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Canadian ETFs: A look at December’s launches and terminations – and how the industry grew in 2020

INDUSTRY REVIEW
The Canadian ETF industry reached $257 billion in assets under management at the end of November, compared to $205 billion one year ago, for an annual growth rate of 25.4%. ETFs reported record inflows of $40 billion this year representing 19.5% of the AUM at the beginning of the year. In the last 5-year period, the ETF industry passed from $89.6 billion to $257 billion for an annual growth rate of 23.5%.

Thematic ETFs were popular this year. ESG ETFs saw inflows of $1.8 billion compared to the last record set in 2018 of approximately $750 million. The number of ESG ETFs created during the year was 49, bringing the number at year-end to 58. Innovation was another major theme. Emerge, a thematic ETF provider, was able to take full advantage of this trend by increasing its assets under management from $10M to $204M as a result of the $157M inflow.

In the last few years, asset allocation ETFs have made a breakthrough for investors who want simplicity. Since their introduction in 2018, they collectively provided an inflow of approximately $100 million each month. 13 out of 39 ETF providers offer asset allocation ETFs.

NEW LAUNCHES
December was rather quiet in terms of launches which is not unusual. Only Horizons launched a new ETF. The Horizons Tactical Absolute Return Bond ETF takes long and short positions in debt instruments and derivatives, primarily North American, across the entire credit spectrum in order to provide positive absolute returns with low volatility in any environment.

Interest in bitcoin has returned strongly as a result of the impressive rise in price. For bitcoin enthusiasts, there is no bitcoin ETF yet, but there are other structures. Honourable mention to the CI Galaxy Bitcoin Fund (BTCG.UN & BTCG.U) managed by CI Investments and structured as a limited partnership (LP) that started operations on December 16.

Portfolio Manager’s January Comment For Q4 2020 Results

Global equities ended the year on a strong finish. The S&P/TSX Composite Total Return Index increased by 9% in Q4 for a total annual return of 5.6%. During Q4, the S&P500 produced a 12.1% return for an annual total return of 18.4% while the MSCI ACWI ex US posted a 17.1% return leading to an annual return of 11.1%.

There was a number of drivers behind this strong finish. Firstly, most company’s results were inline or better than expected. Secondly, central banks have maintained a dovish tone. Finally, the arrival of highly potent anti-COVID vaccines.

In Canada, the best Q4 sectors were Health care up 29.9% and Consumer discretionary up 20.4%. The worst sectors were Consumer Staples down 6.0% and Materials down 4%.

For the year, Info-Tech and Utilities were the top performers up 80.3%% and 19.5% respectively while Energy and Health Care were the weakest down 30.8% and 23.6%

NQICA in Q4 returned 7.3% leading to an annual total return of 2% versus the S&P/TSX TR composite return of 9% in Q4 and 5.6% for the year.

The best performers in NQICA were First National up 8.9%, Equitable Group up 6.6% and Stella-Jones up 4.8% on the back of excellent Q3 results.
On the other hand, the worst performers in Q4 were Richelieu Hardware down 12.6% and Metro down 4.8% on profit taking.

StockPointer® US Model Portfolio Transactions – December 2020

We have rebalanced the Stockpointer® US which is effective now. Here are the details:

Ins:

  1. Amgen (AMGN) – Market Trend. Increase in the Health Care sector as seen in the Top 100 index, therefore, increasing our position in the portfolio.
  2. Humana (HUM) – Intra-sectoral transaction. In the top of its sector.
  3. CDK Global (CDK) – Intra-sectoral transaction. In the top of its sector.
  4. Weight Watchers (WW) – Intra-sectoral transaction in replacement of DNKN. In the top of its sector.


Outs:

  1. AT&T (T) – Market trend. Decrease in the telecommunication sector as seen in the Top 100 index, therefore, decreasing our position in the portfolio.
  2. American Express (AXP) – Intra-sectoral transaction. No longer in the top of its sector.
  3. TransDigm Group (TDG)Intra-sectoral transaction. No longer in the top of its sector.
  4. Dunkin’ Brands (DNKN) – The company has been bought by Inspire Brands in a cash deal.

Canadian ETFs: November’s Launches and Terminations

INDUSTRY REVIEW
The Canadian ETF industry reached $249 billion in assets under management at the end of November compared to $200 billion one year ago for an annual growth rate of 24.5%. The number of ETFs continued to grow as our Canadian ETF database has surpassed the 1000 mark including all classes. This number includes more than 800 unique ETFs.

