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StockPointer® US and ADR Equities Model Portfolio Transactions – June 2019

We have rebalanced the Nasdaq Inovestor Global Index based on our US and ADR Model Portfolios, which will be effective on June 21st after market close. Here are the details for the US Model Portfolio:

Ins:

  1. Employers HOLDINGS INC (EIG) – Market Trend. Increase in Financials sector as seen in the Top 100 index therefore increasing our position in the portfolio.
  2. ABBVIE INC (ABBV) – Market Trend. Increase in Healthcare sector as seen in the Top 100 index therefore increasing our position in the portfolio.
  3. EVERCORE INC (EVR) – Intra Sectorial transaction.
  4. CREDIT ACCEPTANCE CORPORATION (CACC) – Intra Sectorial transaction.
  5. PRICE T ROWE GROUPs (TROW) – Intra Sectorial transaction.
  6. TRANSDIGM GROUP INC (TDG) – Intra Sectorial transaction.
  7. GEOPARK LTD (GPRK) – Intra Sectorial transaction.

Outs:

  1. MICRON TECHNOLOGY INC (MU) – Market Trend. Decrease in IT sector as seen in the Top 100 index therefore decreasing our position in the portfolio.
  2. VECTOR GROUP LTD (VGR) – Market Trend. Decrease in Consumer Staples sector as seen in the Top 100 index therefore decreasing our position in the portfolio.
  3. VALERO ENERGY CORPORATION (VLO) – EPI. EPI fell below 1.
  4. CIGNA CORPORATION (CI) – SP Score. No longer within SP score range and not in the top 20 of its sector.
  5. PRINCIPAL FINANCIAL GROUP (PFG) – SP Score. No longer within SP score range and not in the top 20 of its sector.
  6. ALLSTATE CORPORATE (ALL) – SP Score. No longer within SP score range and not in the top 20 of its sector.
  7. THE CHEMOURS COMPANY LLC (CC) – SP Score. No longer within SP score range and not in the top 20 of its sector.

 

Here are the details for the International Model Portfolio:

Ins:

  1. BANCO SANTANDER MEXICO SA (BSMX) – Market Trend. Increase in Financials sector as seen in the Top 100 index therefore increasing our position in the portfolio.
  2. JAZZ PHARMACEUTICALS PLC (JAZZ) – Market Trend. Increase in Healthcare sector as seen in the Top 100 index therefore increasing our position in the portfolio.

Outs:

  1. TAIWAN SEMICONDUCTOR MANUFACTURING (TSM) – Market Trend. Decrease in IT sector as seen in the Top 100 index therefore decreasing our position in the portfolio.
  2. NIELSEN HOLDINGS PLC (NLSN) – Market Trend. Decrease in Consumer Discretionary sector as seen in the Top 100 index therefore decreasing our position in the portfolio.

New market player offers zero management fee ETFs

In this research report created this week for The Globe And Mail, we look at Canadian ETFs: May’s launches and terminations.

A new ETF issuer joined the industry during May with a suite of alternative ETFs.

Accelerate Financial Technologies’ mission is to “democratize alternative investments by offering institutional-caliber hedge fund and private equity strategies in low-cost, liquid and easy to use ETFs accessible by any investor.” Instead of charging a management fee, each ETF has a performance fee over their high-water mark or its respective benchmark.

Find the full report here

This article is written by Kimberly Yip Woon Sun,  ETF Analyst for Inovestor Inc. 

Portfolio Manager’s June comment For May Results

The S&P/TSX Total Return Index contracted by 3.1% in May that is less then both the S&P 500 (-6.35%) and the MSCI ACWI ex. USA (-5.26%). At May end, after a first declining month, the YTD S&P/TSX Total Return Index was up 13.4%.

Markets have been on a roller coaster as the probability of tariff wars are rising. On top of tariffs, US investors were increasingly concerned in regards to potential regulation of the American mega cap technology companies due to the monopolistic nature of their business models.

