An interesting trend has emerged in the Canadian market this year to date. The Toronto Stock Exchange Index is near a record high, while investors in Canadian dividend paying stocks are in negative territory year to date. To illustrate this point let's look at some year to date returns:
XIC (Barclays ETF that tracks the largest most liquid names in Canada)
Year To Date = +5.8%
Some Highlights = Encana (ECA) +35%, Research in Motion (RIM) +25%, Potash Corp. of Saskatchewan (POT) +38%
XDV (Barclays ETF that tracks the 30 highest yielding dividend growing Canadian firms)
Year To Date = -2.7%
Some Lowlights = Bank of Montreal (BMO) -12.5%, Manitoba Telecom (MBT) -10.8%, National Bank of Canada (NA) -0.3%
It's no wonder the Canadian index is soaring while dividend paying stocks flounder. Commodities have been on fire lately, while banks remain under the dark clouds of the credit crunch. Financial services firms make up a much larger portion of the dividend paying universe in Canada than they comprise the total index.
One might assume that these two ETFs would perform quite similarly but this year to date is really showing that this would be a false assumption. Does this mean now is a great time to buy some of the growthy companies that make up the Canadian index? Who really knows, but as a dividend growth investor it is much easier to find value in some of the beaten down constituents of the boring old XDV. When most investors are ignoring these dividend paying firms, is usually the best time to get involved. The Canadian XDV will have its days in the sun in future years and that is perhaps when you want to be accumulating cash or diversifying into other areas. The nice thing about many of the Canadian financial service industry stocks is that at the end of the day they should benefit from any successes that the commodity economy in Canada garners through increased economic activity.
Showing posts with label ETF. Show all posts
Showing posts with label ETF. Show all posts
Tuesday, May 13, 2008
Friday, January 11, 2008
the price of clarity
If anyone ever tells you that investing is 100% safe, they are lying to you. There are risks present in every investment, and you are taking a risk every time you buy something. Whether you fashion yourself a stock picker, an indexer, or some combination of these investing styles, chances are that you are going to have to make a decision as to when to buy. You could be choosing when you should buy a particular Exchange Traded Fund (ETF), or choosing when to buy a stock that you believe is beaten down or undervalued in some way, relative to where the price should go in the future. Either way you are placing a bet as to the future of that particular security.
The sandbox that I've decided to play in consists of financially stable, established companies with strong brands, favourable demographics, and histories of swift earnings and dividend growth. I believe by making this choice I have inherently taken some of the risk out of the equation. Therefore after I chose the companies that I would focus on, I was stuck with the conundrum of when to buy them. In creating a modelling process where I use a discounted model to determine reasonable prices that stocks should be worth, I have established a framework in order to value firms. I don't expect my models to tell me when a stock is dirt cheap, and therefore guarantee the success of an investment. The purpose my models do serve is to provide a kind of framework in order to prevent me from overpaying for a stock. They also show me what type of earnings growth the market is pricing in for a particular company, so at the very least they tell me what is expected from the company at it's current price. Put another way, how does the market feel about the prospects of this company going forward?
Often times the uncertainty around an industry or a particular company is the key driver that causes bad stock prices to stick to good companies. The more I follow investing and the market, the more I have discovered that bad news often hurts stocks much less than uncertainty (or the expectation or possibility of bad news). I've noticed that many investors take the attitude that during these periods of uncertainly it is always a wiser and more efficient call to wait for the dark clouds to part before buying. It is my opinion though that for a long term investor, uncertainty is a blessing in disguise. Often times if you truly want to obtain the lowest cost on an investment you need to buy during that awful period of uncertainty. Sure, you will always get a chance to buy the stock or ETF after it is discovered where all of the bodies are buried; however, usually by that time much of the market has beaten you to it, with the same information, or they dive into the stock earlier with a little less knowledge than would be ideal.
Personally in a lot of cases, with the type of stocks I follow, I feel that if you are long term you might be better off diving in with less knowledge than ideal, instead of waiting for the perfect moment of clarity. See, because when you wait, that perfect clarity is always reflected in the stock price, whereas dark clouds usually come on the cheap.
This type of strategy won't work all the time; nothing does. Sometimes you are better off waiting for some degree of clarity based on your personal thoughts and analysis of the stock.
Here are some examples right now where I believe there is high uncertainty, and thus low prices...
Home Depot (HD), Lowes (LOW), Masco (MAS), Reitmans (RET.A)
Citigroup (C), CIBC (CM), Bank of America (BAC)
The sandbox that I've decided to play in consists of financially stable, established companies with strong brands, favourable demographics, and histories of swift earnings and dividend growth. I believe by making this choice I have inherently taken some of the risk out of the equation. Therefore after I chose the companies that I would focus on, I was stuck with the conundrum of when to buy them. In creating a modelling process where I use a discounted model to determine reasonable prices that stocks should be worth, I have established a framework in order to value firms. I don't expect my models to tell me when a stock is dirt cheap, and therefore guarantee the success of an investment. The purpose my models do serve is to provide a kind of framework in order to prevent me from overpaying for a stock. They also show me what type of earnings growth the market is pricing in for a particular company, so at the very least they tell me what is expected from the company at it's current price. Put another way, how does the market feel about the prospects of this company going forward?
Often times the uncertainty around an industry or a particular company is the key driver that causes bad stock prices to stick to good companies. The more I follow investing and the market, the more I have discovered that bad news often hurts stocks much less than uncertainty (or the expectation or possibility of bad news). I've noticed that many investors take the attitude that during these periods of uncertainly it is always a wiser and more efficient call to wait for the dark clouds to part before buying. It is my opinion though that for a long term investor, uncertainty is a blessing in disguise. Often times if you truly want to obtain the lowest cost on an investment you need to buy during that awful period of uncertainty. Sure, you will always get a chance to buy the stock or ETF after it is discovered where all of the bodies are buried; however, usually by that time much of the market has beaten you to it, with the same information, or they dive into the stock earlier with a little less knowledge than would be ideal.
Personally in a lot of cases, with the type of stocks I follow, I feel that if you are long term you might be better off diving in with less knowledge than ideal, instead of waiting for the perfect moment of clarity. See, because when you wait, that perfect clarity is always reflected in the stock price, whereas dark clouds usually come on the cheap.
This type of strategy won't work all the time; nothing does. Sometimes you are better off waiting for some degree of clarity based on your personal thoughts and analysis of the stock.
Here are some examples right now where I believe there is high uncertainty, and thus low prices...
Home Depot (HD), Lowes (LOW), Masco (MAS), Reitmans (RET.A)
Citigroup (C), CIBC (CM), Bank of America (BAC)
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 iShares™ CDN 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.
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 iShares™ CDN 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.
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