NEW LAUNCHES
It is TD’s turn to launch new ESG ETFs. The geographic location is standard: Canada (TMEC-T), U.S. (TMEU-T) and international (TMEI-T). TD is not here to play around with management fees of 0.10%, 0.15% and 0.20% for the respective ETFs. They are one of the most competitive ETFs in terms of fees in the ESG space in Canada. As the ESG AUM continues to grow, we expect fees to decline as operational costs reduce as a percentage of AUM.

Ninepoint joined the group as an ETF provider in Canada, although it is not new to the asset management industry. It will offer some of their funds as an ETF series. Investors have access to a new ETF that works like a saving account (NSAV-NE), a precious metals ETF focusing on gold (GLDE-NE), a mining sector ETF focusing on silver (SLVE-NE), and a different way to invest in corporate bonds with Ninepoint Diversified Bond Fund (NBND-T).

Manulife has launched 3 fixed income ETFs that should cover the basic needs for investors. Manulife Smart Short-Term Bond ETF (TERM-T) invests in short-term securities in Canadian corporations based on its current holdings. The low maturity is perfect for short-term objectives while providing higher yield than a government bond ETF. Manulife Smart Core Bond ETF (BSKT-T) is a standard Canadian bond universe that every investor should own. It is mostly investment grade, but the manager has the possibility to invest in higher yielding securities. Manulife Smart Corporate Bond ETF (CBND-T) gives exposure to the Canadian corporate bond universe and is diversified across sectors. Manulife has also launched one Canadian (CDIV-T) and one U.S. (UDIV-T) ETF focusing on high paying and sustainable dividend stocks.

Portfolio Manager’s December Comment for November Results

Equity markets had a strong positive monthly performance in November. In Canada the performance was particularly strong among Energy and Health Care (cannabis) stocks. In the U.S., the performance was notoriously strong among Energy and Financials stocks. Two of the key drivers behind the performance of this rally were the sucessful results achieved by Pfizer and Moderna clinical trials for their Covid vaccine.

In November, the S&P/TSX rose by 10.6%, the S&P 500 increased by 10.9% while the MSCI ACWI ex USA gained 13.5%. At November end and over a 12-month period, the S&P/TSX returned 4.3% behind the S&P 500 gain of 17.5% and the MSCI ACWI ex. USA increased by 10%.

NQICAT advanced by 7.6% in November and posted a 12-month return of -1.1%.

The best S&P/TSX sectors for the month were Health Care up 35% followed by Energy up 18.6% and Consumer Discretionary up 16.3%. The worst performing sectors were Materials down 4.8%, Consumer Staples up 2.6% and Utilities up 5.4%.

NQICAT’s best performers in November were Parkland up 22.2% and TD up 19.7%. On the opposite, the weakest contributors were Kirkland Lake Gold down 8.5% and Metro down 3.6% mainly because of sector rotation out of defensive/Covid related stocks.

 

Nine Companies Creating Shareholder Wealth

What are we looking for?

Companies showing momentum in their fundamentals as well as low volatility.

We mix two well-known metrics in the financial world to create our screener. We want a positive change in the economic value-added (EVA) figure, which tends to coincide with a positive stock return. We also use beta to find low-volatility stocks that should produce, on average, a better risk-adjusted return.

The Screen (available here on the Inovestor’s platform)
We screened Canadian companies, focusing on the following criteria:

  • A market capitalization higher than $1-billion;
  • A positive three-month change in the EVA metric between 5 per cent and 75 per cent – the EVA gives us a sense of how much value the stock is adding for shareholders and is calculated by taking the net operating profit after tax and subtracting the cost of capital;
  • A 24-month change in the EVA metric between 15 per cent and 200 per cent – we want a positive change in EVA in the medium-term;
  • A one-year return on capital higher than 7 per cent – we want a company with decent profitability;
  • Sales growth over 24 months higher than 4 per cent. Sales growth provides the opportunity to a company to expand and generate higher EVA in the long-term;
  • A beta lower than one – 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. This is our low-volatility factor.

The stocks are ranked by five-year mean return on capital. For informational purposes, we have included recent stock price, dividend yield and one-year return. Please note that some ratios may be reported at end-of-previous quarter.

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).

