maxim that some stocks are for renting, not buying for the long term.
-- Scott Barlow
Three big numbers to note
73.6% The odds that the U.S. Federal Reserve hikes rates in December, according to the CME Group's FedWatch tool.
73% The number of S&P 500 companies that have reported results so far that have topped Wall Street expectations, with growth for the quarter now expected to be 3 per cent, according to Thomson Reuters I/B/E/S. The quarter had been expected to show a decline of 0.5 per cent at the start of October.
5.2% The amount Amazon.com stock fell on Friday, its worst day in nearly nine months. It closed at $776.32 after the online retailer warned that heavy investments in the crucial holiday quarter would hurt profits.
Stocks to ponder
Heroux-Devtek Inc. This is an undervalued stock whose growth is expected to ramp up in 2017, write Jennifer Dowty. Longueuil, Que.-based Heroux-Devtek is an industry leader and is involved in the design, development, manufacturing, and repair of landing gear systems and aerospace components. Management and directors own 11.8 per cent of the voting securities as of March 31. Its last earnings report was in-line with expectations and revenue growth is anticipated to accelerate. The company doesn't currently pay a dividend. Of the six analysts who cover the stock, there are four 'buy' recommendations and two 'hold' recommendations. Target prices range from a low of $15.50 to a high of $19, implying upside potential ranging between 10 per cent and 35 per cent.
Power Corporation of Canada. This stock has a 4.6 per cent yield and is in a sector that's gaining momentum, writes Jennifer Dowty. Power Corp. is a holding company with a 65.6-per-cent interest in Power Financial as of Aug. 5. Power Financial is a holding company with interests in Great-West Lifeco, IGM Financial, and Parjointco. Of the 10 analysts who cover the stock, three have "buy" recommendations while seven have "hold" recommendations. Target prices range from a low of $29 to a high of $34, implying up to 17 per cent upside potential.
Metro Inc. Is a food retailer whose stock price has broken its recent uptrend, and just days ago displayed a bearish technical signal – the "death cross," writes Jennifer Dowty. Shares of Metro also broke below a key support level $45, ending its uptrend that had been in place. The share price is now in a downtrend with the next major support level at $40. The relative strength index is at 43, suggesting the shares are in neutral territory, not yet oversold. Generally, a reading of 30 or below indicates an oversold condition. Since the beginning of the year, there have been 14 analyst reports issued, five are 'buy' recommendations, seven are 'hold' recommendations, and two are 'sell' recommendations. The average one-year target price is $46.71, implying a potential return of 11-per-cent over the next 12 months.
TIO Networks Corp. This stock has eight unanimous 'buy' calls and a 30 per cent upside forecast, writes Jennifer Dowty. TIO provides technology used to process bill payment transactions and it does not currently pay a dividend. The average one-year target price is $2.89, implying there is 30 per cent upside potential over the next 12 months. It recently completed the first phase of the integration of its acquisition of Softgate Systems Inc. Over the years, the share price has a pattern of rallying, followed by a consolidation period, before resuming its uptrend. Right now, the share price appear to be consolidating in the low $2 range. Year to date, the stock price is relatively unchanged, down 1 per cent.
The Rundown
These three stocks could be worth buying on the dip right now
Buying shares of a stock on weakness can prove to be a successful portfolio management strategy, writes Jennifer Dowty. Price weakness is not always a bad thing. In fact, at times, it can be welcomed, representing an opportunity to buy a solid company at a discount or bargain price. A key objective is to determine whether price weakness is indeed a buying opportunity. So, what do you do when you see a stock price tumble or steadily fall day after day? First, you research and assess; you don't react until you gather all the facts. Determine why the share price is falling. Check for analyst upgrades or downgrades, consider the stock's volume or if it's stock is tied to commodity prices. Here are three stocks that have come under pressure recently: Hydro One Ltd., Milestone Apartments REIT and New Flyer Industries Inc.
Three charts that show just how fragile the mining stock rally really is
Domestic mining stocks are having a terrific 2016 with the S&P/TSX diversified metals and mining index higher by 122 per cent. This incredible performance is entirely justified by global metals prices – the S&P GSCI industrial metals index is also climbing (less dramatically) – but the difficult part is figuring out the fundamental basis for the commodity price strength. Historically, mining sector performance has been inversely correlated with the U.S. dollar. The dollar, however, has been stronger of late in anticipation of a Federal Reserve interest rate hike. This casts a bit of a shadow on the recent rally in metals. it looks like the recovery is a relief rally – a snap-back in stock prices on the realization that the economic growth outlook in China and elsewhere will not deteriorate forever. Based on the charts, however, the rally looks fragile, at least for now. Further strength in global manufacturing activity and growth expectations for next year would be a definite help in sustaining the sector strength. More strength in the U.S. dollar, on the other hand, would be unhelpful.
Saputo: A case study in investor-unfriendly disclosure
In our recent package of stories, "The Numbers Game," we examined the ways companies guide investors to their preferred, more typically positive measure of earnings, dissuading us from diving deep into an income statement compiled according to generally accepted accounting principles, or GAAP. But what if the company doesn't provide a traditional income statement at all? I'm talking about a set of numbers that takes you from revenue at the top, through the cost of goods sold and the expenses of selling, all the way to net income. Surely such an omission is not allowed? And yet, it very well may be, if we take the disclosures of cheese company Saputo Inc. as our guide.
