If you're looking for some of the best Canadian stocks to buy in 2021, you've definitely come to the right article.
And, the fact that you're looking for the top Canadian stocks shows you believe there is value right here at home.
Canadian stocks and the Toronto Stock Exchange in general have had a poor reputation in terms of returns. Many investors looking to learn how to buy stocks in Canada skip the Canadian markets and head down south for more growth.
But, there's money to be made when it comes to Canadian stocks and the Canadian stock market, especially in the environment we're heading into, that being a re-opening of the economy and rising interest rates.
We know how to identify the best stocks in Canada
In fact, I've achieved annualized returns of over 22.76% over the last five years since I swapped my strategy to specifically target Canadian growth stocks.
Proof? Here's a snapshot of my returns pulled directly from Qtrade. Which by the way, is in my opinion the best brokerage platform in the country (you can read my Qtrade review here.)
But don't fret, the 10 top Canadian stocks listed below aren't slouches, and they have some potential to post outsized returns.
So what are the best stocks to buy in Canada right now?
10. Agnico Eagle Mines (TSE:AEM)
It's been a long time since a Canadian stock in the material sector has been featured so prominently on this list of top stocks.
With the possibility of inflation coming and interest rates increasing, Canadian investors would be crazy to leave their portfolios without any exposure to gold.
As we can see in recent times, gold is making a comeback, and the rising price of gold miner shares is providing some stability to Canadian's portfolios.
There are a few things I look for in particular when I'm looking at a long term gold play. The first one is mining jurisdictions.
Are there opportunities to make more with smaller, more speculative mining companies? Absolutely.
In fact, we relayed both Leagold Mining and Semafo to Premium members back in 2019, and both companies were scooped up via acquisitions, resulting in some nice returns.
However, for a long term play we want gold companies that mine in safe jurisdictions, where there is relatively little risk of political or regulatory interference.
Agnico Eagle Mines (TSE:AEM) fits that bill. The company primarily operates in Canada, Finland, and Mexico and owns 50% of the Canadian Malartic mine.
In 2020, the company produced 1.74 million ounces of gold, which at the current gold price of $1800/oz~ would equal $3.12 billion USD in revenue.
Agnico has issued guidance that gold production will increase by 300,000 ounces in 2021.
The company is the second largest gold producer in the country with a market cap of $17.6 billion, behind only Barrick Gold.
The company used to be a single mine producer, but has expanded at a rapid rate since the financial crisis of 2008, adding more than 5 mines to its portfolio.
Additionally, through further developments the company plans for a 25% increase in production by 2022.
Agnico has also just achieved Canadian Dividend Aristocrat status, with a 5 year dividend growth streak after its most recent increase in the fall.
Over the past 5 years, Agnico has grown its dividend at a pace of 34.34% annually, and its most recent increase more than doubled this rate as it pumped its dividend up by 75%.
Its yield is small at 1.93%, but with significant cash flow generation in the company's future, I expect its dividend growth rates to increase.
Agnico Eagle Mines 5 year performance vs TSX
9. Pollard Banknote (TSE:PBL)
The lottery is a great business, but unfortunately the government benefits the most.
Pollard Banknote (TSE:PBL) provides investors one way to participate in the lottery business, while also getting a piece of the growing “iLottery” space.
Pollard Banknote is the number 2 producer of instant lottery tickets in the world. This is the core of Pollard’s business, and it’s a very good business.
The business has high barriers to entry as there are regulations about importing lottery tickets, so Pollard is likely to hold on to its competitive position.
Pollard has grown its instant lottery ticket revenues at a 9% compound annual growth rate since 2012.
The most exciting part about Pollard is its 50% ownership in NeoPollard Interactive.
This is a 50-50 joint venture with NeoGames that is focused solely on the iLottery space, giving states the ability to operate lotteries on the internet.
This is a very new industry, but it is growing rapidly and NeoPollard Interactive is the most successful operator in the industry.
Just 8 states offer instant lotteries on the internet, and NeoPollard operates three of them. And the iLotteries in NeoPollard states have much better higher penetration, indicating that NeoPollard is better than its competitors.
We think it’s inevitable at this point that eventually every jurisdiction that runs lotteries now will add iLottery and given NeoPollard’s success so far, I expect NeoPollard is going to win a lot of business as states and countries legalize it.
The growth in Pollard’s base instant lottery ticket printing business, and its new iLottery business, will ensure the company keeps up its excellent growth.
Over the last 5 years, Pollard has grown revenue 13.7% annually, and it has grown its bottom line even faster, with earnings per share growth of 28.8% per year.
Growth was slower in 2020 because of COVID-19 lockdowns, but analysts expect growth to accelerate again in 2021. Analysts are estimating that Pollard’s revenue will grow 13.3% and earnings per share to grow 7.3%.
