How to invest in the new media age, Buffett’s dividend dilemma, and why stocks may stay frothy

11

Home Capital, Donald Trump, climate change, the Shiller CAPE ratio, record domestic household debt levels, Syria, the rise of French fascism, anti-free speech campus movements – there’s a media fixation to make anyone miserable and feel like the world’s going to hell, no matter what their political affiliations.

Most of the market-specific trends are positive, in direct tonal opposition to the general news flow. The Canadian economy has proven remarkably resilient despite commodity price volatility. Economists expect gross domestic product growth of 2.3 per cent in 2017, well above the 1.4 per cent increase in 2016.

South of the border, Merrill Lynch quantitative strategist Savita Subramanian writes that the current corporate earnings season has seen the strongest profit growth in five years.

“Earnings growth of [more than] 13 per cent is tracking its highest in over five years. Even sectors that were slated to see poor growth have fared well, including Industrials (-1 per cent year-over-year versus -9 per cent expected) and Discretionary (+3 per cent year-over-year versus -2 per cent expected). Overall, 66 per cent of companies have beaten on EPS [earnings per share], 62 per cent have beaten on sales, and 48 per cent have beaten on both-the highest proportion of top-and bottom-line beats in 13 years (since the first quarter of 2004).”

Richard Bernstein, founder of RB Advisors and a previous holder of Ms. Subramanian’s job at Merrill Lynch writes, “Investors have somewhat lost touch with overall corporate fundamentals because they are myopically watching politics. RBA’s research has indicated for more than a year that the trough in the U.S. profits cycle was in the fourth quarter of 2015, that 2016 was the year of profits recovery, and that 2017 would be the year of the profits expansion. It is likely that S&P 500 reported profits growth will exceed 20 per cent at some point this year.”

Mr. Bernstein previously wrote a book entitled, “Navigate the Noise: Investing in the New Age of Media and Hype” which encouraged investors to turn off the media and just focus on actual numbers. This seems an important bit of advice to follow in the current environment.

— Scott Barlow

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Stocks to ponder


Granite Real Estate Investment Trust.
Loaded with cash, this REIT is catching the eye of activists, writes Jennifer Dowty. This is a REIT with positive price momentum. The trust offers investors yield of 5 per cent with a conservative payout ratio. It has a healthy balance sheet with a large cash balance, which could be used to unlock value for unitholders. Toronto-based Granite owns and operates primarily industrial, warehouse, and logistics properties across North America and also abroad, in Europe. The average 12-month target price is $48.54, implying the share price is fully valued.


Diversified Royalty Corp.
This stock has an 8 per cent yield, seven buy calls and a 22 per cent upside forecast, writes Jennifer Dowty. This stock is on the positive breakouts list, indicating it has positive price momentum. The company currently offers invests an attractive 8 per cent yield; however, the payout ratio exceeds 100 per cent. Management is actively looking to identify and acquire a royalty acquisition to replace its lost income stream from a recent sale of royalty income rights. An acquisition announcement may serve as a catalyst to lift the share price out of its recent consolidation pattern.

The Rundown

Home Capital’s fate is up for debate

The fate of Home Capital Group Inc. as an independent company remains open to debate, but the value of its mortgages is not, according to the market’s upbeat reaction Tuesday to news that the embattled lender may be selling a slice of its mortgage book, writes David Berman. Home Capital’s shares surged as much as 20 per cent in early trading on Tuesday, after the company announced that a mystery party may buy up to $1.5-billion worth of uninsured mortgages.


Why Warren Buffett should never pay a dividend

Warren Buffett can grab headlines and attract new investors to his flagship Berkshire Hathaway Inc. All he has to do is break with tradition and start paying a dividend, writes Ian McGugan. Here’s hoping he resists the temptation. The great investor has insisted on a no-dividend policy for decades. To relent now would be an admission of defeat – honourable defeat, to be sure, but still defeat. It would also be beside the point. Anyone who invests in Berkshire is buying into a philosophy of investing – one that insists a single, sage investor can deploy capital better than Mr. Market. It’s easy for outsiders to take issue with that premise, but if you’re a Berkshire shareholder, you’re implicitly endorsing it. You’re declaring that you prefer to have Mr. Buffett direct where your money goes rather than buying an index fund and trusting the market to allocate your funds. Given that, a dividend makes no sense.


This time, it really is different: Why stocks may stay frothy for years

John Templeton, the great value investor, famously said that the four most expensive words in the English language are, This time, it’s different. But what if, this time, he’s wrong? asks Ian McGugan.  Maybe the economy isn’t going back to its old ways any time soon. Maybe markets aren’t going to revert to historical patterns in short order. If so, it’s possible that we’re in a new investing era, one in which frothy stocks will go on being frothy for years to come. That, to be sure, is far from a sure thing, but it would be in keeping with the views expressed by a couple of respected thinkers who have recently spoken about the state of the U.S. economy.


