Sunday, September 30, 2007

household savings rate...updated

Back in May I posted regarding my household savings rate (HSR), which I defined as savings in the form of investments (reg. and non reg.) divided by net income or gross income. Let's concentrate on net income for now, back then I estimated my HSR to be 34%. At that time commenters, Four Pillars and Mr.Cheap noted that perhaps the principle paid on a mortgage should be considered savings as well, which I believe is a valid point but still does not tell the whole story. What I can't get past is the fact that unless you include interest paid on your mortgage, then someone who invests rather than paying down their mortgage more aggressively will look as if they are saving more money than a friend who pays down their mortgage with the same disposable cash.

On a recently run poll on this blog asking 'What % of your Net Income do you Save?' the following results were obtained:

27% of people save between 10 - 20%
23% between 40 - 50%
17% between 30 - 40%

Several financial sources, including David Bach's books like Smart Couples Finish Rich, claim that you should save at least 10% of your net income to retire well, or in Bach's words 'less than 10% and you are living above your means'. If you could save 20% of your net income you should achieve great wealth or in Bach's words be 'really rich'. From these results it looks as if several readers of my blog (40% of readers) will be really rich in the future. The factor that is difficult to judge here is what people considered 'savings'. Some people probably included mortgage payments, others included principle payments, and others did not, and only included other forms of savings.


I have recently calculated the following for my family:

HSR = 36%
HSR (including full mortgage payments = 51%

HSR for 2008 when my wife goes on maternity leave = 15%
HSR (including full mortgage payments for 2008) = 37%

If my calculations are correct, and too much unforeseen expenses don't crop up during 2008 then I will be quite pleased to still be able to save 15% of net income with our reduced employment income situation. I am still debating whether my wife will continue to contribute to an RRSP for the year at her usual rate, decrease her contributions, or hold off for 2008 all together. It is although starting to look like our income trust security blanket that we have built up may not get used, which is wonderful as I'd be quite please to roll this over into an RESP for my first child, or keep it invested and start a synthetic drip for a future child's RESP or other uses.

Thursday, September 27, 2007

cheap stocks continued

Continuing with the preview of the current stocks that appear on my 'cheap stocks as per my watchlist'...

Remember to do your own research before purchasing any investment.

Thomson Corp. (TOC) - Under $43
- This, to me is always a hard company to analyze as their business is currently in transition and the avenues in which they make money and run their business are complex.
- I do feel that the work they do is important and will become more so in the future.
- This is also a hard company to call 'cheap' as they have always traded at a high multiple.
- Since their acquisition of Reuters back in May of this year the stock has been very weak.
- P/E multiple contraction, I would think is a risk with this name.
- Current P/E of 16.6 is very low for this company, who's P/E is usually above 20.
- TOC has been a consistent, although slow grower of dividends and currently yields 2.7%

TELUS Corp. (T)* - Under $58
- TELUS has had an interesting year after being speculated to be an acquirer of BCE as well as acquired by private equity, personally I am glad neither occurred.
- The speculation eventually subsided which hurt the shares.
- This company reported weak earnings and some one time costs last report date and the stock came down to about 23% below it's 52 week high.
- Every time I see another 14 year old with a cell phone I remember how much growth must be left in the wireless business.
- Also all that old Bell Canada Enterprises (BCE) money needs to go somewhere, TELUS and Manitoba Telecom seem to be the obvious choices for yield as well as sector exposure.
- This company really markets their products well, and are diversifying by capturing a lot of corporate business, as well as being the strongest player in the fastest growing regions of Canada.
- Their short dividend growth history has been superb and the company currently yields 2.7%
- P/E = 19

*Buy the non-voting shares as they are more liquid and if you employ a Dividend Reinvestment Plan or Share Purchase Plan they buy T.A instead of T. I own shares in TELUS.

