It has certainly been an eventful couple of weeks in the markets to say the least. There were several days when the Dow Jones was down 500 points or more, and even as much as 1,000 points in one day. It is times like this that test our resolve and can shake our confidence. It is why I try to always remind folks that when Markets are doing well it is not a matter of if, but when they will drop. There is a long history of Market corrections. The good news is that history shows that given time Markets rebound and move higher. The problem is, the sell-offs tend to happen quickly and unexpectedly and the headline news turns incredibly negative.

The good news is there are some things you can do to minimize the damage.

First, do not panic. This advice has already paid off as we have seen the Markets rebound from the recent sell-off. That said, we can be sure another downturn is coming – we just do not know when!

Second, buy and hold shares in quality companies. My clients are used to hearing this advice as it has been my mantra for several years now as Markets have been moving higher. Focus on buying high quality companies with real and strong earnings and relatively low debt levels. In other words, survivors. Irrespective of the Market’s short-term trend, there is always a market for high quality companies with low debt levels. As such, the shares of these companies should rise with the Market, however they should offer support in the event of a downturn (especially over the long term) because a slowdown in the economy or rising rates will not put them out of business. A slowing economy may translate into lower earnings, however those with unsustainably high dividends and/or debt levels that are too high would be at risk of cutting dividends and/or facing bankruptcy. In most cases, these companies can lose significant value. On the other hand, high quality companies with low debt levels and sustainable dividends can “weather the storm”. Yes, their shares will likely lose value in the short-term and their earnings may suffer. The positive is that whatever earnings they keep are not already ear-marked for a dividend or interest payments.

We can see some concrete examples of this in very recent history in the Energy sector. Despite Global Markets reaching all-time highs in January of this year, the Energy Sector has been mired in a downtrend since early 2015. Since that time, the shares of companies with relatively high debt levels and/or high dividend payout ratios have been forced to cut their dividends (and in some cases eliminate them entirely) and have seen their shares lose significant value.

Consider Crescent Point Energy vs. Vermilion Energy (which is a similarly sized and more conservatively managed Energy company) and Suncor (which is a much larger, more diversified Energy Company).

Crescent Point Energy shares have fallen more than 70% from their peak in April 2015. On top of the share price dropping, their dividend has been cut from $0.23 per month to $0.03 per month! (A drop of 87%).

Over the same time-frame:

1. Vermilion shares are down 23.5% (significantly less than Crescent Point) and the dividend has remained steady throughout; and,

2. Suncor shares are up 13.08% and the company has increased its dividend 3 times (from $0.28 per quarter to $0.36 per quarter- a 28% increase).

Third, constantly look to upgrade your portfolio. The stocks you own should represent our best ideas. Over time, a few different things can happen:

1. A company’s fortune can change. This can happen for many reasons, such as management changes, revenue declines, or a company may lose a key customer. Take General Electric for example. Until last year (and after a steep selloff in 2008) this was considered a solid, blue-chip company. Now, the shares are down 49% over the last year and the dividend (which had been steadily rebuilding since being cut in 2009) has been cut again (from $0.24 cents per share in September 2017 down to $0.12 per share in December 2017 and beyond);

2. Share rise to meet and/or exceed our targets. In some cases, targets are increased and/or the rise in price is confirmed by the underlying fundamentals. Sometimes we like to re-allocate those funds to a stock that offers more compelling value; and,

3. We may see a shift in the Markets that warrants a change within our sector mix. For example, I discussed the changes in the Energy Sector starting in 2015. At that time it was prudent to move away from the Energy Sector into other areas of the Market. A more recent example has been rising rates, which have led to a sell-off in Utilities.

Lastly, always diversify – by Asset Class (stocks vs. bonds vs. cash), by Geography (Canada vs. US vs. Global), by Sector (not concentrating on only one sector – such as financials, utilities, commodities, or technology), and by individual investment (never holding more than 10% of your portfolio in any one stock). It is a well-worn (but no less accurate) piece of wisdom – don’t put all of your eggs in one basket.

Bottom line: after nine relatively strong years in the Market (and a recent reminder that markets can go down), now is the time to make sure you are properly diversified in high quality companies around the world.