But that should just be the beginning. If iLottery takes off like we think it will, Pollard is going to grow into a much larger company.
Even though iLottery is just starting, Pollard Banknote has already proven to be a fantastic investment for shareholders. A $10,000 investment in Polalrd when it went public in 2005 would be worth over $91,400 today.
Over the last year the stock price is up 261% as investors are catching on to the potential of its iLottery business.
Pollard pays a modest dividend, with the yield currently 0.29%. But Pollard does look like it will be growing its dividend.
The company raised its dividend by 33% in 2019, and as earnings grow and the iLottery business matures, I expect the dividend will grow a lot as well.
Bottom line is there is an opportunity to invest in Pollard at the start of a revolutionary growth story, all while Pollard’s core business continues to produce profits.
Pollard Banknote 5 year performance vs TSX
8. Goeasy Ltd (TSE:GSY)
Over the last half decade, there's been somewhat of an emergence in a particular niche industry in the financial sector, and that is alternative lenders. One of the best Canadian stocks in that niche? Goeasy Ltd (TSE:GSY).
Goeasy Ltd is a small-cap Canadian stock that provides non-prime leasing and lending services through its easyhome and easyfinancial divisions.
The company has issued $5 billion in loans since its inception.
It also continually works to increase Canadian borrower's credit scores, with 60% of customers increasing their credit scores less than 12 months after borrowing.
The company provides loans for a wide variety of products including furniture, electronics, and appliances. Goeasy has become an attractive alternative for Canadians due to strict lending restrictions placed on Canada's major financial institutions.
A lot of investors view Goeasy's business model as predatory. If something doesn't adhere to your principles, don't invest in it.
Much like tobacco or alcohol, some investors aren't willing to support companies with such products. But you can't deny that what Goeasy is doing is working, and it's working well.
Since 2001, Goeasy has grown revenue at a 12.8% compound annual growth rate. In fact, the company has never had a year since 2001 where revenue was flat or lower than the year before.
If we look towards recent years, from 2015 to 2020 the company doubled revenue, confirming the fact that alternative lenders are catching on in a big way.
Even more impressive is the company's earnings, as net income since 2001 has grown at a pace of 31% annually. To grow net income at a compound annual rate of more than 30% over 2 decades just highlights how strong this company has been.
That's exactly why a $10,000 investment in Goeasy Ltd in 2001 would be worth over $1 million today.
The company is also growing its dividend at one of the fastest rates in the country. The company has a 39.8% 5 year annual dividend growth rate and has raised dividends for 5 consecutive years, including the most recent increase of 47%!
Overall if you're looking for a growth play in the financial sector, I don't think there is a better option than Goeasy Ltd.
Despite a global pandemic, the stock has still provided excellent returns to current investors, and has provided significant returns to Premium Members when we highlighted it in 2018.
We used to have the stock higher on this list, but its run up in price has caused us to drop it down a bit. But make no mistake about it, this is one of the best stocks on the TSX Index today.
Goeasy ltd 5 year performance vs TSX
7. TFI International (TSE:TFII)
TFI International (TSE:TFII) is a stock we covered extensively at Stocktrades Premium, especially during the peak of the COVID-19 pandemic, and the company has more than tripled off those lows.
TFI International is a trucking and logistics company. The company operates in four segments: Package and Courier, Less-Than-Truckload, Truckload, and Logistics. Along with 31,000 employees, it has over 500 terminals across North America.
The company has operations in the United States and Canada, and following its recent acquisition of UPS’s Less-Than-Truckload freight business, the bulk of its revenue, almost 75%, will come from the US.
So why were we extremely bullish on TFI during the pandemic over at Stocktrades Premium, and why are we still bullish on them despite the huge price increase in 2020 and 2021?
While mass panic selling was occurring, TFI International's stock was not immune to the sell off. The stock quickly plummeted in March, hitting the $24 range. Fast-forward a year and the stock is currently trading 365% above those levels.
With the strong financial position the company was in, it went on the hunt for struggling companies, and ended up purchasing Gusgo Transport, Fleetway Transport, CCC Transportation, APPS Transport, Keith Hall & Sons, assets of CT Transportation, the dry bulk assets of Grammer Logistics, and assets of MCT Transportation, DLS Worldwide, and the aforementioned UPS Freight business.
Yes, it’s a lot, CEO Alain Bedard was very busy putting capital to work. TFI took advantage of the situation and bought assets at discounted rates, highlighting the ability of its management.
Although the company has struggled to increase its top line over the last 5 years (5.6% annual revenue growth) its become much more efficient and as a result its bottom line has improved. Earnings over the last 5 years have increased at a 21.5% clip annually.
The UPS Freight acquisition is transformational for the company. As mentioned, TFI International will now be more weighted towards business in the US, as opposed to the past when most revenue came from in Canada.