Saturday, September 22, 2007

MG's current 'cheap' stocks

The following is a short list of a few stocks that I believe are currently trading significantly underneath their fair value according to my models that I use to evaluate stocks on my watchlist, which is composed of about 40 stocks. I will list the stock (with ticker), the price under which I believe the stock to be cheap, some details about why the stock might be trading at this low level, as well as other details about the company that I feel are relevant.

Remember to do your own research before purchasing any investment.

Reitmans Canada (RET.A) - Under $21.
- Reported weak results last quarter and announced a restructuring of it's struggling Cassis banner ( a clothing store catered toward baby boomers).
- August same store sales were down about 6%, the CEO blamed the credit crunch's impact on shoppers confidence....which seems a little silly to me...
- Apparently the high $CAD should help them as they purchase their materials in $USD and earn $CAD.
- Yields 3.2%, and has been an aggressive raiser of dividends, however shareholders have not seen a raise in quite some time....
- P/E = 14.7

Citigroup (C) - Under $50
- U.S. banks have been under pressure because of the subprime crisis, however they seem to be recovering as of late and should do better as interest rates dive.
- In the short term earnings could be hurt by the crisis.
- Citigroup is generally regarded as a very good quality, global bank, which is well diversified.
- Yields 4.6%, great dividend raiser, the dividend has been almost tripled since Jan. 2003.
- P/E = 10.9

Bank of America (BAC) - Under $51
- See Citigroup...
- Yields 5.0%...
- P/E = 10.7

The Home Depot (HD) - Under $36
- Easy to see why this one is cheap given the U.S. housing crisis.
- Regardless of your opinions on their customer service in the stores, every way you look at the fundamentals of this company will show you their strength. I once called Walgreen 'Home Depot without the hammers.'
- I have a feeling that when we all look back at the time period of 2006 - 2008 we could see it as a good time to have purchased shares in HD (that is assuming housing activity levels off and picks up soon).
- All this being said this industry is scary right now, "buy when everyone else is selling?"
- Yields 2.6%, another very good grower of dividends as they have quadrupled their dividend since 2003. They are also buying back their own shares at a phenomenal rate as I've posted about previously.
- P/E = 13.6

more to come....

Thursday, September 20, 2007

bought some Walgreen Co.

I purchased an initial position in Walgreen Co. today from my wife's RRSP account. I already own some WAG in our non registered account. Readers of this blog have heard previously why I like Walgreen (WAG) going forward as a long term investment. Check my archives to find out more about WAG. With the Canadian dollar pretty much at par, and Walgreen still shuffling around $45 / share, I thought this was as good a time as any to buy some. The currency change alone over the past 6 months has made this purchase a much more economical one than previously when I first got involved.

The defensive nature of Walgreen is always evident when you look at its performance vs. the index when things go bad for the markets. WAG's share performance from July 15 forward (when things started to go bad for credit markets) when compared to the S&P illustrates this very well.

Monday, September 17, 2007

investing based on demographics

Middle Class Millionaire is doing a great series on investing based on which companies might benefit from demographics in North America going forward. Responders, including myself, suggested several stocks to him to preview including some of my favourites like Walgreens (WAG), Scotts Miracle Gro (SMG), and IGM Financial (IGM).

I also suggested Disney (DIS) to him and explained my rationale for the demographic play to him this way:

My thesis on Disney is that if there is one thing that boomers over 55 value, it’s their Grandkids. My parents were absolutely ecstatic when they found out they were going to be Grandparents. Kids today have more people, and wealthier people willing to purchase toys, movies, trips, etc. for them. Also, because today’s society is based more on dual income families they tend to buy their kids affection with Disney products, and have more income and wherewithal to take a vacation to Disney Resorts. Disney has become somewhat of a status symbol for the middle class. I once heard a Father say ‘my goal is to earn enough money this year to take my family to Disneyland’.

Saturday, September 15, 2007

net worth update september, 2007

Results for the two months ended September 15, 2007.

