Morgan Stanley’s new pessimism on the energy sector noted that oversupply concerns are likely to remain a problem for the commodity price despite the falling number of active oil rigs south of the border.TODD KOROL/Reuters
The state of play in the energy sector forms a terrific real-world test of investors' portfolio strategy knowledge and risk tolerance.
There are two distinct outlooks for the oil price. I wrote Tuesday that speculative excess and continued high U.S. inventory levels suggest that the most probable direction for the commodity price in the short term is lower.
However, the U.S.-based Energy Information Agency remains confident that global oil supply and demand will balance in the third quarter of 2017, and crude inventories will begin to decline. The Paris-based International Energy Agency also published a report predicting that the recent lack of investment in new oil supply will lead to shortages, and much higher commodity prices, in the coming years.
'Don't try and time the market' is one of the first rules of investing, so investors who accept the 'short-term weakness, long-term bullish' market scenarios above should not wait until they believe oil stocks have bottomed. As psychologically difficult as it is, scaling in bit by bit into oil stocks through the down phase is the right strategy. This will position them with larger holdings when the IEA-predicted rally begins, and bigger gains as it happens.
Energy markets are volatile and, of course, things may not play out the way I or the agency experts believe. This is another way in which current energy market conditions are such a great test – having a plan and then being forced to adapt, or abandon the strategy, when confronted with new circumstances is another important investing skill.
-- Scott Barlow
Stocks to ponder
Richards Packaging Income Fund. This is a relatively undiscovered income fund that appears on the positive breakouts list. It offers investors an attractive 5 per cent yield, which appears sustainable, writes Jennifer Dowty. On March 2, the Fund announced an 18 per cent hike to its monthly distribution. The Fund has experienced steady top line growth over the years.
CIBC. Canadian bank stocks are performing well this year, but one stock is shining brighter than the rest: Canadian Imperial Bank of Commerce, writes David Berman. CIBC has gained 9.2 per cent so far in 2017, which is about 1.5 percentage points better than the average gain for the biggest five banks and more than 3 percentage points better than the laggard (Toronto-Dominion Bank). Why does this matter? CIBC was highlighted in this space late last year as the best bet among the biggest five banks, for the simple reason that it lagged its peers in 2016.
Magellan Aerospace Corp. This stock may appear on the positive breakouts list in the future if analysts are correct, writes Jennifer Dowty. The stock has an unanimous 'buy' recommendation with analysts anticipating the share price may rally anywhere between 15 per cent and 31 per cent over the next year. Since November, three analysts have issued research reports on the company, with all three analysts having a "buy" recommendation on the stock.
Exco Technologies Ltd. Investors looking for a cheap stock with a stable, growing dividend should consider global auto parts manufacturer Exco Technologies Ltd., analysts say. Shares of the Markham, Ont.-based company, which makes vehicle accessories and die-cast moulds, have gone in reverse over the past year – down more than 20 per cent because of some operational challenges, as well as concerns about slowing auto sales and potential trade disruptions imposed by U.S. President Donald Trump's administration, writes Brenda Bouw. Some analysts are expecting the shares to move higher in the months ahead, driven by a stronger balance sheet and potential growth through acquisitions.
The Rundown
Investment advisers want your help in fending off regulators
If you're pleased with the status quo in the investment advice business, there's a petition you should sign, writes Rob Carrick. An organization of investment advisers called Advocis is behind the initiative. Advocis is fighting regulatory proposals that would dramatically change the way advisers are paid. On a website called Financial Advice For All, the group is trying to rally everyday people to its cause. Just add your name and e-mail address, and you'll be lining up with a group that is fighting efforts to fix the No. 1 problem in financial advice today. Too much of what passes as advice is really about selling products.
Why share buybacks are a good thing
Canadian companies have been enthusiastic buyers of their own shares at a time when Warren Buffett – the world's greatest investor – continues to rail against buybacks, writes David Berman. Should investors be worried? Buybacks, or share repurchases, are a way for companies to return money to shareholders without committing to dividend hikes. The practice reduces the number of outstanding shares, boosting profit on a per-share basis by at least 4 per cent, according to Standard & Poor's recently quarterly figures.
Keep watching these two 'triple-threat' stocks
During this earnings season, we have seen numerous "triple-threat" stocks. These are companies that have reported better-than-expected quarterly results, announced dividend increases and have realized strong positive price momentum – a winning formula for investors. These positive attributes provide a solid foundation for a stock to go higher. Jennifer Dowty looks at two such stocks: Restaurant Brands International Inc. and CCL Industries Inc.
Don't let Snap fool you. IPOs aren't must buys
The early success of Snap Inc. has a downside: It attracts us to new stocks, most of which are doomed to underperform over the next year or so. Early investors made a killing and anyone jumping into the rally has done very well, too. That leaves risk-averse curmudgeons wondering if the next dividend payout on their index-tracking exchange-traded funds is a signal that they need to change their ways, writes David Berman. The short answer is no, even if Snap turns out to be a runaway success. Academics have been crunching the returns on IPOs for decades, and have come to the conclusion that new issues tend to pop higher on their first day of trading but then underperform the broader market.
A sign of frustration as oil caught in rangebound territory
Friday's report on speculative oil futures positioning, combined with a weaker commodity price, provided the first signs that rampant optimism in energy sector is on the wane. Further erosion in sentiment raises risks that an unwinding of bullish bets will push the crude price sharply, if temporarily, lower, writes Scott Barlow.
Q&A: What Odlum Brown's Murray Leith has been buying, selling and thinking about markets
Donald Trump has stirred up a lot of emotion in the markets during his election campaign and since he became U.S. President. While Mr. Trump has been taking credit for the recent rally, some investors say economics should get the top bill, writes Brenda Bouw. The Globe spoke with Murray Leith, executive vice-president and director of investment research at Vancouver-based Odlum Brown Ltd., recently about his take on the so-called "Trump bump," as well as what stocks his firm has been buying and selling lately and why investing is a lot like playing Monopoly.