TICKER NAME PRICE MKT. CAP ($MIL) EVA CH. 24M  (%) EVA CH. 3M (%) 24M SALES CH. (%) BETA RTN. ON CAPITAL (%) RTN. ON CAPITAL – 5Y MEAN 1Y PRICE RTN. (%) DIV. YIELD (%)
ENGH-T Enghouse Systems Limited 66.56 3680 85.4 13.2 44.2 0.89 23.6 23.4 60.7 0.8
RCH-T Richelieu Hardware Ltd 37.27 2105 51.4 69.0 7.8 0.76 18.1 16.9 40.0 0.7
TIH-T Toromont Industries Ltd. 90.21 7425 20.5 10.0 4.5 0.81 13.4 16.1 31.5 1.4
CP-T Canadian Pacific Railway Lim 421.8 56732 39.8 7.8 10.6 0.86 16.3 14.7 34.6 0.9
JWEL-T Jamieson Wellness, Inc. 35.53 1416 160.7 18.4 22.9 0.30 16.1 11.4 37.3 1.4
IFC-T Intact Financial Corporation 143.7 20552 49.3 34.4 16.1 0.81 11.4 10.3 5.6 2.3
L-T Loblaw Companies Limited 64.30 22860 34.2 74.1 9.1 0.03 7.5 8.4 -10.5 2.1
NPI-T Northland Power Inc. 46.31 9389 77.7 16.9 27.8 0.87 9.1 6.2 67.6 2.6
FNV-T Franco-nevada Corporation 169.45 32336 64.1 17.0 51.6 0.36 7.6 4.8 32.6 0.7

What we found

Software and services company Enghouse Systems Ltd. posted impressive financial results over the 24-month period in terms of sales and EVA change. The company has the highest return on capital over the past year as well as over the past five-year period. The share price rose 50 per cent in the first half of 2020, but has since given back some of this gain. It has declined by about 15 per cent since its record high of $80 on Sept. 2. With this pullback, the current price could offer an opportunistic entry point.

Hardware distribution company Richelieu Hardware Ltd. posted a massive uptick in its three-month EVA change. Moreover its short-term ROC is higher than its five-year average, another signal of momentum.

Toromont Industries Ltd., a construction equipment and power systems specialist, might seem less dynamic than the first two ideas at first glance, if comparing its one-year return on capital to its five-year corresponding figure. We think this is perfectly normal for a cyclical company at this time of the economic cycle. The market anticipates the changing cycle as the stock is up more than 25 per cent year-to-date regardless of lower revenues and earnings per share (not shown). The company has the third-highest long-term ROC and we anticipate the lower one-year ROC figure will converge rapidly to its long-term profitability.

Investors are advised to do further research before investing in any of the companies listed in the accompanying table.

Portfolio Manager’s November Comment for October Results

In October, the S&P/TSX declined by 3.1% the S&P500 decreased by 2.7% and the MSCI ACWI ex USA lost 2.1%. For the 12-month period ending October 30th, the S&P/TSX posted a negative return of 2.3%. Over the same period, the S&P500 surged 9.7% while the MSCI declined 2.2%.

The NQICAT recorded a net loss of 1.3% in October and a 12-month negative return of 3.1%.

The best TSX sectors for the month of October were Health Care up 7.3%, Consumer Dicretionary down 0.3%, and Utilities down 1.3%. The worst performing sectors were Information Technology down 8.7%, Consumer Staples down 7.5% and Energy down 4.7%.

The best monthly performers in the portfolio were First National up 16.1% and Equitable Group up 13.3%. At the opposite, the weakest contributors were Open Text Corporation, which was down 13.0% and Alimentation Couche-Tard down 11.5%.

2 stocks were sold and bought in the strategy in October. For this rebalancing, the model required an higher exposure to the Materials and Telecommunications sector.

The economic profile of two holdings (Magna international Inc and Sun Life Financial) have felt under the minimum threshold in the course of the quarter and needed to be sold.

The 2 purchases were Quebecor Inc. (QBR.B) and Stella-Jones (SJ). Both stocks had the highest EVA score in their respective sectors.

Seven Growth Stocks That Are Reasonably Priced

What are we looking for?

Growth stocks outperformed value by a huge margin over the past 10 years. And while higher valuations are often seen as problematic for growth companies, let’s put that into perspective. Today, we look for U.S. and Canadian large caps with a growth-at-a-reasonable-price (GARP) tilt.

