Financial Questions for Bill Richardson Part 19
Question 1: I’ve noticed that Canadian stocks seem to be outperforming US stocks in 2021. Is this the start of a trend or just a short-term thing?
You are absolutely correct. In 2021 (through June 10), the TSX 60 Index is up 16.98% and the S&P 500 in Canadian Dollars is up 7.32%. If we sort through the best performers in the TSX 60, 9 of the 20 top performers in 2021 are financial services companies and 8 are energy companies. At the top of the list, Imperial Oil is up 73% in 2021 which is amazing performance but if we look at longer-term performance, the price dropped from a high of $48 to a COVID low of $11 and has since recovered to $42. So, somebody who invested $10,000 in Imperial Oil in January 2017 will see that this investment is now worth $9,912 including all dividends received (source: YCharts.com).
We focus our attention on companies with positive earnings growth over time, that is expected to continue and that we can buy at reasonable prices. Imperial Oil produced earnings of $3.18 per share in 2017 and today are losing $1.746 per share. (How many times have you filled your gas tank in 2021?). Earnings are expected to recover to $3.57 over the next two years. Companies, like those in the energy sector, have earnings that go up and down in the short-term and sideways to lower over time. Over the past 10 years, investors would have received an annualized 10-year return of 0.76%. That is less than 1% per year for the past 10-years. We avoided the drop in stocks like Imperial Oil in 2020 and missed the big bounce back in 2021 and opt for companies like Adobe that have returned 21% per year for the past 10-years (source: YCharts.com). It is easier to make money by focusing on stocks in positive trends than trying to play cyclical swings.
Financials is a very different story. This sector took it on the ear in the 2008 financial crisis even solid companies, like the Canadian banks (Royal, TD, etc.) were negatively affected. We always have an allocation to this sector as stocks in this sector pass the consistent and predictable earnings growth test and try to pick the best stocks within it. Sometimes, it is the Canadian banks, sometimes insurance companies, and sometimes major stock market data providers, like NASDAQ. It all depends on which have the best growth prospects at reasonable prices. In this case, banks dropped because oil prices dropped and there were fears about bad loans. Now that oil prices have recovered, investors flocked into oil stocks and banks, who lend to oil companies.
So, two of the biggest sectors have had a good run and Canadian stocks joined the party but we continue to prefer the broader opportunities presented by the more powerful US economy.
Question 2: I’ve noticed that some of the mutual funds are performing very well this year. They seem to be underperforming the indices. What’s up?
In the previous question, we talked about strength in the price of oil. Rising oil prices lead to a strong Canadian Dollar. Most mutual fund managers hold large US stock positions and when the Canadian Dollar rises and the US Dollar declines.
Year-to-date, the Canadian Dollar is up 5% so when we look at a fund, like the Dynamic Global Dividend fund, and it is down 0.5%, the stocks are actually up close to 5% but currency took all the gains away (source: YCharts.com). An example of a great manager with 3-, 5- and 10-year double digit returns that has struggled ytd, partly because of his growth bias and largely from currency fluctuations. Over time, the Canadian Dollar goes sideways but there can be spikes up when oil prices rise.
Question 3: We hear there might be a shift from growth stocks to value stocks. Are you more of a growth manager or a value manager?
As described earlier, I am a growth at a reasonable price manager. Which makes me both a growth and value manager. Some people say they are a value manager because they bought Imperial Oil when the price was down. Imperial Oil is not a value stock because the price dropped. They are losing money and when a company loses money, they don’t have a PE multiple, which is a common way to assess value. I would consider a purchase like this to be a speculative buy.
If you are investing for growth or a combination of growth and income, your focus should always be on growth for stocks (at a reasonable price) and protection of capital first and return second for income.
Until next time, have a great day!