When TFI International purchased UPS Freight, it was roughly breakeven, with margins around 1%. Management has guided they think they will improve margins to 10%, which will provide a lot of earnings growth to go along with the revenue growth. Analysts estimate earnings per share will grow 21.8% in 2021 and 25.2% in 2022.
This growth in profits should allow TFI International to continue growing its dividend. The company has a 9 year dividend growth streak and has raised dividends at a 10.3% clip annually over the last 5 years after the most recent 11.5% increase in the fourth quarter.
It only yields around 1.05%, but with the dividend making up only 24.5% of trailing earnings, it should have plenty of room to grow.
The company used to be #3 on this list, but we've reduced it due to a huge run up in price. However, it's still a great long term option for Canadians.
TFI International 5 year performance vs TSX
6. Shopify (TSE:SHOP)
A list of top Canadian stocks wouldn't be complete without the top performing Canadian stock in recent memory, Shopify (TSE:SHOP).
Shopify was lower on this list, however due to a dip in price, it's now becoming fairly attractive again.
Shopify offers an e-commerce platform primarily to small and medium businesses globally. They operate in two primary segments, subscription solutions and merchant solutions.
Subscription solutions allow merchants to conduct business through Shopify's tools, while merchant solutions help businesses become more efficient via Shopify Payments, Shopify Shipping, and Shopify Capital.
Since the company's IPO in 2015, Shopify has returned over 4100% to investors. The company has been labeled "overvalued" by analysts and investors throughout its history, but despite this it simply fails to disappoint.
Over the last 5 years, Shopify has achieved revenue growth of 70.1% annually. This type of revenue growth from a company the size of Shopify is extremely rare.
Now, the company is seeing slowing growth as over the last 3 years revenue growth sits around 65.1% annually, but this is still a company that is growing at a rapid pace.
Make no mistake however, the company is expensive. Trading at over 48 times sales and 18 times book value, you're paying a premium for continued growth even after the recent pullback.
Overall, the company is expensive, and could face significant volatility moving forward in terms of price, especially if the company were to post a large earnings miss. It will need to keep up with expected growth rates in order to maintain its share price, and this isn't an investment for the defensive investor.
If you don't have a quick trigger finger in terms of selling stocks, in my opinion there will be few investors who are disappointed 5-7 years down the road if they bought Shopify even at these levels.
The company is still growing rapidly and has a large cash balance to reinvest in its business.
The stock was one of the first recommendations over at Stocktrades Premium, and members who bought when we highlighted the stock are now sitting on returns in excess of 700%.
Shopify 5 year performance vs TSX
5. Nuvei (TSE:NVEI)
Going off the board with this pick, Nuvei (TSE:NVEI) is one of Canada’s newest IPOs.
The company went public in August and its share price has performed quite well.
As of writing, Nuvei’s share price is up by ~86% in just over eight months of trading. Not a bad return for those who got in early.
Is the jump in price justified? When compared to the valuations that peers commanded, we felt that the company’s IPO pricing did not do the company justice.
As we discussed with Premium members, there was a price disconnect which offered an attractive risk to reward opportunity.
Prior to listing, Nuvei was the largest privately held fin-tech company in the country. The company provides payment-processing technology for merchants.
Their suite of products serves both online and in-store transactions and counts Stripe, Paypal, Fiserv, Lightspeed POS, Global Payments, Shift4 Payments and WorldPay among its competitors.
On a trailing twelve-month basis, Nuvei generated US$339M in revenue and US$43B in gross transaction value (GTV). Nuvei grew revenue by 64% in fiscal 2019 and over 50% in 2020.
Since going public, the company has attracted plenty of attention. There are 13 analysts covering the company – 11 rate it a “buy” or “outperform” and 2 rate it a “hold”.
Although the company is not yet profitable, the expectation is for the company to turn a profit next year. They also expect 29% revenue growth in 2021.
It is important to note, that newly listed companies carry additional risk. They have less public history for investors to look at to asses the business model.
Can it meet lofty estimates?
New listings are particularly vulnerable to performance as compared to expectations. Given this, IPOs such as Nuvei are most appropriate for investors with a higher risk profile.
Performance of Nuvei Vs TSX since its IPO
4. Telus (TSE:T)
There is limited 5G plays here in Canada. We're often forced to head down south to the American markets if we want exposure to high-growth 5G opportunities.
While Telus (TSE:T) doesn't exactly boast world beating future potential, the stock is the best telecom stock to own in the country today in terms of both 5G exposure and overall growth.
Telus is part of the Big 3 telecom companies here in Canada, and is the stock you want to buy if you want exposure to a more pure-play telecom company.
Unlike Rogers Communications and BCE, Telus doesn't have a media division and instead has invested in business models that drive higher margins like telehealth and security.
This should allow Telus to not only grow its dividend, which is the best dividend in the telecom sector, but should also allow it to drive top and bottom line growth.