The screen

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

· Market capitalization higher than $25-billion;
· Economic performance index (EPI) higher than 2.5 – this is the ratio of return on capital to cost of capital. We look for businesses with a sizable risk-adjusted return on capital;
· StockPointer (SP) Performance Score of more than 75. The score, which can range between zero and 100, mainly considers risk-adjusted return on capital and free cash flow per share;
· PEG ratio below three – this is our growth-at-a-reasonable-price (GARP) factor, which considers valuation and growth. It uses the price-to-earnings ratio divided by the five-year earnings growth mean (while mean is similar to average, this method puts more weight on extreme values)
· 12-month sales growth higher than 4 per cent – we are looking for a company showing sales momentum in the past year;
· 24-month growth in net operating profit (NOP) of more than 10 per cent. We want a company showing strong improvement of its operations in the past two-year period;
· Most recent return on capital lower than 50 per cent – we exclude companies with an unsustainable ROC (a really high ROC is often temporary, owing to a short-term boost from unusual items);

For informational purposes, we have also included recent price-to-earnings ratio, five-year earnings growth mean, dividend yield, one-year price return and recent stock price. Please note that some ratios may be as of end of previous quarter.

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

TICKER Company RECENT PRICE ($) MKT CAP ($MIL.) NOP CH. 24M (%) SP PERF. SCORE RTN ON CAPITAL (%) EPI SALES CH. 12M (%) PEG Ratio P/E Ratio 5Y EPS Growth Mean (%) 1Y PRICE RTN. (%) DIV. YIELD (%)
HD-N Home Depot, Inc. 266.71 287100 18.8 91.0 38.6 3.8 8.5 1.5 24.4 16.2 12.4 2.3
INTU-Q Intuit Inc. 314.68 82390 50.8 90.5 27.2 2.6 13.2 1.1 45.5 40.0 22.7 0.8
CLX-N Clorox Company 207.25 26120 14.1 86.0 23.3 3.8 8.2 2.6 28.2 10.9 41.0 2.1
FAST-Q Fastenal Company 43.23 24820 14.4 86.0 26.9 2.7 5.3 2.8 29.6 10.5 16.4 2.3
CSU-T Constellation Software Inc. 1398.59 29640 37.4 82.5 30.3 3.8 15.3 2.8 65.4 23.3 7.0 0.4
ORLY-Q O’reilly Automotive, Inc. 436.6 31990 24.5 77.7 29.2 3.4 9.4 1.0 19.5 19.9 -0.1 0.0
TROW-Q T. Rowe Price Group 126.66 28680 23.7 77.2 28.1 2.6 6.5 1.2 14.2 12.2 8.3 2.8
CPRT-Q Copart, Inc. 110.36 26040 51.8 77.0 27.5 2.7 8.0 1.3 37.6 28.0 33.1 0.0

The top three on our list using this approach, ranked by SP performance score, are Home Depot Inc.Intuit Inc. and Clorox Co.

Home improvement retailer Home Depot is an excellent example of how long-term growth can generate massive returns for investors. It has the highest return on capital and performance score of our list. The PEG ratio is in the middle of the pack and this company is also of premium quality based on its long-term historical growth. This more than justifies the higher PEG ratio than some others on our list.

Software developer Intuit Inc. has a P/E of 45.5, but the valuation is one of the cheapest if we consider the PEG ratio. This case illustrates that a P/E ratio can mean nothing if it is not compared with historical growth statistics. Intuit premium valuation is supported by its superior SP Performance Score, its 12-month sales growth and its 24-month NOP growth.

Clorox Co., a maker of disinfectant products and other household items that have been in high demand during the pandemic, has had a massive tailwind in the past three quarters. (Its fiscal first-quarter earnings, reported Monday, topped Wall Street’s forecasts, with sales up 27.2 per cent compared with the year-ago period.) In the short term, we can expect health measures to contribute to sales even if a vaccine makes it to the market. Its high EPI can be attributed to its strong retail brands and market dominance. More than 80 per cent of the company’s sales are generated from brands that hold the No. 1 or No. 2 market share positions in their respective categories. While the return on capital is lower than other candidates, that is a small price to pay for its incredible stability.

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

For more details about these growth stocks, please subscribe the Inovestor for Advisors platform for free here.

Christian Godin is a portfolio manager at Inovestor Asset Management.

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/