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Market. The markets haven’t moved much since the volatility bomb at the start of the year. The market is trading in a technical range while people stay undecided about the broader issues. It is hard to tell where we are in the cycle because of conflicting signals from emerging markets. And the trade war adds uncertainty. There won’t be a sustained break to the upside until some of the short-term issues are resolved. The underlying reality is that the US economy is doing well and should be fine unless there is a full-blown trade war. He sees the market “late-cycle but not end-of-cycle.” A typical bull market ends with a few common characteristics: (a) yield curve inverted (hasn’t happened yet--the end of the cycle can take 6 to 12 months after inversion); (b) commodity or inflation assets lead the market (crude is just starting to do that); (c) a peak in mergers and acquisitions (this has been heavy, but not at the level of past-cycle peaks). The peaks of past cycles look about 50% higher than today’s level of M&A’s. This usually happens after yield curve inversions and in that period, banks do a lot of lending to finance M&A deals. These two tend to go hand-in-hand.
This is a past holding. It has good price momentum, is in the top 20% of US stocks on that measure. It offers a great return on equity (35%) and has a good balance sheet. However, it is expensive (32x price to earnings) and has been more volatile lately. He will not buy at this time but it is a dominant global brand that he likes.
This is an example of a stock that he would have a short position on. The stock has a very high dividend but its payout ratio is quite high and is therefore at risk. The stock has negative price momentum. They have also had some earnings challenges from their royalty deals. (Analysts’ price target is $19.72)
The stock is close to its 52-week low, dragged down by 2 factors: (a) It is the most international bank and EM markets have struggled this year. A strong US dollar hurts emerging markets. (b) They have done acquisitions and issued shares in the process. He owns this stock despite its price pressure. “You don’t ever go really wrong by buying the Canadian banks.” They are an oligopoly, they have great management teams and they always tend to recover. This is a trading opportunity: good value, good volatility, but weak price momentum at this time.
New Flyer has been caught up with some of the other reasonably-priced dividend-paying stocks that have been left behind as people chase growth stocks. This is a global phenomenon, and shows particularly in the US. This company scores in the top 20% on valuation and the top 20% on stability, has given a 22% return on equity and trades at 15x earnings. It offers a good yield (3%) and a low payout ratio. However, it did miss on earnings in the last quarter. They continue to have a backlog and so they have a growth profile ahead of them.
This had been a short for him because the utilities were expected to drop in price as interest rates rose--and they did. They were also relatively expensive and Enbridge had a debt problem. However, they have sold assets and are improving their balance sheet. Their payout ratio is now looking meaningfully better than it was. He no longer sees it as a short but he does not recommend it yet as a Buy. They company is still not cheap, interest rates will rise further, and the balance sheet problems are not yet fully resolved. This stock has room to drop further.
Comment on Utilities and REITs. The utilities were probably oversold as rates rose. They have recovered sharply recently. However, if the bull market continues, there will more interest rate increases and utility stocks will probably come back down. For an investor looking for yield, he recommends REITs over utilities because they have more pricing power in an inflationary environment.
(A Top Pick March 30, 2017. Up 4%). This is an example of a high-quality stock that has sold off as the market has chased growth. Airlines have been under pressure because oil prices have been rising. However Chorus doesn’t have this problem. They have no currency exposure or fuel exposure. They are purely an operator on a pass-through basis. They own the planes (JAZZ) but Air Canada owns the routes and subcontracts capacity to Chorus. As long as Air Canada is flying, Chorus makes its margin on the hours flown. They have a high dividend but only a 37% payout ratio. They trade with a high return on equity and are very cheap. They did an equity deal a few months ago that weighed on the stock, but they did it to grow their leasing business. There is no good reason for the declining price of this stock.
(A Top Pick March 30, 2017. Up 96%). This company does recreational vehicles (Ski-Doo) and has been doing extremely well since it went public. Even with the big price runup, this company still has decent valuation. It scores in the top 15% on valuation. The valuation is getting more expensive compared to when he invested, but it is still reasonable given the company’s growth profile.
This is another high-quality dividend-paying stock that has been hurt this year. They’ve had some net redemptions, but the selloff is overdone relative to that. From a valuation perspective, this is in the top 10% and it is a very stable stock. This is a great consolidator. However, active management has been declining relative to passive investment. There are no debt problems. He is happy to own it here but the negative price momentum stops him from recommending it for new money.
It fell with the other utilities but has not bounced back as much as the others. He is neutral on it. He likes its stability and its valuation characteristics but it is not showing good price momentum.. The dividend yield is high, the payout ratio is not excessive and the 15x Price to EBITDA is a little cheaper than its peers, so it wouldn’t take a whole lot of price improvement for him to recommend it. He needs more confidence that disappointed sellers have sold their shares and so will not sell the stock off when it rises more
This stock rises like a phoenix out of the ashes every now and again. There is always the promise of hydrogen fuel cells but it is never realized. From a quantitative perspective, it has negative price momentum, poor stability and currently, poor valuation because it has no meaningful earnings. If the stock was less illiquid, he would short it. (Analysts’ price target is $6.28)
