A Comment -- General Comments From an Expert (A Commentary)

REITs. Dynamics of REITs has shifted a little. Very strong growth in 2008-2012, coming out of the financial crisis. Now that there has been a shift in psychology where people are expecting interest rates to climb up, REITs are going to be somewhat challenged to keep up with the growth that we would expect to see in the rest of the market. Growth is going to be somewhat more muted, probably in the 2%-3% area.

PrairieSky IPO. The pricing on this IPO is $28. The size and price of the deal have both been increased because of strong demand. Expected to start trading next Thursday. Unless you participated in the initial offering there is a chance that it will trade at something other than $28. There was huge demand for the deal.

Markets. The problem with “Sell in May and go away” is that it is too haphazard. It seems to indicate that you should just get rid of everything. In any portfolio, you should be looking at the different pieces of it and then decide what to do with that. He advocates “Don’t buy in May and go away”. It is better not to Buy as compared to just to Sell, but even with that, historically June, July and August generally are positive. You are better off to sit back, do your research, watch what is going on, be aware and look to Sell things eventually when they have reached your Sell target. Never Sell haphazardly.

At this point in time, a lot of people are still overly worried. Feels we have been in an incredibly stable period for the last couple of years. Inflation has been low. Commodities have been staying within range for the most part. Interest rates have been staying at one level for the most part. Stock markets have been good. The VIX has not been volatile lately. Feels people have been way too worried and have missed gains.

What do you focus on when you attend shareholders meetings? Shareholders meetings are a wonderful tool that investors should have in their toolkit. Going to meetings gives you a far better idea of what is going on in the company. He’ll often go to a meeting before he buys into a company. Sometimes he does not know management and this gives them a better feel for management. He often goes with specific questions in mind.

Insider buying/selling? He puts a lot of credence into this. His system is 1 point if they are doing quite a bit of buying and usually more than one person. If there is just one insider, there is less credence. Investors should always be looking at insider buying and selling. This gives you a clear indication of what is going on. A great place to go for this is The Increaser.

Markets. Somewhat cautious. We’ve seen a variety of things happening, especially over the last 3-4 months. There has been a significant selloff in some of the small caps and some social media momentum stocks that had risen so much. There are anecdotal stories of leveraged PE deals, where over 40% of Leveraged Buy Outs are being done at over 6X leverage to EBITDA. Those are levels last seen before the financial crisis. Also, the market has risen over the last 2-2.5 years with very little correction. Investors see that and continue to believe the trend will just continue and there will be no hiccups. We know from history that markets go through periods that frighten investors and we seem to be overdue for something like that. Valuations are not necessarily inexpensive. However, being on the sidelines has been a mistake in strategy. You need a low interest-rate environment and in this environment, where we have central banks propping up the market and a rising risk appetite and reasonable corporate results, you have a market that has been trending higher. You have to be cautious in your security selection. He tries to roll down to lower volatile stocks in companies where he has real good sense in what they can do in the next 3-5 years.

(ETFs versus equities in a TFSA?) He tends to buy dividend paying stocks for TFSA’s as he slowly builds a portfolio over time and these are securities that are going to be held for a long time. In a TFSA you want the maximum capital appreciation and the most income you can bring in from a dividend. Because of this, he tends to buy stocks. You can use ETFs. If he were buying ETFs, he would probably tend to buy dividend focused ones.

Markets. TSX is almost 400 points away from its all-time high set in 2008. This is certainly good. We have been recovering for a long time and he sees no reason why it can’t keep going. Market may consolidate here as it pushes through this level. Things remain quite supportive for the markets to continue higher. There are some divergences and rotation underneath the surface. Leaders from last year are selling off at the moment. Things that underperformed a bit last year are starting to outperform again. A lot of this has to do with what is happening in the interest-rate market and with yield. Yields shot up last year when Bernanke talked about eventually tapering, but they over did it in a short-term so we are now getting some of that back. Fixed income is less attractive. Valuations are in a fair range, certainly not overly cheap, but nowhere near bubble territory either.