14 companies with recent insider buying activity
Energy stocks are under accumulation by insiders, writes Jennifer Dowty as she gives the details about 14 companies that have experienced recent insider buying activity in the public market through their direct and indirect ownerships. Of the 14 stocks listed, over half of the companies are from the energy sector.
Gordon Pape: My RRIF portfolio has delivered 8.5% annual growth
Gordon Pape launched this RRIF model portfolio in February 2013 for readers of his Income Investor newsletter, so this is its fourth anniversary. Its goals are to protect capital and to provide higher cash flow than investors could get from conservative securities like bonds and GICs. The initial value was $49.910.30. This portfolio balances the two objectives of income and safety by putting a significant amount into low-risk assets and the rest into higher-yielding securities. Detailed are the current positions in the portfolio with a commentary on how they have fared since the time of the last review in August, 2016.
BoC may soon change direction and lift loonie, says report
The Canadian dollar may soon get a lift from the Bank of Canada, despite the central bank's own assertions to the contrary, writes Tim Shufelt. The Bank of Canada's official stance remains largely supportive of a weak currency. But inflation and improving economic readings could force a change of tack, according to a report from Montreal-based Pavilion Global Markets.
I've lost my trading records for a stock. Now what?
John Heinzl writes that he's heard from many readers over the years with the same problem: They've lost their trading records – or never bothered to keep them in the first place – and are now unable to determine their adjusted cost base (ACB). This makes it impossible to calculate their capital gain for tax purposes when they decide to sell their shares. As tempting as it might be to "fudge the numbers" and come up with a guesstimate of the ACB, this is not recommended, Mr. Weinstein said. If the Canada Revenue Agency (CRA) asks you to justify your ACB and you're unable to do so, it could reassess your tax return and possibly charge you interest or penalties, he said.
How these all-too-human errors could sink your assets
The diehard economists and financial pros who still cling to the tattered notion that people and markets tend to behave rationally must be having a hard time explaining the peculiar words and actions of U.S. President Donald Trump in his first weeks in office, writes Brian Milner. They should consult Daniel Kahneman, who helped explode the myth of the rational human through groundbreaking psychological experiments he and his late Israeli colleague, Amos Tversky, began conducting in the 1960s. Their work showed why decision makers go wrong, exposed the flaws in conventional economics theory and highlighted the all-too-human errors stemming from innate biases and mental quirks.
Long-term investors could take a cue from Buffett on Sirius XM
Portfolio manager Larry Sarbit writes that he has been a keen observer of what great investors own in their portfolios. No one has been more intriguing to him than Warren Buffett of Berkshire Hathaway. Historically, Mr. Buffett's investments have been extremely selective, but once they have been chosen by him (or his team), his amazing historical track record means it's a good bet that they will deliver something wonderful to shareholders. In the fourth quarter, Berkshire took a large position in Sirius XM directly to the tune of 167 million shares, making Berkshire the largest minority shareholder. Here's why he thinks they have bought into this business and why it may belong in your portfolio as well. (Full disclosure: Sirius has been an outsized investment for Mr. Sarbit's firm– almost 11 per cent of its firm's funds – during the past number of years.)
How to defend your retirement savings against a market correction
A well-designed retirement portfolio has multiple layers of defence against a stock market correction, writes Rob Carrick. One is a cash holding to cover financial emergencies. Another is a mini-ladder of guaranteed investment certificates that mature in one and two years. Each GIC holds enough to cover one year's living expenses. If stocks tank, you have time to let things recover because your expenses are covered by safe investments. These defensive strategies are an answer to a question from a reader who sees a hole in all the coverage of retirement investing.
Panic and fear are tools for this contrarian investor
Larry MacDonald talks to an investor who is in business school who aims to invest in mid-cap companies that have suffered a setback and are out of favour with investors.
Other Links
How the Trump market rally could become a "bloodbath"
Research Reports
Chart Watch: Correction overdue, but underlying up-trend remains
12 securities insiders are selling
Number Crunchers
Fifteen financial stocks showing reasonable valuations
Ask Globe Investor
The Question:
Here is a question related to mutual fund MERs.
Hypothetically, let's say there are two mutual funds in a portfolio. Fund A has a MER of 2.5 per cent and Fund B has a MER of 1.5 per cent. Both funds report exactly the same return for every year after fees and expenses.
My question: In this hypothetical example why should I care about mutual fund MERs if the net return is the same? Actually, why would I care about MER at all? Should I only focus on the return?
The Answer:
I'm glad some people understand what I've been saying for years. The only number that should matter when judging mutual funds is the net return to you. If a mutual fund with a 2.5 per cent management expense ratio returns 10 per cent a year after expenses and an ETF with a 0.5 per cent MER gains just 8 per cent, which would you choose? Clearly, the mutual fund puts more money in your pocket than the ETF, even if its costs are higher. This is not to suggest people should ignore costs. However, judge them against returns before deciding.
-- Gordon Pape, Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters.
Do you have a question for Globe Investor? Send it our way via this form. Questions and answers will be edited for length.
What's up in the days ahead
On the hunt for a good dividend-paying ETF? Then you'll want to check out John Heinzl's piece in Wednesday's Globe Investor where he'll outline some of the best ETFs for income. Speaking of exchange-traded funds, Rob Carrick will kick off our 2017 ETF buyer's guide Saturday with a look at Canadian equity funds.
Click here to see the Globe Investor earnings and economic news calendar.
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Compiled by Gillian Livingston