The last 5 years have not been favorable to Canadian telecoms in terms of growth. In fact, Telus has only grown revenue by 3.7% annually over the last 5 years and earnings have remained relatively flat.
However, the environment has completely changed for these companies. Telecom infrastructure is difficult to construct and extremely costly.
On one hand, this is a huge benefit to a company like Telus. Unless they're willing to share towers, it creates a barrier to entry that is almost impenetrable.
On the other hand however, it makes development of new infrastructure extremely expensive, and telecom companies often carry a large amount of debt to do so.
When interest rates are high, we can expect these companies to struggle. However, now that we are in a low interest rate environment, this bodes well.
Even if rates were to increase, they'd likely still be well below levels we've witnessed in quite some time.
Analysts are predicting double digit revenue growth for the company in 2021, which can be compared to shrinking revenue growth expected from both Rogers Communications (-3.4%) and BCE Inc (-0.8%).
Telus 5 year performance vs TSX
3. Parkland Fuels (TSE:PKI)
Parkland Fuels (TSE:PKI) is one of Canada's largest and one of North America's fastest independent marketers of fuel and petroleum products. Parkland serves motorists, businesses, consumers, as well as wholesalers across Canada and the United States.
The company’s growth is primarily driven through acquisitions, evident by its purchase of Chevron Canada’s downstream fuel business making them the sole distributor for Chevron branded fuels.
Another positive from the company's acquisition heavy strategy is the fact that a variety of brands allows it to distribute its products to a wide range of markets across North America.
Parkland has had some impressive growth rates over the last 5 years, averaging revenue growth of 20.9% annually. Over that same timeframe, the company has also grown earnings at clip of 20.3%.
Considering the company pays a healthy dividend, I think it would be a mistake for Canadians not to capitalize on the stock still being down from pre-COVID levels. This is a company that could benefit significantly from the inevitable reopening.
The company is a Canadian Dividend Aristocrat having raised dividends for 7 straight years and pays its dividend on a monthly basis, making it even more attractive to Canadian investors wanting a steady income stream.
Analysts expect marginally shrinking revenue in 2021, coming in at -2.7%. This is a far cry from the company's historical averages of 20% annual growth, but we're ok with this.
As long as the company can maintain its dividend and continue to be in a strong position to grow moving forward, we'll be patient and let it recover from this unprecedented pandemic.
Parkland Fuel 5 year performance vs TSX
2. Brookfield Renewable Partners (TSE:BEP-UN)
Brookfield Renewable Energy Partners (TSE:BEP.UN) is a pure-play renewable energy company here in Canada, and has been one of the fastest growing companies in the sector by a longshot over the last half decade.
Brookfield Renewables has over 21,000 MW of capacity and nearly 5300 facilities across four continents.
Over the long run, Brookfield looks to give shareholders annual returns of 12-15%.
This is a lofty goal, but one that the company has easily achieved over the last half decade.
In fact, over the last 5 years, Brookfield Renewables share price is up roughly 200%. And this is including its huge correction as of late as renewables have taken a hit.
Its acquisition of Terraform Energy back in March of 2020 made it the largest pure-play renewable energy company in the world, and if you're looking for a company to give you exposure to the renewable sector, Brookfield is in our opinion, best in class.
The shift away from fossil fuels and into renewable forms of energy generation is a shift that is still very much in its infancy, but is one we feel is inevitable.
We're not saying oil is going to disappear overnight. We're not that extreme.
In fact, we still feel that there will be many uses for oil extending well into the future. Energy generation may just not be one of them.
In terms of dividend, the company currently yields 3.58% and the dividend is well covered by funds from operations.
Brookfield has stated it plans to grow the dividend anywhere from 5-9% annually over the next 5 years, which is actually an uptick in dividend growth compared to its previous 5 years.
Make no mistake about it though, Brookfield, due to its size and popularity, is one of the most expensive renewable energy plays in the country right now.
If you're looking to take a position, it's important you understand that there is likely to be significant swings in the company's share price. The pullback since the start of the year is probably a great time to buy this renewable energy leader.
Brookfield Renewable 5 year performance vs TSX
1. Royal Bank of Canada (TSE:RY)
Considering this list is primarily made for growth stocks, it did feel somewhat weird including The Royal Bank of Canada (TSE:RY).
However, this Canadian bank stock is simply too good right now to not be included on a list of the best stocks to buy in Canada.
Royal Bank is a global enterprise with operations in Canada, the United States, and as we'll see the importance of later, 40 other countries.
It is a well diversified bank, with personal, commercial, wealth management, insurance, corporate, and capital market services.
The company is Canada's most valuable brand, and has been for the last half decade. RBC currently sits at Canada's second largest company in terms of market capitalization, falling just behind another stock on this list, Shopify.