Speculators add to twitchy oil market

Speculative optimism in oil futures peaked in February of this year and the sharp decline in bullish crude bets since that time has helped hedge funds avoid much of the portfolio damage from the recent weakness, writes Scott Barlow. In the short term, however, it appears the unwinding of futures positions has some ways to go, and the process would form a short-term hurdle for oil prices. He looks at charts that tell the story.


‘Sell in May and Go Away’ is nothing but a myth

Equity investors often hear about “Sell in May and Go Away” at this time of year. It implies that investors should sell their equity securities in early May and buy them back in late October at a lower price. Dates most frequently connected to the strategy by technical and seasonal analysts are May 5 and Oct, 27, writes Don Vialoux. Data over the past 66 years does not support the expression.


Why some see the pullback in pot stocks as a buying opportunity

The latest pullback in pot stocks may be a buying opportunity for investors willing to stomach continuing volatility in the sector as Canada gets closer to legalizing recreational marijuana. Some pot stocks are down 10 to 30 per cent since April 12, the day before Ottawa tabled its legislation with a self-imposed deadline to legalize pot by July 1, 2018, writes Brenda Bouw. Some analysts see this dip as a buying opportunity, while others caution that there’s still much that isn’t known yet about how the industry will be regulated.


Where high-net-worth investors are putting their money right now

They say imitation is the sincerest form of flattery. And perhaps the most profitable, too. Here are three places where high-net-worth investors are putting their money right now.


This investor says BlackBerry’s turnaround is finally here

Jonty Russell monitors a list of companies that he knows and understands well. If growth catalysts emerge for any of them, he’ll dig into their financial statements. Those without heavy debt loads and other red flags are candidates for investing, writes Larry MacDonald. He’s quite bullish on BlackBerry. Here’s why.


How much bank exposure does your portfolio really have?

John Heinzl looks at a fund manager’s statement that investors should have no more than 20 per cent of their equity portfolio in bank stocks. He explains that the 20-per-cent limit is just one fund manager’s opinion. If your exposure is slightly higher or lower than that, don’t worry. Generally, you should aim for a weighting that lets you participate in the solid returns that banks have generated historically, while limiting your risk should they run into trouble from a housing bust or some other unforeseen event. The toughest part of that is calculating what your holdings actually are, particularly if you own a number of funds.


Rob Carrick’s 2017 ETF Buyer’s Guide: Best Canadian dividend funds

A dividend ETF is like a faucet that pours out cash every month, writes Rob Carrick. Exchange-traded funds holding dividend-paying stocks are a handy option for both income-seeking investors and people who want a portfolio of mainly blue-chip stocks. You get an instant portfolio of dividend-paying stocks managed for you at a much lower cost than anything in the mutual fund world. And, you get cash distributions paid every month. In the fifth instalment of the 2017 Globe and Mail ETF Buyer’s Guide, we look at funds in the dividend and monthly income categories.


New rule proposed to boost transparency around funds with embedded fees

The industry group charged with protecting investors wants to ensure that Canadians buying mutual funds through online brokers aren’t paying for advice they’ll never receive, writes Clare O’Hara. The Investment Fund Institute of Canada on Monday proposed regulators adopt a rule that would ensure mutual funds that carry an embedded adviser fee are only sold in channels where advice is offered. The regulators include the Investment Industry Regulatory Organization of Canada and all provincial securities commissions. These so-called Series A funds bundle an advice fee within the product and are usually sold to investors who deal directly with an investment adviser. But these funds are also currently sold through discount brokerage channels. As such, do-it-yourself investors could be paying for investment advice they aren’t receiving.


Others:

Ten companies with recent insider buying activity

Nine companies with recent insider selling activity

The Globe’s stars and dogs for the week


Number Crunchers

Nine Canadian stocks that are undervalued wealth producers


Ask Globe Investor


Question:
Would there be an advantage to opening a U.S. dollar account to invest in stocks that have to be purchased in U.S. funds and having dividends paid into it? This would eliminate the currency exchange cost once we purchase the U.S. dollars to fund the account with. We do travel to the sunny south occasionally and could use any U.S. proceeds then.


Answer:
Yes, it makes a lot of sense to do that. Most Canadian banks offer U.S. dollar accounts so you should have no problem in setting it up.

— Gordon Pape

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What’s up in the days ahead

John Heinzl will take a look at three dividend stocks that offer yields of at least 4 per cent. Meanwhile, Ian McGugan will explain why the record lows in the volatility index this week may mean you’ll need to save more for your golden years.

Click here to see the Globe Investor earnings and economic news calendar.


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