Please feel free to call or email me directly with any comments or questions. I can be reached at 416.231.6528 (office), 416.855.9512 (cell) and/or jeff.ker@rbc.com.

Financial Planning

One of the significant benefits of working with RBC Dominion Securities is our depth of resources and this is evident in our Financial Planning capabilities. Depending on the amount that you have invested with us, we have several levels of Financial Projection/Planning support available to you.

All of our clients have access to a MyGPS Financial Projection. With a few pieces of information I am able to prepare a Retirement projection to determine whether or not you are on track to meet your retirement goals. Depending on the results, we can develop strategies for savings and investment, as well as other areas we have discussed, such as Will and Estate Planning, Tax planning, Charitable Giving and Insurance.

For those clients with between $500,000 and $1,000,000, I can enlist our Financial Planning Analysts team, which is comprised of professionals with financial planning designations to help prepare a more in-depth, full financial plan.

For clients with $1,000,000 or more invested with me, we can tap into the resources of our Financial Planning Specialist Jung-Hee Kim. Jung-Hee has her MBA from the Schulich School of Business and her Master of Taxation degree from the University of Waterloo. Jung-Hee would be involved from the beginning, leading the discovery meeting, clarifying the planning process, and analyzing and presenting the plan.

I strongly believe that Financial Planning is an important part of the process of investing and will continue to offer and strongly recommend these services to all of my clients and prospects. Please feel free to contact me when you want to take the next step in your planning.

Investment Spotlight:

iShares Edge Multifactor ETFs

These Exchange-Traded Funds are based on methodologies created by MSCI and are available from iShares. They offer a rules-based approach to selecting securities with the goal of outperforming the market over time. MSCI has identified four factors that have been shown to be drivers of performance:

1. Quality: Financially healthy firms with strong balance sheets typically outperform lower quality stocks over time;

2. Value: Stocks that are inexpensive relative to their fundamental value generally outperform growth stocks;

3. Size: Smaller companies, often overlooked or mispriced, have tended to outperform larger stocks; and,

4. Momentum: Trending stocks have historically continued to appreciate due to the “herding effect” of return-following investors.

There is a 5-step process that is used to capture stocks that display attributes of one or more of these factors while keeping the risk profile in line with the sector/country weights of each index with the broad market. Bottom line: rather than simply buying the Market, they are attempting to build a better portfolio.

These portfolios fit well with the philosophy I introduced at the start of this post, as one of the four factors that is used to build the portfolio is quality. Also, the portfolios are constantly rebalanced and the stocks are re-evaluated based on these factors. Over time, the holdings will change and the portfolio will be upgraded.

One of the other big benefits of these ETFs is the relatively low cost. These ETFs have a Management Expense of 0.50%, which is about the half the cost of the average F-series mutual fund (which is 0.97% according to Investor Economics).

Click Here for a link to the section of the iShares website devoted to the iShares Edge Smart Beta ETFs.

What Worked in the last Month

Amazon: Shares of Amazon were up more than 22% in January. After a strong Christmas season and ahead of earnings, the stock had a very strong January.

 

RBC Capital Markets rates the shares Outperform, with at $1,700 Target Price (which was revised up from $1,200 after they reported earnings in early February).

 

In the December 20, 2017 Report entitled “Expecting a Full Sleigh of Alexas This Holiday”, RBC Capital Markets cited these factors for our Outperform rating:

 

1. Still Significant Secular Growth for Online Retail;

2. Clear Amazon Market Share Gains and a Path for More of the Same;

3. New Revenue Growth Opportunities;

4. Material Margin Expansion;

5. One of the Best Management Teams on the Internet; and,

6. High Growth and High Quality EPS.

 

What Did Not Work in the last Month

Pembina Pipeline: Shares of Pembina Pipeline fell approximately 8.31% in January.

 

Shares of all Pipeline and Utility stocks fell sharply in January, on the back of rising interest rates in the US and Canada and the forecast for these to continue in 2018.

 

RBC Capital Markets rates the shares Outperform, with at $52 Target Price. Notably, we believe that Pembina deserves a premium valuation because of its premium assets, will continue to grow its dividend, has some good projects in the pipeline (pardon the pun) and the potential for additional project announcements.