  • Debt/Asset Ratio moved down from 0.58 to 0.57
  • Net worth up 5.5%
  • Total Assets up 1.7%
  • Total Liabilities moved down 0.9%
  • House Value / Total Assets moved down from 75% to 74%
  • Non registered portfolio moved up 20.9%
Good progress in a down market. Extra money was employed in the market this period because of an opportunity to buy Bank of Nova Scotia, as well as more Yellow Pages on a dip in mid August.

Wednesday, September 12, 2007

simplest ways to ensure financial difficulty your entire life

List compiled with inspiration from young, (age 25 - 35), friends and relatives (ie they helped me compile this list without realizing they did so)

1. Buy a vehicle without looking at total cost of ownership (financing, gas, insurance,maintenance)

2. Buy a home for your maximum lender pre-approval amount.

3. Do not start an RRSP because you have debts to pay off.

4. Do not make proper (higher interest to lower interest) debt repayment a priority.

5. Maintain a short-term view of your finances.

6. Fail to coherently plan finances around life events.

7. Fail to work as a team with your partner when it comes to your household finances.

8. Fail to realize that how you spend and manage money matters more than how much money you make.

Friday, September 7, 2007

limit order for Inter Pipeline

I put in a Limit Order today to add to my position and buy more Inter Pipeline Fund (IPL.UN) at $8.80. It is currently trading at around $9.00. The order expires on October 15, 2007.

If the 'buy' goes through at $8.80 then I would have purchased this portion at a yield of 9.55%. This will complete my Income Trust portion of my portfolio which I have previously described as part of our 'maternity leave' financial strategy.

Thursday, September 6, 2007

equity investing 'is' earnings growth

Evaluating stocks is an involved process and not something to be taken lightly or oversimplified. An important point to remember is that if something appears to be 'too good to be true' then it probably is. The market has a way of evening itself out to equilibrium and offering identical value across the board, since it has limited or no knowledge of the future. An example of this might be a very high yielding stock, a technology company with unbelievable earning growth, or a value trap (a stock that appears cheap, but is cheap for a valid reason).

Why is earnings growth the most important factor when evaluating a stock?

1. Earnings growth drives up a company's share price more than any other factor. Even if a stock is experiencing (P/E) multiple contraction, earnings growth will eventually cause share price to rise, it must be this way because mathematically it has to. An example of this is General Electric (GE) from 1999 to now. If GE's share price did not start rising from 2003 - now, their P/E would have fallen to very low levels, which investors would have never let happen. If earnings growth continues for long periods then there is nothing that will hold a stock's price back from rising, short of multiple contraction. Similarly I see this situation developing soon with Walgreens (WAG). WAG continues to pump out superb earnings growth but the stock just sits there, this trend can only continue for a limited time, which is obviously one of the reasons that I am so bullish on the stock as readers of this blog know very well.

2. Earnings growth supports, and actually allows for dividend increases. When a company earns more money quarter after quarter, that gives them the confidence and resources to pay an ever increasing dividend, which should also provide a floor for the share price, if not cause the share price to rise. Conversely when a company has weak earning growth their share price will suffer, if they continue to raise the dividend their yield will rise, however, their pay-out ratio will rise at the same time. This trend can not continue forever, and eventually the company will have to slow dividend growth, freeze the dividend, or cut the dividend. For an example of this have a look at Loblaws (L) stock over the past 5 years. Loblaws is paying the same $0.21 per share dividend that it was paying in early 2005 (they've froze the dividend). During 2005 it was yielding 1.1%, it is now yielding 1.9%; does this make the stock more attractive now because the yield has almost doubled? Given that these are still relatively low yields but the same type of trend can and does happen with higher yielding stocks and the trend would have been much more severe if Loblaws continued to raise it's dividend over the past 2 years.

3. Earnings growth can show the quality of management. A large part of managing a company is reducing expenses, if a company can continue to grow earnings even when their top line is weaker, this shows that management has found a way to cut costs.

