Citi’s Montreal-born chief U.S. equity strategist Tobias Levkovich voiced concern about a sell-off in technology stocks in a Sept. 25 research report.
“The easing of Information Technology earnings per share expansion may be more challenging for that sector’s momentum-driven investor base … Several issues including regulation, taxation, higher discount rates on terminal values, valuation and some small fissures in the fundamentals (softer memory prices, higher employee costs and sales misses) are coming together to undermine the tech story.”
There’s a lot to discuss in this highly concise summary but I want to focus on the importance of the technology sector’s ‘momentum-driven investor base.’
In simple terms, momentum investment strategies emphasize companies with the strongest recent improvement in stock performance and earnings growth, with the expectation that the strong get stronger. It is a proven method, outperforming the index by significant margins over multi-year periods. But there’s a catch.
Pure momentum investing strategies do not pay any attention to stock valuations which means the drawdowns – an insider term for asset value declines when rallies end – are much larger than for more conservative strategies employed by value- or growth-at-a-reasonable-price investors. In 2009, for instance, momentum-based portfolios fell as much as 80 per cent.
Technology stocks have been a focus for momentum investors over the past 10 years, particularly the FAANG stocks (Facebook Inc., Amazon.com, Apple Inc., Netflix Inc. and Alphabet’s Google).
The nominal rate of profit growth for technology companies will remain strong relative to most other market sectors , but the slower rate of improvement that Mr. Levkovich expects will be viewed as a loss of momentum. The risk is that momentum-focused investors will start selling these stocks aggressively and the downside of the investment strategy – deep, painful drawdowns – will quickly become apparent.
-- Scott Barlow, Globe and Mail market strategist
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Stocks to ponder
North American Construction Group Ltd. (NOA-T). This stock appears on the positive breakouts list (stocks with positive price momentum). This small-cap stock that has nearly doubled in value year-to-date. During the past two quarters, the company has reported better-than-expected earnings results sending the share price soaring 9 per cent and 15 per cent the following day. Over the next year, earnings per share is expected to rise over 50 per cent driven higher by a recently announced acquisition. Alberta-based North American Construction Group, or NACG, is a construction and mining contractor, which services energy and resource companies. Jennifer Dowty explains (for subscribers).
Brookfield Infrastructure Partners LP (BIP.UN-TSX). John Heinzl likes profitable, growing businesses that enjoy an enduring competitive advantage or “moat.” And he likes them best when they go on sale. Brookfield Infrastructure Partners is a shining example. Since touching a recent high of $55 in August, shares of the diversified global infrastructure play have skidded about 9 per cent – likely a response to rising interest rates, which have put pressure on dividend stocks in general. Now for the silver lining. The units, which closed Tuesday at $50.50 on the Toronto Stock Exchange, now yield an attractive 4.8 per cent (calculated by converting BIP’s annualized dividend of US$1.88 to Canadian dollars.). John Heinzl explains (for subscribers).
The Rundown
Why investors should be eyeing opportunities in pummelled lumber stocks
Canadian lumber stocks survived an infestation of mountain pine beetles, two particularly destructive years for forest fires and heavy U.S. duties on Canadian softwood exports. But the recent dip in U.S. homebuilding activity has proved to be a stumbling block for the sector since June. West Fraser Timber Co. Ltd. has fallen 23 per cent over this three-month period, Canfor Corp. has fallen 25 per cent and Interfor Corp. has fallen 30 per cent. Are declining stock prices setting up a buying opportunity ahead? David Berman examines these stocks (for subscribers).
Barrick-Randgold deal could be a wake-up call for investors
Like any epic tale, the big deal between Barrick Gold Corp. and Randgold Resources Ltd. can be read in at least a couple of ways. The cynical view is to see it as a desperation strategy. If you can’t do much to upgrade the appeal of your key commodity (and gold miners can’t) and if your recent share price performance has been brutal (and it has), then there’s nothing like a flurry of corporate re-engineering to keep investors intrigued. But a more positive take is to view the grand alliance as the beginning of a new round of merger and acquisition activity in the sector. That’s the view of IKN, the widely read mining industry newsletter that was first to break news of the tie-up. Ian McGugan takes a look at these two views (for subscribers).