On average over the last 5 years the company has grown revenue by 6% and earnings by 3% on an annual basis.
With a dividend yield in the 3.5% range and an 8 year dividend growth streak, it's one of the best dividend payers in the country.
A very interesting note: RBC paid out more in dividends in 2019 than Shopify had total revenue, despite Shopify being the larger company market cap wise.
The Canadian banking industry is one of the strongest investment sectors in the world, highlighted by the fact that no Big 5 financial institution cut their dividend during the 2008 financial crisis, and no Big 5 institution has done so yet during the COVID-19 era.
Regulatory agencies asked the banks to preserve liquidity and not raise the dividend in 2020 as a preventative measure to both clients and shareholders. It's rare that I'd consider no dividend growth a good thing, but in the situation we're in, I'll take it.
It’s expected the banks will be allowed to raise their dividends again this year.
Royal Bank knocked earnings out of the park during a global pandemic, and as a result has caught the attentions of a lot of investors. The stock has fully recovered from the COVID-19 downturn and is now back at all time highs.
Why has Royal Bank fared better than most? Well, this is primarily due to the fact it has the most global exposure out of any of the other banks.
This has allowed it to be exposed to a multitude of economies at different stages of recovery. Compare this to a bank like Toronto Dominion, who almost has all of its revenue exclusively in Canada and the United States.
Moving forward, in my opinion the Royal Bank is simply a must have in the majority of Canadian's investment portfolios.
Royal Bank 5 year performance vs TSX
Tesla And Hertz – Whatever Next…
Tesla And Hertz – Whatever Next…
Authored by Bill Blain via MorningPorridge.com,
“Democracy is absolutely the worst form of government, except for anything else…”
Tesla’s rise into the $1 trillion club is extraordinary – proving…
“Democracy is absolutely the worst form of government, except for anything else…”
Tesla’s rise into the $1 trillion club is extraordinary – proving that listening to what the momentum crowd is buying, while suspending disbelief and fundamental analysis is one road to success. Hertz is a lesson in seizing the moment – its stock gains and free publicity from its new EV fleet will likely exceed the cost of the cars!
As I write this morning’s Porridge I am going to try and not sound like a bitter and twisted old man….
I suppose today’s lesson today might be: “Don’t over think it.” Every morning I wake up and try to make sense of the market noise to discern the big forces acting on markets, the underlying rationales, what the numbers really mean, the potential arbitrages, and the direction of trade flow. But I wonder if I’m doing it wrong.
It’s not what I think that matters. The only thing that’s important is what the market thinks.
The market is simply a voting machine where suffrage is simply the price of a stock. If the market believes Donald Trump’s sight-unseen social media empire is worth billions, so be it. If the market believes Meme Stocks are worth trillions, so be it. Whatever the market believes.. so be it.
As so many clever economists and traders have spotted before me.. it’s the madness of crowds that matters. Over the last few years understanding Behaviours has proved far more useful than forensic accounting skills when it comes to stock picking.
I make the mistake of calling out the inconsistencies of the “drivers” like Adam Neumann, Cathie Wood, Elon Musk and the Eminence Noirs driving SPACs and funds – rather than understanding what makes them look so attractive, clever, clearsighted and intuitive to so many market participants. Promise most people you are going to make them unfeasibly rich – and they will listen.
I make the schoolboy error of asking.. how?
Life is full of regrets. If we let them define us – we truly would be miserable.
Do I regret dumping Tesla in the wake of the cave-diving comments scandal? I reckoned it was massively overpriced around $70. Ever since I have pontificated why it’s not worth a fraction of even that valuation. I don’t regret selling, but I acknowledge I’ve been wrong about the price. But not because I got the fundamentals wrong – I misread the crowd. Failing to understand the momentum was my failure. I am less wealthy than I could have been.
Tesla is worth a Trillion dollars plus. Elon Musk is the richest guy on the planet. These are facts.
Tesla, remarkably, has become a great auto-company. It makes good cars. It understands the logistics of super-charging networks. It has front-run the switch from ICE to EVs, making them mainstream, leading a massive industrial shift, and forced the rest of the sector to play catch up. It changed the perception of EVs from milk-carts to desirable luxury status symbols. It will successfully open new plants and sell more cars. It’s the number one selling car in Europe this quarter – possibly because no one else can get hold of chips!
Perversely, Tesla’s success demonstrates momentum can take a company to fundamental strength. For much of Tesla’s life, sceptics like myself predicted it would stumble and fall, brought down most-likely by apparently insurmountable production problems, its debt load, or regulation. It didn’t happen. Instead it survived, thrived and has been able to reap the momentum and build a strong balance sheet on the back of its extraordinary stock price gains. It could potentially acquire whole swathes of its rivals and supply chain.