4. Earnings growth can show the strength of an industry. Usually if several companies in the same industry show slowing earnings growth it says something about the industry and vice versa for rising earnings growth.

What truly matters most in the process of selecting stocks is future earnings growth. Strong past earnings growth is great but it will not increase a company's share price and dividend payments going forward.

How do we determine future earnings growth?

This is the eternal question in the investing world because he who picks the stocks which grow their earnings the quickest for the longest sustained time - wins, no matter what your investment style is. Whether you are a growth investor, momentum investor, a value oriented investor, a yield investor, or a dividend growth investor, etc. you will come out ahead if you select the stocks with the highest sustained earnings growth rate going forward.

When is comes to determining future earnings growth you can look at a myriad of factors not limited to analyst estimates, economic conditions, company specific initiatives, demographics, industry fundamentals, the list goes on and on...

If it was easy to determine what the future earnings growth rate was then we would all be millionaires. The fact that it is difficult is no surprise. This is what makes a market, this is uncertainly, this is investing....

Tuesday, September 4, 2007

a 'low energy' approach

Our Canadian market, and thus the TSX (Toronto Stock Exchange) is very heavily weighted in energy stocks, (such as oil and natural gas producers), and material stocks (such as Aluminum or Uranium miners). As far as selecting stocks goes I feel less confidence roaming and researching in the energy space vs. the financial sector or consumer products areas.

My confidence in predicting future earnings is significantly lower with energy companies than it is with a consumer products firm. The reason for this is due to the fact that a barrel of oil or a unit of natural gas is worth varying amounts of money of different days. If I don't know what direction and at what rate the price of a barrel of oil will go, then I have a hard time predicting where the earnings of a company will go, that pulls this oil out of the ground and sells it. This makes it difficult for me to determine when an energy stock is cheap, fairly valued, or expensive going forward. Energy stocks need to be valued according to different metrics, because the traditional price/earnings ratio will give a skewed impression due to fluctuations in commodity price. These metrics vary depending on the school of thought that you subscribe to or which analyst you listen to. Whether it's price / cash flow, price/ book or net asset value...etc..............why bother......

All this being said, I believe energy is a good place to be invested in the medium and long term. With the continuing strong, energy dependant growth of many developing countries (ie China and India) as well as the ongoing energy apathy in North America, I believe the demand for oil, natural gas, and uranium will only grow. In my opinion this is a perfect sector to just take the guess work and homework out of it and buy the ETF (Exchange Traded Fund). Barclays iShares offers a product that I believe is perfect for exposure to the energy sector in Canada: iShares Canadian Energy Sector Index Fund (XEG).

The iSharesCDN Energy Sector Index Fund seeks to provide long-term capital growth by replicating, to the extent possible, the performance of the S&P®/TSX® Capped Energy Index through investments in the constituent issuers of such index, net of expenses. The Index is comprised of securities of Canadian energy sector issuers listed on the TSX, selected by S&P using its industrial classifications and guidelines for evaluating issuer capitalization, liquidity and fundamentals.

This exposure does not come without a cost as the MER (management expense ratio) is 0.55%, and the ETF will cost you your usual brokerage commissions to buy and sell. The benefits of this type of product are fairly clear though, as you receive immediate exposure to the largest energy names in Canada including trusts, for a reasonable price. Due to this exposure to income trusts XEG yields 2.50% in distributions (not strictly dividends), so you will pay relatively more tax on this income.

The top 3 holdings of this ETF (as of writing this) are:
Encana (ECA) 14.4%
Suncor (SU) 12.8%
Canadian Natural Resources (CNQ) 11.5%

Personally I will give strong consideration to XEG next time I feel the time may be right to buy some more energy exposure. For the time to be right sentiment on oil price should be low, and my portfolio should require some more commodity exposure to maintain proper diversification. This is one sector that I might want to take the low cost / low maintenance approach and just try to ride the tide of the sector long term.