The best TSX sector in May was Information Technology, up 4.3%, as the largest players such as CSU OTEX, GIB.A and SHOP,) all posted good quarterly results. On the other hand, the worst sector was Health Care, down 13.8%, a sector in which INOC is not invested.

Looking more specifically at INOC, defensive stocks such as ATD and DOL outperformed nicely as investors were looking for a safe heaven away from the surrounding chaos. INOC’s best performer in May was CCL.B following better than expected results. The three weakest performers for the month were Norbord, Magna, and Linamar, their poor performance was driven by macro economics and politics but also in the case of Magna by management downward revision of this year financial results guidance.

Thirteen defensive U.S. health care and consumer staples stocks

In this week’s filter created for The Globe and Mail, we screened for Thirteen defensive U.S. health care and consumer staples stocks.

Looking back at May, it was the worst month so far in 2019 for the markets. The U.S.-China trade war spiralled deeper early in the month, with U.S. President Donald Trump raising tariffs on US$200-billion worth of Chinese products and China retaliating by setting tariffs on US$60-billion of American goods. Last week, the markets tumbled as the geopolitical mess worsened due to escalating trade tensions. In addition, last Thursday Mr. Trump threatened Mexico with a new wave of tariffs, which will begin on June 10. During this period of extended uncertainty, non-cyclical sectors hold up better due to their defensive characteristics. Today, we will screen U.S. health care and consumer staples stocks to identify some companies with solid operations and revenues that may be able to withstand this trade-war storm. We screened the U.S. stock universe by focusing on the following criteria:

  • Market capitalization greater than US$10-billion;
  • A 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 is the economic profit generated by the company and is calculated as the net operating profit after tax minus capital expenses;
  • A positive 12-month change in the economic performance index (EPI) and a current EPI greater than one – this ratio is the return on capital to cost of capital;
  • A future-growth-value-to-market-value ratio (FGV/MV) of between 40 per cent and negative 70 per cent. We chose this range to eliminate stocks that trade at an exaggerated premium or discount as that would increase the risk. This 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.
  • Free-cash-flow-to-capital ratio. This metric gives us an idea of how efficiently the company converts its invested capital to free cash flow, which is the amount left after all capital expenditures have been accounted for. It is an important measure because it gives us the company’s financial capacity to pay dividends, reduce debt and pursue growth opportunities. We are always looking for a positive ratio and more than 5 per cent is excellent.

Portfolio Manager Commentary – May 2019

The S&P / TSX total return Index increased by 3.2% in April, adding to the strong 1st quarter returns leading to a YTD return of 16.9%. This gives the Canadian market a very strong start so far in 2019 which has actually slightly outperformed the MSCI ACWI (13.4%) and slightly lagged the S&P 500 (18.3%). Most sectors of the Canadian market were positive contributors in April, with Informational Technology being the strongest and Materials being the weakest.

The Canadian central bank & the FED comments have remained highly constructive for the equity markets. Furthermore, the overall earnings are weak but not as much as was feared by the market. This explains why the market is holding its YTD gains.

YTD commodity prices, including energy and metals, have been stable which is crucial for the Canadian market. Finally, the current state of mind of the market is mainly shaped by US tariffs. In Canada more specifically, the real estate market remains steady despite worries about an over-extended cycle. The declining long-term interest rates in Canada are maintaining high valuations in the sector.

Our Nasdaq Inovestor Canadian Equity Index (NQICA) rose by 5% in April, leading to a YTD positive return of 17%, slightly outperforming the market. Looking at contribution factors to the NQICA returns, the largest proportion of the gains was thanks to Magna International (MG) that rose by 14.6%. Following a similar trend are Dollarama (DOL) and Equitable Group (EQB) which rose by 13.0% and 12.8% respectively as the market was anticipating attractive earnings. On the contrary, Metro Inc. (MRU) was down 1.4% over the month and Great-West Lifeco (GWO) down 1.98% during the last 2 weeks of April following its addition to the portfolio.