It’s been an extraordinary climb from likely disaster to undeniable success – and the one constant has been the support of dedicated Tesla fans. Frankly, it flabbergasts me just how Elon got away with it… but he did.
At this point you are expecting a But…
But…. What would be the point?
In the mind of the crowd facts like how 10-year old Telsa only just started making profits on selling cars don’t matter. Its consistently made profits for the last 2.25 years – largely from selling regulatory credits. Prior to that… Tesla racked up losses. It has consistently failed to deliver so many promises on deliveries, automation and new models. None of these facts matter.
It’s what the market believes that matters.
So, there is no point looking at Tesla this morning and trying to explain how it’s worth a trillion – a multiple of the much larger and more profitable Toyota. Let’s not wonder why many analysts reckon its going higher. There is no point trying to fathom why a $4.2bn order from newly out-of-bankruptcy Hertz caused the stock price to ratchet up $110 bln yesterday.
This morning analysts are predicting Tesla stock will go higher, building from the “breakthrough psychological level of $900, right through the key $1200 milestone level, and then the next level is $1500.” There was nary a mention of its PE, fundamentals, margins or such irrelevancies… just that its going higher.
The Hertz trade is fascinating – Hertz has generated tremendous publicity for its re-launch, and enough stock upside to pay for the cars! It steals a march on any other hire firm wanting to build a fleet of EVs. Hertz went bust early in the pandemic and sold its whole fleet. But, as signs of economic recovery first appeared it became the perfect recovery play. After a bidding war, it was bought out from bankruptcy and restarted with a clean sheet. It now has its very own army of meme stock proponents. Its stock price has more than doubled to $12 on the OTC market.
The fact car hire firms are vulnerable businesses in a highly competitive market, or there are now literally hundreds of new EV makers, in addition to the incumbent ICE auto-manufacturers – all now competing in the EV space for Tesla’s lunch – doesn’t matter.
Always bear in mind Blain’s Market Mantra no 1: The Market has but one objective: to inflict the maximum amount of pain on the maximum number of participants.
Technically Speaking: The Bull & Bear Market Case – Part 2
Last week’s "Technically Speaking" covered the first part of the bull and bear market case as we head into the end of the year. As we noted, investors face a conundrum between year-end seasonality and the Fed starting to taper its bond-buying program….
Last week’s “Technically Speaking” covered the first part of the bull and bear market case as we head into the end of the year. As we noted, investors face a conundrum between year-end seasonality and the Fed starting to taper its bond-buying program.
I received lots of comments about the article from individuals pointing out their perspectives on the market. In addition, there were enough excellent comments to derive a follow-up to last week’s post.
The dichotomy of views is broad. Numerous articles recently discussed how the bull rally would emulate that of the 1920s. Others discuss the biggest crash ever is coming. The problem is wading through the noise to discern the underlying risk at any given point.
It’s challenging to do. Such is why so many advisors charge clients a fee for “buy and hold” strategies. Since there is a lack of knowledge or experience to manage risk, they tell clients they can’t do any better than deal with the eventual losses.
That isn’t investing. That is a capitulation to laziness, a lack of research, and a lack of defined investment discipline and strategy. While such approaches seem to work while markets are rising, financial goals get permanently destroyed when markets eventually decline.
If such was not the case, then why, after two of the largest bull markets in history, are 80% of Americans woefully unprepared for retirement?
While the promise of a continued bull market is very enticing, it is essential to remember that all markets ultimately complete a “full cycle.” Therefore, if your portfolio, and eventually your retirement, depends on the thesis of an indefinite bull market, you should at least consider the following charts.
The Bullish Case
Despite the recent correction in the market, bullish sentiment has quickly returned to the market. As a result, the CNN Fear & Greed Index is back to “greed” levels after the latest rally. However, the index gets heavily influenced by the movement of the market.
Our “Fear/Greed” index gets based on how investors allocate to the market without any influence from market price changes. While our index declined with the recent correction, investors have quickly piled into equity risk over the last week.
What is clear, judging by the surge in SPACs like Digital Media (DWAC) last week, investors have been quick to jump back into some of the most speculative assets recently without regard to the underlying risk. But, of course, such is also a sign of a high degree of “complacency.”
At the moment, there are plenty of concerns, but investor psychology remains hugely bullish. Most concerns are well known, and, as such, the market discounts them concerning forward expectations, valuations, and earnings projections. However, what causes a sudden “mean reverting event” is an exogenous, unexpected event that surprises investors. In 2020, that was the pandemic-related “shutdown” of the economy.
Currently, as shown by the collapse in the volatility index over the last couple of weeks, investors are highly confident that a “correction” will not occur.
“The Volatility Index (VIX) closed at a new 18-month low as the S&P 500 closed at a new multi-year high on Thursday, 10/21/21. If you were wondering, the 18-month low in the VIX Index represents the first occurrence since November 2017.” – Sentiment Trader
It is worth remembering the market had three 10-20% corrections in 2018 as low volatility begets high volatility.
