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Eighteen low volatility S&P 500 stocks capable of withstanding market shocks

The unresolved and further complication of the Sino-U.S. trade dispute hit the markets once again last week, which I believe will cause higher volatility in the markets in the short run. On Friday, U.S. President Donald Trump confirmed that, for now, no business will be made with Chinese telecom giant, Huawei, and that he is not ready to finalize a trade deal with China. This follows China’s decision to stop purchasing American agricultural products. Therefore, for the Globe and Mail this week, we screened the U.S. market to identify companies with low volatility and sustainable operations that can withstand further potential market turmoil.

This strategy screens the S&P 500 using the following criteria:

  • A market capitalization of US$10-billion or more;
  • A beta of one or less. A stock with a beta less than one is considered less volatile than the market;
  • A five-year average return on capital (ROC) greater than or equal to 10 per cent, reported as of last quarter’s end, and a positive change in the 12-month return on capital figure;
  • A minimum free-cash-flow-to-capital ratio of 5 per cent. This ratio gives a sense of how well the company uses the invested capital to generate free cash flows, which could be used to do such things as stimulate growth, distribute or increase dividends, or reduce debt;
  • A 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 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 cost of capital less than 10 per cent, reported as of last quarter’s end.

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Portfolio Manager’s August comment For July Results

The S&P/TSX Total Return Index rose by 0.34% in July, the S&P 500 by 1.44% and the MSCI ACWI ex. USA declined by 1.18%. At July end, the YTD S&P/TSX Total Return Index was up 16.62% which was lower than the S&P500 (20.24%) but higher than the MSCI ACWI ex. USA of 12.65%.

The market met new highs in July before retracing some of that gain as trade disputes dampened and long-term treasury rates fell to historical lows. At month’s end, the US 10-year treasury yield crossed the 2% mark to the low side.

The best TSX sector in July was Consumer Discretionary up 3.4%, followed by Information Technology, up 3.2%. On the contrary, the worst performing sector was Health Care principally due to the performance of the Cannabis sector.

Looking more specifically at INOC, the best performers in July were Equitable Group (+27.01%), a Canadian bank with the majority of its business involved in the residential mortgages with prime and non prime, who reported better than expected figures for Q2 results. The next best performer was Parex Resources Inc. (+7.38%), an oil producer with assets in Colombia, whose gains were due to the rally in oil prices last month.

On the other hand, the weakest contributor to INOC was Stella Jones (SJ), which was down 12.89%. News in regard to the departure of the company’s long-standing CEO caused the market to react negatively. The other negative contributors were Norbord (OSB) and Linamar (LNR).

Canadian ETFs: Two new providers, two exits amid competitive atmosphere

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

Competition remains fierce in the Canadian exchange-traded fund industry. As two new ETF providers enter the market, two others announce their exits. The new market players introduced suites of innovation-focused ETFs and alternative funds.

Emerge Canada Inc. launched five actively managed thematic ETFs on NEO Exchange. They focus on innovative sectors including genomics and biotech, autonomous tech and robotics, AI and big data, and fintech. The suite will be subadvised by ARK Investment Management LLC, a New York-based firm specializing in disruptive innovation. ARK Investment Management is an award-winning ETF issuer that attracted more than US$2.8-billion in ETF assets under management. Each of Emerge’s ETFs comes in two different classes, Canadian dollar units (shown in the accompanying table – EARK, for example) and U.S. dollar units (EARK.U).

Another provider joined the market in July. Picton Mahoney Asset Management,a Toronto-based hedge fund manager, introduced exchange-traded class of units for its entire Fortified Alternative Fund family. The suite comprises alternative funds that invest in long and short positions in equities, derivatives, securities of investment funds, fixed income securities and/or cash and cash equivalents. In addition to management fees of 0.95 per cent, each Fortified ETF also charges outperformance fees tied to certain benchmarks.

Increased competition and the expanding product range make it difficult for small issuers to survive. For example, Coin Capital Investment Management Inc.announced that it will be terminating the Coincapital STOXX B.R.AI.N. Index Fund (THNK) and the Coincapital STOXX Blockchain Patents Innovation Index Fund (LDGR), thereby exiting the ETF industry, effective on or about Aug. 29.

First Block Capital Inc. is exiting the market by closing its only ETF, the FBC Distributed Ledger Technology Adopters ETF (FBCN), effective on or about Sept. 17. The blockchain ETF was up against similar ETFs from Horizons ETFs, First Trust Portfolios Canada and Harvest Portfolios Group.

Among the well-established fund providers,BMO Asset Management Inc. announced the termination of three ETFs: the BMO Global Banks Hedged to CAD Index ETF (BANK), the BMO Global Insurance Hedged to CAD Index ETF (INSR) and the BMO Shiller Select US Index ETF (ZEUS), effective on or about Nov. 1. Each of these ETFs has not attracted significant assets – less than $20-million in assets under management since their inception back in 2017.