Lack of disclosure requirements shakes faith in Canadian funds
Canadian investors still don't really know how much the fund managers they bet on are betting on themselves. More than a decade after U.S. regulators mandated the disclosure of U.S. managers' holdings in their own funds, no comparable requirement exists in Canada. It's not even being considered, writes Tim Shufelt. Most Canadian fund companies offer up some general, limited information on their managers' personal stakes in the funds they run, which is also known as co-investment. So Canadian investors can ascertain who is leading and who is lagging the industry on managerial investment, at least at the firm level. But the reporting is voluntary, unverifiable and incomplete.
Should robo-advisers be used for large amounts of cash?
What should you do with a sudden big whack of cash, such as if you sell your house and decide to rent instead of buy? Use a robo-adviser? A fee-only financial planner? Robos work well for people who have a block of money to invest. Fee-only planners – they charge hourly or flat fees and don't sell products – will back up a few steps to help you consider the financial goals that will guide your investing, writes Rob Carrick.
Why the McDonald's stock 'recovery' is a mirage
John Heinzl admits that after he punted McDonald's Corp. from his Strategy Lab model dividend portfolio, there were times he thought he had made a big mistake. His rationale for getting out was simple: Facing intense competition and shifting consumer tastes, Mickey D's had posted a string of negative same-store sales results that suggested the burger chain's best days were behind it. He still believes that, he writes, but the stock apparently saw things differently: When he sold in December, 2014, McDonald's traded at about $91 (U.S.). Last May – 17 months later – it hit a record high of $131.96 for a gain of 45 per cent (excluding dividends). Why were investors suddenly lovin' McDonald's again? All-day breakfast. But any regrets he had about selling have since faded, because the boost to McDonald's sales and share price both turned out to be temporary.
The case against dividend ETFs
Dividend ETFs have been slammed by one of the country's top experts on income investing, writes Rob Carrick. Tom Connolly, publisher of the Connolly Report since 1981, says "I wouldn't even think of a dividend ETF." They have too many stocks, go for high yielding dividend stocks and aren't focused on stocks with dividend growth potential. And in Canada, there's only so many strong dividend stocks so they're pooled together with riskier high yield stocks in dividend ETFs.
Predictive strategy shows a bullish outlook for the energy sector
Montreal-born Tobias Levkovich is the current chief U.S. equity strategist for Citi. In early 2015, Scott Barlow says he featured a report by Mr. Levkovich that showed that it was relatively simple to estimate profit growth in the energy sector. The strategy predicted a sharp drop in earnings growth and that's exactly what occurred. Reapplying Citi's analysis in the current environment provides a far more optimistic outlook for Canadian energy stocks. The predictive method is astonishingly simple – year-over-year profit growth for the energy sector will be roughly equal to the year-over-year change in the West Texas intermediate crude price 12 months earlier. Since the annual change in crude prices bottomed in July, 2015, and has been improving since then, the trend in profit growth for domestic energy stocks should continue to trend higher.
Short sellers are ratcheting up their bets against Enbridge
Financial-analytics firm S3 Partners LLC follows trends in short sales of stocks and sends out alerts whenever significant changes are spotted, writes Larry MacDonald. For many investors, this can be useful information: A jump in short sales can be a signal to avoid or sell a stock; a large decline can be a signal to buy. Of note, pipeline firm Enbridge Inc. had the largest increase for both the weekly and monthly periods up to Oct. 17 (the value of its short position is now four times higher than what it was 18 months ago).
How an options strategy can protect you on the downside – and defer tax
Are you losing sleep because a stock you bought is dropping in value? If you want to avoid a a big capital gains tax bill this year, and defer it to next year -- and not worry about the stock declining further in value -- you can, says Tim Cestnick. You can do this using a "protective collar" that involves two types of options.
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Ask Globe Investor
The Question:
A stock I own was recently delisted from the Toronto Stock Exchange. What do I do now? How can I sell it?
The Answer:
If a company goes bankrupt, is insolvent or the fair market value of the shares is nil and the company is not expected to carry on, then it is as though you disposed of the stock at zero value. If the security is held in a non-registered account, you need to contact your broker and instruct them to remove the security from your account. You may then file this "sale" on your income tax return for the capital loss. Capital losses that occur in a registered savings plan (RSP), registered income fund (RIF) or tax-free savings account (TFSA), however, may not be claimed as a loss.
-- Nancy Woods is an associate portfolio manager and investment adviser with RBC Dominion Securities Inc. Visit her website www.nancywoods.com or send an email request or question to asknancy@rbc.com.
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What's up in the days ahead
This weekend in Globe Investor, David Milstead examines one of the U.S. market's high-flying sectors of late - defence stocks - and why it may not be all because of Donald Trump. While hedge funds are famous for their sky-high fees, Norm Rothery profiles a fund manager who has taken a less-travelled route by following in Warren Buffett's footsteps. And Monday look for Tom Bradley's prose on the powerful factors that may be ruining your portfolio - and how you can avoid them.
On Monday, Rob Carrick looks at a bank alternative that is really working for your money,
Click here to see the Globe Investor earnings and economic news calendar.
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Compiled by Gillian Livingston and Darcy Keith