3) Earnings Expectations
Currently, significant support of the bullish advance remains the rather exuberant expectations of earnings heading into the end of the year. With estimates very high, forward valuations are dropping as market prices remain at the same level currently as in August.
As long as expectations get met, the bullish advance can continue. Furthermore, as noted last week, with the buyback window opening November 1st, that support for asset prices will continue into year-end.
So with this very bullish backdrop for equities short-term, what is there to be worried about?
The Bearish Case
1) It’s Been A Long Time
As noted this past weekend, the S&P 500 index has gone 345-days without violating the 200-dma. Such is the sixth-longest streak going back to 1960.
While investors are currently starting to believe that a test of the 200-dma won’t happen, there are several points to be mindful of.
- Corrections to the 200-dma, or more, happen on a regular basis.
- Long-stretches above the 200-dma are not uncommon, but all eventually resolve in a mean-reversion.
- Extremely long periods above the 200-dma have often preceded larger drawdowns.
The most crucial point to note is that in ALL CASES, the market eventually tested or violated the 200-dma. Such is just a function of math. For an “average” to exist, the market must trade both above and below that “average price” at some point.
2) Lack Of Liquidity
Since the pandemic-driven shutdown, there has been a flood of liquidity into the financial system. In the short term, that liquidity supports economic growth, the surge in retail sales, and the explosive recovery in corporate earnings. That liquidity is also flowing into record corporate stock buybacks, retail investing, and a surge in private equity. With all that liquidity sloshing around, it is of no surprise we have seen a near-record surge in the annualized rate of change of the S&P 500 index.
“However, as stated, there is a dark side to that liquidity. With the Democrats struggling to pass an infrastructure bill, a looming debt ceiling, and the Fed beginning to “taper” their bond purchases, that liquidity will start to reverse later this year. As shown below, if we look at the annual rate of change in the S&P 500 compared to our “measure of liquidity” (which is M2 less GDP), it suggests stocks could be in trouble heading into next year.”
While not a perfect correlation, it is high enough to pay attention to at least. With global central banks cutting back on liquidity, the Government providing less, and inflationary pressures taking care of the rest, it is worth considering increasing risk-management practices.
3) Bad Breadth & Volume
In the very short term, despite the bullish market rally, the technical backdrop remains exceptionally weak. However, to expand on a point from last week, breadth remains dismal, with only 60% of stocks above their respective 50-dma even though the index is at all-time highs.
Moreover, while our “money flow buy signal” reversed to previous highs, volume dissipated sharply during the advance. Such suggests that “commitment” to the market rally remains lacking, and liquidity is thin.
Plenty Of Risk, Limited Reward
While anything is possible in the near term, complacency has returned to the market very quickly. As noted, while investors are very bullish, there are numerous reasons to remain mindful of the risks.
- Earnings and profit growth estimates are too high
- Stagflation is becoming more prevalent
- Inflation indexes are continuing to rise
- Economic data is surprising to the downside
- Supply chain issues are more persistent than originally believed.
- Inventory problems continue unabated
- Valuations are high by all measures
- Interest rates are rising
Furthermore, as noted above, there is limited upside as the annual rate of change in the market declines.
So what do you do?
As discussed last week, we believe additional equity exposure gets warranted due to the bullish case. However, the longer-term dynamics are bearish.
For now, we remain optimistic about the markets due to liquidity, seasonality, and bullish sentiment. However, we remain concerned about the broader macro risks, which keep us cautionary. Therefore, it is crucial to stay unemotional and focus on managing your portfolio.
Such is why focusing on “risk controls” in the short-term, and avoiding subsequent significant draw-downs, will allow the long-term returns to take care of themselves. The following are the “control boundaries” under which we operate.
Everyone approaches money management differently. Our process isn’t perfect, but it works more often than not.
The important message is to have a process that can mitigate the risk of loss in your portfolio.
Does this mean you will never lose money? Of course, not.
The goal is not to lose so much money you can’t recover from it.
The post Technically Speaking: The Bull & Bear Market Case – Part 2 appeared first on RIA.economic growth pandemic sp 500 equities stocks fed gdp recovery
UK Faces ‘Plan B’ Peril: COVID Multiplies The Economic Threat
UK Faces ‘Plan B’ Peril: COVID Multiplies The Economic Threat
Authored by Bill Blain via MorningPorridge.com,
“T’was the best of times, t’was the worst of times …”
The risks of Plan B and a further Covid Lockdown are multiplying….
“T’was the best of times, t’was the worst of times …”
The risks of Plan B and a further Covid Lockdown are multiplying. It will clearly impact markets, but the real economic effects of Covid combined with energy costs, supply chains and bleak company earnings forecasts may be pushing us towards stagflation anyway.