Find the full report here

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

Portfolio Manager Q2 Commentary

The S&P/TSX Composite Total Return Index increased by 2.6% in the second quarter. This adds to the first quarter gains for a YTD return of 16.2%. During Q2, the S&P 500 produced a 4.3% return for a YTD rate of 18.5% and the MSCI ACWI ex USA posted a 3.2%, leading to a 14% YTD total return.

Over the 2nd quarter, the FED has confirmed its dovish stance given that inflation and economic activity is under control. The Chinese economy growth has been decelerating resulting in the slowest GDP growth in the last 27 years. On the other hand, expectation for the Canadian growth rate has been on the rise. Reasons for this growth is the stronger than expected exports, better than expected labor market conditions, and higher than expected housing starts.

Our NQICA index returned 4.6% in Q2 and 16.5% YTD versus the S&P/TSX which returned 2.6% in Q2 and 16.2% YTD. The 1-year return for NQICA is 4.4% versus 3.9% for the S&P/TSX over that same period.

The worst performers in the index were Norbord (OSB), down 11%, and Great-West Lifeco down 5.6%. On the contrary, the best performer was Dollarama (DOL), up 29.4%, followed by CCL Industries (CCL.B), up 19%.

At the end of Q2, NQICA was under weighted in Energy (-13%) and Financials (-4%) and over weighted in Consumer Discretionary (15.5%) and Consumer Staples (4.3%).

The current rebalancing requirements are minimal and are entirely due to the model’s sector weights’ variation. The telecom sector weight increased, and the financial sector weight decreased due to the greater economic value added (EVA) created by Telecom versus Financials. Industrial Alliance (IAG), having the lowest SP Score of our financial holdings, was kicked out of the index. IAG was replaced by Telus (T) which is the highest scored telecom company not already in the model.

Canadian ETFs: Smaller providers continue to get pushed out of the market

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

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

The Canadian ETF industry ended the second quarter with assets under management (AUM) at $181-billion. Despite the booming industry, smaller providers of exchange-traded funds are being forced out of the market owing to increased competition.

The latest example is Galileo Global Equity Advisors Inc., which announced Monday that it will be exiting the industry with the closing – on or about Sept. 9 – of its only ETF, the U.S. Global Go Gold and Precious Metal Miners ETF (GOGO-TSX). “Although the fund has outperformed its peers since its inception [Sept. 29, 2017], the costs associated with maintaining this product in the Canadian marketplace are simply too prohibitive,” Frank Holmes, director of Galileo Global Equity Advisors, said in a news release.

As for notable recent additions, Evolve Funds Group Inc. launched two themed ETFs in June. The Evolve Global Materials & Mining Enhanced Yield Index ETF (BASE-TSX) seeks to replicate the performance of the Solactive Materials & Mining Index, while mitigating downside risk. The ETF invests directly or indirectly in companies engaged in the manufacturing, mining and/or integration of metals and materials, while writing covered call options on up to 33 per cent of the portfolio securities. It is also offered in unhedged units under the ticker BASE.B.

Evolve also introduced Canada’s first e-gaming ETF last month. The Evolve E-Gaming Index ETF (HERO-TSX) seeks to replicate the performance of the Solactive Electronic Gaming Index, designed to provide investors with access to companies listed domestically and globally that have business activities in the electronic gaming industry. The momentum behind e-gaming “signifies a cultural shift in entertainment with 2.2 billion gamers globally. … This year, the industry is forecast for growth upwards of 38 per cent,” Raj Lala, president and CEO of Evolve Funds Group Inc., said in a June news release.

Find the full report here

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

Executive Summary

The New Executive Summary Explained

StockPointer subscribers have access to a revamped Executive Summary that provides more analytics to simplify interpretation.

In addition to the upgraded user-interface, three new features have been added:

  • Upgraded Intrinsic Value display
  • New performance indicators
  • New data points

Download User Guide

Quote Box

Quote box summarize daily information on the company. It contains essential information on the company including dates, currencies, company location.

Sector and Industry Identifies the sector and industry that the company is part of.
The Report title indicates the quarter and fiscal year of the report. It also displays the date that the data was generated. Usually the date generated is the previous day. Beside the line, you might see a warning icon, that will appear when the next financial statement is expected soon or it’s late.
The field displays the fiscal year-end of the company and the most recent financial statement as well as when the financial statement was available.
The field currency informs the currency of the report as well as if the data is in millions or thousands.

Intrinsic Value

StockPointer® evaluates the intrinsic value of a company by adding the current value of the company and estimating the present value of Economic Profit generated by the company over time.