Canadian ETF Industry Report: April 2019

The Canadian ETF Industry reached a new record high of $178.7-billion in assets under management at the end of April. Three new ETFs were added to the product line during the month.

APRIL ETF LAUNCHES:

With the reintroduction of the STATES Act in the United States, which would protect states’ rights to determine their own policies on marijuana and limit cannabis prohibition at the federal level, cannabis investing is at another turning point. Two ETF providers want to exploit this untapped market by introducing U.S. Marijuana ETFs.

Evolve ETFs launched the Evolve U.S. Marijuana ETF (“USMJ”). USMJ seeks to provide long-term capital appreciation by actively investing in a diversified mix of equity securities of issuers that are involved in the U.S. marijuana industry where state and local laws regulate and permit such activities. Evolve ETFs’ other marijuana-focused fund, the Evolve Marijuana Fund (“SEED”), was Canada’s Top Performing Equity ETF listed on the TSX over the past year with one year total return of 71.37%1 as of April 30, 2019.

After launching the world’s first marijuana ETF, which attracted over $920-million in assets under management, Horizons ETFs added to the suite of Cannabis-focused ETFs with the introduction of the Horizons U.S. Marijuana Index ETF (“HMUS”). HMUS seeks to replicate, to the extent possible, the performance of the U.S. Marijuana Companies Index. The underlying index is designed to provide exposure to the performance of a basket of North American publicly-listed life sciences companies having significant business activities in, or significant exposure to, the United States marijuana or hemp industries. The ETF is also available in U.S. dollar under the ticker HMUS.U.

Both the Evolve U.S. Marijuana ETF and the Horizons U.S. Marijuana Index ETF trade on Aequitas NEO Exchange.

Eleven U.S. energy stocks poised to withstand oil-price volatility

In this week’s filter created for The Globe and Mail, we screened for U.S energy companies that can withstand magnified volatility.

Market speculation around production cuts by the Organization of Petroleum Exporting Countries and the impact of U.S. sanctions against Iran and Venezuela have been among the factors driving recent oil-price volatility. Today, we will identify U.S. energy companies whose healthy operations and strong fundamentals make them solid bets to withstand the heightened unpredictability. We screen the S&P 500 energy sector for quality companies by using the following criteria:

  • Market capitalization greater than US$5-billion;
  • Positive 12-month change in the economic value-added (EVA) metric – a positive figure shows us that the company’s profit is increasing at a greater pace than the cost of capital. The EVA is the economic profit generated by the company and is calculated as the net operating profit after tax (NOPAT) minus capital expenses;
  • A positive change in the 12-month NOPAT – a measure of operating efficiency that excludes the cost and tax benefits of debt financing by simply focusing on the company’s core operations net of taxes;
  • Future growth value/market value (FGV/MV) between minus 50 per cent and 50 per cent, to exclude companies with exaggerated discounts or premiums. FGV/MV 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.
  • Free-cash-flow-to-capital ratio. This metric gives us an idea of how efficiently the company converts its invested capital to free cash flow, which is the amount left after all capital expenditures have been accounted for. It is an important measure because it gives us the company’s financial capacity to pay dividends, reduce debt and pursue growth opportunities. We are always looking for a positive ratio and more than 5 per cent is excellent.
  • Economic performance index (EPI), which is the ratio of return on capital to cost of capital, representing the wealth-creating ability of the company. Anything above one is favourable; the higher the figure the better.

StockPointer® Canadian Equities Model Portfolio Transactions – April 2019

We have rebalanced the Nasdaq Inovestor Canadian Index based on our Canadian Model Portfolio, which will be effective on April 18th after market close. Here are the details:

Ins:

  1. Great-West Lifeco Inc. (GWO) – Market Trend. Increase in Financial sector as seen in the Top 100 index therefore increasing our position in the portfolio.
  2. Norbord Inc (OSB) – Market Trend. Increase in Materials sector as seen in the Top 100 index therefore increasing our position in the portfolio.
  3. Open Text Corporation (OTEX) –  Market Trend. Increase in Information Technology sector as seen in the Top 100 index therefore increasing our position in the portfolio.