"How to address the biggest economic shock in 300 years?” asked UK Chancellor Rishi Sunak while doing his pre-budget politicking last week. Whatever you believe or don’t believe about Covid, Sunak is quite right to consider it at the centre of the on-going economic crisis. Markets should factor that reality accordingly – which boils down to a very simple question: how much will Covid force Central Banks and Governments to act to stabilise the global economy?
This week pay attention to the UK Budget on Wednesday on how Chancellor Sunak addresses the ongoing critical-care needs of the UK by stepping away from his previous “policy-mistake” sounding mention of austerity spending cuts and tax-rises to make noises about increased “levelling out” spending. Hanging over everything will be the question – how much more economic pain could Covid inflict?
It’s a tough question. A new lockdown would be economic suicide. The UK government plans to ride it out – but the history of the last 19 months says they won’t hesitate to make a U-Turn and institute Plan B if they think their credibility is on the line if the numbers of infections surge and the health service looks swamped. That’s a potential trade: should you sell UK stocks now on the likelihood the government will panic? (And buy-them back almost immediately as the Bank of England stops the noise about a rate cut and QE taper.)
But… another question is how much will rising infection numbers cause the economy to contract anyway? How much has confidence already been dented?
Here in Blighty, It’s a tale of two headlines:
Daily Telegraph: Coronavirus cases to slump this winter, say scientists.
The papers looks like it boils down to a political split – which may reflect the UK’s national pride in our venerable National Health Service. How much we are prepared to sacrifice to protect the sacred cow of the NHS has become a badge. The left-leaning, Labour supporting Daily Mirror is peddling one set of scientific views, while the daily journal of the Conservative Party, the Torygraph, finds another set of white-coats to quote.
What does the threat of Plan B or further lockdowns mean for the UK economy? A quick glance round the motorway service stations we stopped in yesterday shows many more people wearing masks, and I’ll be interested in how many people start working from again as the perceived threat level rises.
I wonder how rationally people consider the pandemic. The vector for the rise in infections is schoolchildren being children – their interactions will diminish this week due to mid-term holidays. Back in September, a British Medical Journal report (How is vaccination affecting hospital admissions and deaths?) said 84% of hospital admissions before July had not been vaccinated, although rates of vaccinated infections were rising – their conclusion was simple: unvaccinated people are 3 times as likely to go to hospital and 3 times more likely to die. There is a broad consensus the efficacy of vaccines wanes after 5-6 months – hence booster shots.
Maybe the best way to move forward is the Swedish solution of taking personal responsibility to rising infection numbers? However, research in the Guardian earlier this year suggests that strict-lockdown Denmark and easy-going Sweden experienced similar levels of economic dislocation, but Sweden suffered a death rate 5 times higher than Denmark! It’s down to behaviour – Sweden kept the schools, offices, shops and pubs open, but people got careful, stopped going out and kept the kids at home anyway.
As the supply chain crisis continues, and energy prices go through the roof, we already know it’s going to be a tough holiday season – retailers warning of toy shortages and price hikes on scarce Turkeys. It impacts consumer behaviour – we all want to spend, but if we can’t because of rising prices and falling incomes, and it feels dangerous to do so – then what effect does that have on spending patterns? It’s got to be negative.
We’re seeing the supply chain effects beginning to hit corporate results – an increasing number of firms have been giving lacklustre holiday earnings guidance. Intel took a spanking last week on the back of expectations of a downbeat outlook. Snap got pummelled on the back of a disappointing Q3 number. This week is big for Big Tech earnings – and names from Apple to Amazon could be pummelled by supply chain shortages and the problems these cause meeting holiday demand.
Headlines about a downbeat Apple sales forecast have consequences – not just in making global consumers a little more depressed about the future.
The very first thing junior economists learn about is multiplier effects – on consequences as lay-people call them. A company finds it can’t get it full allocation of Christmas units to sell so it cuts advertising, cuts stuff overtime and starts planning to cut investment in new plants, warehouses and future spending. Repeat over the whole economy, and with everyone with less in their pockets… as “transitory” inflation feels increasingly permanent, and you’ve got a perfect recipe for stagflation.
I often get accused of being a misery-guts and far too negative about the state of the global economy. My own market mantras include the classic: “Things are never as bad as you fear, but never as good as you hope”.
Think about that for a moment. Covid caused the greatest economic downspike in 300 years, but the actions of swift government interventions to prop up commerce and fuel consumer spending kept the global economy functional, but wobbly. The markets quickly began to anticipate recovery and upside – yet these remain vulnerable to the news and perceptions around this Coronavirus.
Covid fears are multiplying again. Renewed Covid instability on the back of lockdown news from China, Europe, Australasia, wherever, will continue to roil markets. Supply chains remain fractured and the consequences of the virus effects on the global economy will continue.
Get used to it…
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