Energy. Still seeing India and China as the net incremental buyers of energy and that is where growth is coming from. Developed markets are growing, albeit at a very small pace, because developed markets are more efficient in how we use energy, whether natural gas, oil, gasoline or hydro. Emerging markets are growing mostly through automotive needs through fuel. Thinks there is about a $10 premium in world oil markets. Brent oil is trading at $110 and should be trading at about $100. WTI is trading at $104+ and should be closer to $95 or so. Most of the $10 difference is due to supply constraints because of Libya, Sudan, Nigeria, Iraq and Iran. The noise around the Ukraine gives the traders something to talk about and trade around, but really we are seeing supply of the market from those political hotspots. Energy index this year is up about 12%-13%. The index could probably do 20% this year, so he still sees 5%-10% upside in energy stocks. Expects a little neutrality in the sector through the summer, but thinks the bull market in Canada will commence again in the fall to the end of the year.

Natural Gas. Bullish on natural gas. Inventories in North America are below a 5-year average. This poises the market for $4.50 gas, probably for most of this year. Looking at the capacity for natural gas in the US, it’s almost 4 trillion cubic feet of capacity. Currently we have about 850 billion cubic ft.³ in storage so we need to inject almost 3 trillion cubic feet until October, when things start to get cold again. Currently gas producers are using more than we are using from a demand standpoint, but the question is, will we inject enough gas through May-September to get us to full storage. He doesn’t think so.

Markets. The consensus estimates for the S&P 500, which is really the index that everybody should be talking about, is $120 a share in earnings. That would be looking for 13%-15% earnings growth this year, which seems a little bit buoyant and will probably come down over time. If that’s the case, and stocks follow earnings, we could have a pretty good year. He thinks the recovery on the stock market from 2009 is 100% based on earnings and was just catch up, getting us back to a more reasonable valuation multiple, which was somewhere between 15 and 17 times earnings. We have never been in an environment where interest rates have been this low and, once again, they have told us there is no threat of inflation or interest rates going up. That makes stocks worth more. Since 1961, when forward earnings of the S&P 500 were between 15 and 17 times, the next 5 years gives you almost a 10% compound return.

Stock Selection. To find bargains, he looks at the S&P 500 and screens for companies that are trading at less than 15X earnings. US banks keep coming up left and right. As a value investor, why pay high price for the future. The future is uncertain, so pay a cheap price for today’s earnings. Over time, all good companies revert back to the mean, which are 15-17 times earnings.

Markets. The flat market on the Dow and the S&P 500 is disguising an ongoing correction beneath the surface. There is a rotation out of the small caps. The Russell 2000 is breaking down. You are seeing highfliers being sold to some extent and generally moving into more conservative value oriented big caps. He sees any pullback we get as being fairly modest. Possibly a 4%-5% correction in Toronto, Dow and S&P 500. However, NASDAQ had a 6% correction from 4350 down to 4000 and has since recovered. If the stock markets perceive there is a sustainable increase in economic growth, then the rise in rates will not get impacted that much.

Inflation. He sees inflation edging up. Looking at the components of the US’s CPI, housing and related rents equivalents is 41% indicating housing is going up. Some indexes in the food area are up 9%-10% since the start of the year and they run about 14% of the CPI. Looking at the breakdown of the underlying components of the CPI, there are medical expenses which are 6% and moving up fairly rapidly.

Markets. Doesn’t feel valuations we are seeing are justified. There are prognosticators out there that say we are just in the middle of the beginning of the cycle, but the difficulty he has when screening the 4,000 stocks he looks at, is that a lot of companies are getting away with buying back shares to pump up their earnings and where organic growth on the revenue side is minimal at best. Similar to what GDP growth is, so-so in the US and nonexistent in Europe. Having to deal with foreign exchange headwinds because all the money that went into emerging markets last year and coming back to the US now have sent the US markets very high this year. But now we are starting to see the Russell 2000 beginning to correct and we are getting more losers than winners on a daily basis. This could be the beginning of a nice summertime correction.