The StockPointer® intrinsic value (IV) is the value of the company based on the Economic Profit (EVA) contribution of the company and the estimated future EVA. It is estimated by obtaining the present value of the sum of discounted future EVA and adding the current value. If the IV is negative, we default the value to $0.
The value of upside and downside from the previous closing stock price of the company. The formula is (intrinsicValue / stockPrice – 1) * 100. The intrinsic value is not always correlated to the stock price for various reasons, however look for trends on the chart below.
The intrinsic Value gauge displays: the most recent IV, and the highest and lowest IV quarterly values of the past five years. The 1y and 5y metrics are the rate of change in % during that period (it is different from a growth rate as it takes into consideration all the data points).
The Price to Intrinsic Value gauge displays: last quarter’s P/IV and current P/IV, and the highest and lowest P/IV quarterly values of the past five years. The 1y and 5y metrics are the rate of change in % during that period (it is different from a growth rate as it takes into consideration all the data points).
The Price to Intrinsic Value Adjusted gauge displays: last quarter’s P/IV adjusted and current P/IV adjusted, and the highest and lowest adjusted P/IV quarterly values of the past five years. The 1y and 5y metrics are the rate of change in % during that period (it is different from a growth rate as it takes into consideration all the data points).
Average intrinsic vlaue over that past 3 years.

KPI’s

This sections offers 4 key performance indicators and provides insight for interpreting the performance of a company.

Reputation (Market Value Added)

This key performance indicator is used to gauge the capacity of management to increase the value of the company. The market value added (MVA) is calculated by deducting the invested capital to the total market value. This KPI calculates the percentage of MVA of the market capitalization. The higher the percentage, the higher the reputation. On the other hand, a negative MVA means that the company has an unattractive reputation.

Effective management will grow the MVA and bad management will destroy the MVA.

The reputation returns stars based on the most recent % of MVA on market cap.
The Direction showcases the general trend of the reputation over the past two years. Effective management will improve the MVA.
The Trend indicates the short-term trend of the reputation in the last 12 months. This short term metric may signal a possible future change in reputation.
The value in the circle represents the percentage of FGV on market cap. and the shaded region of the circle represents the percentile ranking of the company.
The chart displays the % of FGV to market cap over the last 5 years
The table displays the current operating value growth over 1 year and 3 years. This is the growth of the actual profits the company is generating.

Percentage Future Growth Value On Market Capital

This key performance indicator is important to evaluate if the stock price is fairly valued. The future growth value (FGV) is calculated by deducting the current operating value of the company from the total market value. In addition, the FGV is the net present value of all future EVA.

This is a complex KPI. Firstly, you must look at whether or not the FGV is in line with the company’s current situation. For example, we expect a high FGV for growth stocks and almost no FGV for a slow or no growth company. Companies can sometimes trade at a discount or at a premium. For example, a growth stock with a declining FGV growth but rising EVA growth signals a bullish forecast.

Economic Performance Index

The economic performance index (EPI) is the main indicator to identify how much wealth is redistributed to the shareholders. The higher the better, and a negative EPI means that the company is not covering its costs of capital.

The value in the circle represents the EPI. and the shaded region of the circle represents the percentile ranking of the company.
The chart displays the performance spread over the last 5 years. The spread is the difference between Return on Capital (ROC) and Cost of Capital (COC), whereas, the EPI is the ratio of ROC to COC.
The table displays the EPI change over 1 year and 3 years.
The symbol indicates if EVA and NOP are converging (>), diverging (<) or parallel (=); and the color refers to if the EVA trend is better than NOP or not (for example if the EVA is negative but rising, it will display a green pill to signal improving performance. EVA and NOP will be parallel if the difference is within 2.5%.
Displays the overall trend by focusing on the percentage difference between EVA and NOP over the last 3 years.
EVA – Here you will find the most recent EVA (in millions $) and the 3-year EVA change to get an idea of the overall trend of the company’s performance.
NOP – Here you will find the most recent NOP (in millions $) and the 3-year NOP change to get an idea of the overall trend in company profits.

EVA Versus Net Operating Profit

This KPI is very useful for understanding the correlation between economic value added (EVA) and net operating profit (NOP). If both the NOP and EVA have the same slope they will be given a parellel and green signal. If both the NOP and EVA are sloping up but the NOP is flatter, it will have a converging and green signal. If both the NOP and EVA are sloping up but the EVA is flatter, it will have a diverging and red signal.

Detailed Information

This section presents information in four sub-sections.

  • Intrinsic Value
  • Market Performance
  • Economic Performance
  • Accounting Performance

You can view the sections as separate tabs or as a complete list by changing the display on the right.

This tab shows the performance and valuation metrics.

Here you have the performance and valuation calculations for the past 5 years, based on either a trailing 4 quarters (TTM) or trailing 12 quarters (T36M).
There are 2 separate hyperlinks that lead you to the detailed calculations for both NOPAT and Capital. Note: the data in those hyperlinks are on an annual basis and not a quarterly basis as that appearing throughout the Executive Summary.
To change the display from a shorter term to a longer term view. Select between last 4 quarters or last 12 quarters based on your preferences.
Stock price versus intrinsic value trend lines.

The Market Performance tab displays TTM and quarterly MVA and FGV information for the last 5 years.

The chart displays quarterly or TTM data
The chart displays quarterly of TTM data

The Market Performance tab displays TTM and quarterly NOPAT and EVA information for the last 5 years.

The chart displays quarterly or TTM data

The Market Performance tab displays TTM and quarterly accounting information for the last 5 years.

The chart displays quarterly or TTM data

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.

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.