Monthly Archives

October 2020

StockPointer® Canada Portfolio Transactions – October 2020

We have rebalanced the Nasdaq Inovestor Canadian Index based on our Stockpointer® Canada model portfolio. These trades are effective as of Friday, October 16th after market close. Here are the details of the trades:

Ins:

  1. Quebecor Inc. (QBR.B) – Market Trend. Increase in the telecommunication sector as shown by the Top 100 index, therefore, increasing our position in the portfolio. The stock is in the top of its sector.
  2. Stella-Jones (SJ) – Market trend. Increase in the material sector. The stock is in the top of its sector.

Outs:

  1. Magna International (MG) – Market Trend. Decrease in the discretionary sector as shown by the Top 100 index, therefore, decreasing our position in the portfolio. Furthermore, the EPI fell under 1.
  2. Sun Life Financial Inc. (SLF) – Market trend. Decrease in the financial sector. Furthermore, the EPI fell under 1.

Signs of Elevated Risk in Lofty Tech Stock Valuations

What are we looking for?
The tech rally shouldn’t be a surprise considering this year’s work-from-home environment. The health and safety measures put in place by government authorities around COVID-19 forced consumers to change their habits to include more tech products in their lifestyle. But do tech stocks justify their lofty valuations?

For perspective, we compare today’s results with a similar screen of tech stocks we did two years ago (tgam.ca/IT-Inovestor).

The screen
Here is a link for our screener

We screened U.S. tech companies focusing on the following criteria:

·Positive 12-month change in the economic value-added (EVA) metric – a positive figure shows us that the company’s profits are increasing at a faster and greater pace than the costs of capital. The EVA gives us a sense of how much value this stock is adding for shareholders and is calculated by taking the net operating profit after tax and subtracting the capital expense;

·Positive EVA and EVA growth on a per-share basis over 12 months;

·Economic performance index (EPI) – the ratio of return on capital to cost of capital – must be greater than one;

·Average five-year return on capital must be greater than 10 per cent and the 12-month change in return on capital must be positive (not shown);

·Future growth value/market value (FGV/MV) and the 12-month change in FGV. The FGV/MV ratio represents the proportion of the market value of the company that is made up of future growth expectations rather than the actual profit generated. The higher the percentage, the higher the baked-in premium for expected growth and the higher the risk;

·Beta – this gives us an idea of how closely the company mimics the market’s fluctuations. A beta of less than one would indicate the stock is less volatile than the market at large.

For informational purposes, we have also included recent stock price, dividend yield and one-year return (as of last month’s end). Please note that some ratios may be reported at end-of-previous quarter.

TICKER Company RECENT PRICE ($) MKT CAP ($MIL.) 12M EVA CHG. EVA/S Ch. 12M EVA per Share EPI Beta FGV Ch. 12M DIV. YIELD (%) 1YR PRICE RTN.(%) FGV ($M) ROC (Avg 5 Y) FGV / MV
ZM-Q Zoom Video Communications, I 482.23                        136,191 N/A N/A 0.81 3.8 0.5 78.7 0.0 526.4              133,352 12.4 97.9%
VEEV-N Veeva Systems Inc Class A 275.56                           41,798 6.7 0.2 0.82 1.6 0.9 38.3 0.0 80.6                38,458 15.1 92.0%
MSCI-N Msci Inc. Class A 348.16                           29,308 1.0 0.1 5.54 2.4 1.0 25.4 0.9 57.7                24,021 18.7 82.0%
ADBE-Q Adobe Inc. 478.99                        232,045 35.8 1.8 5.29 2.4 0.8 32.7 0.0 73.0              187,498 17.0 80.8%
TYL-N Tyler Technologies, Inc. 350.72                           14,302 14.4 0.4 2.59 1.5 0.7 36.6 0.0 34.8                11,158 14.8 78.0%
MSFT-Q Microsoft Corporation 206.19                     1,580,000 30.0 0.7 2.89 1.9 0.9 25.9 1.1 50.4          1,149,583 13.3 72.8%
CDNS-Q Cadence Design Systems, Inc. 105.32                           29,876 161.3 1.8 2.21 1.9 1.0 11.4 0.0 60.6                19,209 12.2 64.3%
JKHY-Q Jack Henry & Associates, Inc 161.56                           12,454 11.2 0.2 2.90 2.1 0.9 13.6 1.1 11.6                  7,933 21.5 63.7%
UI-N Ubiquiti Inc. 165.26                           10,998 72.9 1.7 5.26 5.2 0.9 4.9 1.0 39.8                  6,727 34.8 61.2%
LOGI-Q Logitech International S.a. 77.78                           13,558 194.5 1.6 2.16 2.8 0.5 13.5 1.1 90.8                  6,155 13.4 45.4%
GRMN-Q Garmin Ltd. 94.93                           18,398 79.1 0.8 2.52 1.8 0.9 6.3 2.6 12.2                  7,649 14.4 41.6%

More about Inovestor

Inovestor for Advisors is a fundamental-analysis research platform specializing in the economic value-added (EVA) approach. With Inovestor, advisers can quickly identify attractive investment opportunities, outsource their stock-picking by using model portfolios, and easily communicate investment decisions with clients through client-friendly reports.In addition, Inovestor allows users to create personalized filters, build custom portfolios and carry out in-depth analysis on more than 13,000 companies (Canadian and U.S. stocks and American depositary receipts).

What we found

The current market environment for tech stocks is more challenging than in late 2018: We see higher valuations and decreasing EVA per share growth compared with our previous screen. More companies show an extreme FGV/MV, signalling elevated risk, and the average EVA growth is 91 per cent, compared with 146 per cent two years ago.

Zoom Video Communications Inc. has been one of the big winners during this upheaval. The communications technology company certainly has a good EPI, while its three-month sales growth (not shown) is an incredible 190.4 per cent. That said, its EVA per share of 81 US cents for a stock trading in the US$480 range definitely doesn’t support the current valuation.

Computer software company Adobe Inc. is one of two names on this list that made our screen two years ago (the other was Jack Henry & Associates). Adobe’s valuation based on the FGV/MV is lower than in 2018 (80.8 vs. 84.5). The company also has the second-highest 12-month change in EVA per share on our list. This indicates a strong improvement of its profitability. In this case, the valuation can be justified by strong financial performance and doesn’t seem disconnected with its fundamentals based on historical data.

Investors are advised to do further research before investing in any of the companies shown here.

For more details about these tech stocks, please subscribe the Inovestor for Advisors platform for free: inovestor.com/en-CA/store/

 

Portfolio Manager’s October Comment For Q3 2020

In the third quarter, the S&P/TSX Composite Total Return Index increased by 4.7%, the S&P500 total return grew by 8.9% while the MSCI ACWI ex-USA returned 6.4%.

Q3 returns were eye-popping and are pointing to a V-shaped recovery. Growth and technology have continued their outperformance again compared to the rest of the market.

In Q3, NQICA returned 9.8% leading to a year-to-date return of -5% versus the S&P/TSX composite which increased by 4.7% in Q2 and declined 3.1% on a year-to-date basis.

In Canada, the best Q3 sectors were Industrials up 13.2%, Utilities up 9.9% and Materials up 8.8%. The worst sectors were Health Care down 14.4%, Energy down 9.4%, and Telecommunication services up 0.8%.

The NQICA’s worst performers in the third quarter were Constellation Software with a return of -3.4%, Open Text Corporation declined by 2.0% and Magna International with a return of 1.6%.

On the other hand, the best results in the third quarter were Richelieu Hardware with a return of 22.0%, Empire Company with a jump in price of 19.3% while Canadian National Railway share price rose by 18.5%.