An omen for stock market turbulence: Bond yields are back to near seven-year highs
Bond yields are moving higher again, adding to concerns among equity investors already looking upon trade tariffs, high stock valuations and an aging bull market with some trepidation. Should investors brace themselves for market turbulence? The yield on the 10-year U.S. Treasury bond rose above 3.09 per cent on Tuesday, marking a sharp rise from about 2.8 per cent in late August and putting the yield close to its previous seven-year high of 3.11 per cent in May. David Berman examines what this means for investors (for subscribers).
Nine new stocks added to Canada’s leading pot ETF
Nine new pot stocks have been added to Canada’s largest marijuana-focused exchange traded fund, giving investors access to a broader basket of stocks in the fast-growing legal market. The ETF makes additions and subtractions of its fund holdings on a quarterly basis, although the weightings of individual stocks can fluctuate on a more frequent basis. Clare O’Hara reports.
Are middle-class investors being left behind?
Not so long ago, Canada’s financial advisers had it made. They chatted up clients, sold them fee-laden mutual funds, collected fat commissions, and still made it to the golf course in time for a 4 o’clock tee-off. It was good while it lasted, but lately the party has turned into a bloodbath. Over the past five years, thousands of advisers have been axed. The bank-owned brokerages have been hacking away at their teams for a while, and more recently, Investors Group, the country’s largest independent network, laid off more than 1,000 people from its consultant network. What does this mean for middle-class investors? Read this month’s feature in Report on Business magazine on Investors Group (for subscribers).
Introducing a new three-part podcast on Rob Carrick’s retirementality
How much money are you saving for your retirement? Will it do the job? Will your money be working hard even once you’re not? Looking Ahead: The Retirementality is a personal look at the challenges of retirement planning by Rob Carrick, who will tackle retirement from the point of view of millennials, Gen Xers and baby boomers using his own experiences and advice from financial planners. You can listen to the entire three-part series starting Oct 1. In the meantime, listen to a teaser at https://tgam.ca/lookingahead
Others (for subscribers)
‘NoFTA’ would mean 10% drop for the loonie
‘No relief for Alberta oil,’ says BMO
Thursday’s analyst upgrades and downgrades
Thursday’s Insider Report: Insider trades over $10-million worth of this stock
Wednesday’s analyst upgrades and downgrades
Wednesday’s Insider Report: Bank CEO sells $11-million worth of stock
A high-yield dividend strategy, fortified with ESG
Search for strongly profitable stocks sprinkled with caution
Others (for everyone)
Dearth of equity keeps stock market bull alive
Cryptocurrency giant Bitmain taps Hong Kong for IPO
AGF’s Blake Goldring hands reins to Kevin McCreadie
Ask Globe Investor
Question: What sort of RESP do you recommend?
Answer: If you want to keep things simple, you can open an individual or family RESP at your bank and invest the money in mutual funds. For those seeking greater flexibility and lower costs, consider opening an RESP with a discount broker so you’ll be able to invest directly in stocks or exchange-traded funds. An RESP is not for gambling, so stick with blue-chip, dividend-paying companies or funds. Dialling back the risk level as your child gets closer to attending postsecondary school – by shifting funds from equities to guaranteed investment certificates, for example – is also a prudent strategy. You don’t want to get hit by a market correction just as your son or daughter heads off to college or university.
--John Heinzl
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What’s up in the days ahead
Shares of Canadian uranium producer Cameco Corp spiked 18 per cent on Thursday, after the Tax Court of Canada ruled in its favor over a dispute with the Canada Revenue Agency (CRA) about how much tax it pays. So is it finally time to look at Cameco once again as a way to get into the beaten down uranium sector? David Berman takes a look.
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Compiled by Gillian Livingston