Outs:

  1. The North West Company Inc (NWC) – Market Trend. Decrease in the Consumer Staple sector as seen in the Top 100 index.
  2. Parkland Fuel Corporation (PKI) – Market Trend. Decrease in the Energy sector as seen in the Top 100 index.
  3. CAE Inc. (CAE) –  Market Trend. Decrease in the Industrials sector as seen in the Top 100 index.

Twelve established growth stocks poised for further gains

In this week’s filter created for The Globe and Mail, we screened for established growth stocks poised for further gains.

In the late stage of the business cycle, such as many argue we are in now, it is important for growth investors to improve their downside protection without sacrificing potential upside returns.

Today we look for growth stocks supported by favourable fundamentals that should allow them to capture further gains in a rising market.

We screened Inovestor’s U.S. universe of stocks by focusing on the following criteria:

  • Market capitalization greater than US$10-billion;
  • 12-month change in the economic value-added (EVA) metric greater than 10 per cent – 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 is the economic profit generated by the company and is calculated as the net operating profit after tax (NOPAT) minus capital expenses;
  • One-year return of at least 10 per cent;
  • Average annual earnings-per-share (EPS) growth over five years of at least 15 per cent;
  • Annual sales change one year ago or two years ago of at least 10 per cent;
  • Current economic performance index (EPI) greater than one. This is the ratio of return on capital to cost of capital, representing the wealth-creating ability of the company. A ratio above one is key for sustainable investment opportunities;
  • Free-cash-flow-to-capital ratio. This ratio gives us an idea of how efficiently the company converts its invested capital to free cash flow, which is the amount left after all capital expenditures have been accounted for. It is an important measure because it gives us the company’s financial capacity to pay dividends, reduce debt and pursue growth opportunities. We are looking for a positive ratio.
  • Future-growth-value-to-market-value ratio (FGV/MV). This 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.

April 2019 Portfolio Manager Commentary

The S&P/TSX Total Return Index increased by 13.3% in the first quarter. This gives the Canadian market a very strong start in 2019 which has actually slightly outperformed the MSCI Global (10.4%) and is performing in line with the S&P 500 (13.7%).

The stock markets are currently on the rise due to positive economic expectations. Over the past couple of weeks, the depth and longevity of constructive global perspectives have increased in importance following the most recent economic comments and political statements made by major central banks including that of China, Europe, and the United States.

This staggering global economic bull cycle over a longer horizon has a principal effect on the anticipations of investors in the stock market and it has clearly overcome the contradictions related to the softening of the short-term growth. Even though economic growth and corporate profits growth are presently lower than they were a year ago, their persistence and resilience over the long run are the key factors affecting investors’ psychology.

Our Nasdaq Inovestor Canadian Equity Index (NQICA) rose by 0.6% in March, leading to a YTD positive return of 11.4%, slightly underperforming the market. Looking at contribution factors to the NQICA returns, the best performing stock up 11.16%, was Parkland Fuel Corporation (PKI). On the contrary, the worst performer was The North West Company (NWC), down 9.3% in March.

The most recent rebalancing required the sale of three titles, The North West Company, Parkland Fuel and CAE. They were replaced by Great-West Life Co, Norbord, and Open Text. North West Company saw its ROIC decrease because of an increase in assets without being offset by a corresponding increase in its NOPAT. The catalyst for the sale of Parkland Fuel was the rise in stock prices. The sale of CAE was due to the significant decline in economic value added (EVA) as determined by our quantitative model. Great-West Life Co experienced a substantial increase in NOPAT and that is why we decided to add it to the portfolio. Many cyclical commodity companies have had strong bullish profits for a while and our approach is to increase the sector weights in those cases. Norbord is a holding which entered the portfolio for this reason. Finally, the entry of Open Text is explained both by a high fundamental rating and by an attractive valuation.