In This Week’s Market Observer…
- A Look Back at the First Quarter of 2014: Can you say volatile?
- The Diversified Income & Growth Basket: Off to a solid start in 2014
- New Market Observer Feature – JMRD Basket Corner
- National Bank Goes West Amid Revival of Oil-Patch Deals
- NBF Asset Allocation Update – April 2014
- Retirement Corner
- Week at a Glance
- Reads of the week
- Economic Calendar
- Earnings Reports
A Look Back At The First Quarter of 2014: Can you say volatile?
If nothing else, January 1st through March 31st was exciting. In early January, the Dow Jones Industrial Average dropped over 7% before recovering most of its lost ground in February. As we started March, one was left to wonder where things were headed. On the positive side, earnings were ‘ok’ and economic data were promising. On the negative side, there were reports of China’s economy slowing down and geo-political issues percolating in the Ukraine. Emerging Markets rebounded 12% from the early February lows and all this excitement resulted in market volatility that we expect to continue in 2014. Another factor that will provide more noise for investors to sift through will be U.S. mid-term elections being held in just over 6-months’ time.
To quantify the first quarter, let’s look at the Good, the Bad and the Ugly.
- The Toronto Stock Exchange (TSX) has lagged the US over the past few years.
- Well, even though it is just 3 months, the TSX is outperforming most markets and certainly those in the US.
- TSX Total Return Index was 6.0% higher after the first quarter thanks to a rally in the gold miners and other metals and materials names.
- The US indices just can’t make up their minds which direction to go.
- The Dow was the biggest laggard posting a decline of -0.15% for the quarter.
- The much broader S&P 500 rose 1.81%.
- And the tech heavy NASDAQ managed a 0.6% return.
- As is often the case, leadership changes in the financial markets.
- The Nikkei was the top performing developed market in 2013.
- Through the end of March, the Japanese market was down a considerable 9%.
The Diversified Income & Growth (DIG) Basket: Off to a solid start in 2014
DIG posted a first quarter gain of 4.3%
The DIG Basket performed well during the first 3 months of 2014 and we feel it is positioned extremely well for the balance of the year. Before getting into specifics, we wanted to point out some milestones for the Basket as of the end of March:
- Total assets exceeded $56,000,000 for the first time in this Basket.
- Number of holders exceeded 534
For new clients and for those not familiar with DIG Basket, we provide some historical returns:
- 2009 return of 41.51% versus the TSX Total Return of 35.05%.
- 2010 return of 17.27% versus the TSX Total Return of 17.61%.
- 2011 return of 6.35% versus the TSX Total Return of -8.71%.
- 2012 return of 8.70% versus the TSX Total Return of 7.19%.
- 2013 return of 16.4% versus TSX Total Return of 12.99%.
Compound returns have been very good as well. Below are results as of the end of December 31st, 2013.
- 3 year compounded average return of 10.35%, versus the TSX Total Return of 3.40%
- 4 year compounded average return of 12.04%, versus the TSX Total Return of 6.79%
- 5 year compounded average return of 17.40%, versus the TSX Total Return of 11.92%
We also wanted to highlight the risk-adjusted returns of the DIG Basket versus the TSX Total Return Index and the S&P 500 since January 2009. Risk adjusted return is an important concept that refines an investment’s return by measuring how much risk is involved in achieving that return. An ideal situation is when an investment has a lower standard deviation (volatility) but a higher return than what it is being compared to. As you can see from the attachment, the DIG Basket achieved both a higher rate of return and a lower standard deviation over this period.
Below is a snapshot of the current holdings. The current annual cash flow is $625 for a yield of 4%.
We consider the DIG Basket a top pick for clients seeking income and growth and feel it is very appropriate for a portion of a client’s equity weighting. The current value of one DIG Basket is approximately $15,450 making the minimum initial position approximately $38,625, which is 2.5 Baskets. This amount will continuously change as the prices of the DIG Basket components do fluctuate. Subsequent purchases can be made in one Basket increments.
JMRD Basket Corner
The ‘JMRD Basket Corner’ is a new feature of the Market Observer where we will provide updates on current holdings in the Baskets. As a reminder, we have 4 equity baskets: Diversified Income & Growth Basket (DIG), Exchange-Traded Fund Basket (ETF), All-Cap Growth Basket and the U.S. Growth Basket
Macdonald Dettwiler & Associates (MDA) – Credit Suisse initiated coverage with a one-year target price of $97.00 noting that “MDA is one of the premier providers of communication satellites, which generates strong stable free cash flow and is uniquely positioned to benefit near term from the ramp up of the RADARSAT Constellation Mission (RCM) contract. Our $97 target price represents 12% return potential and is based on an average of our DCF model and a 14x P/E multiple on our 2015 earnings. MDA currently trades at a 2x discount to peers at 13.1x 2015 EPS vs. 15.2x. below its historical 1.3x.”
Newalta (NAL) – NBF analyst Rupert Merer provided a Q1 preview of NAL’s upcoming quarter and forecasts that higher oil prices, good activity and investment bode well for the company’s first quarter. The company will also likely announce a modest 10% dividend increase. Newalta could deliver >20% EBITDA growth in 2014 and surprise to the upside in Q1. Target price increased to $23.50 from $21.00
Telus (T) – Telus announced that CEO & President Darren Entwistle will step aside in May, making room for chief commercial officer, Joe Natale, to succeed him in those roles. Mr. Entwistle will remain at the helm as the telecom giant’s new executive chair, partnering with his protege on corporate strategy and performance. The changes will make effect May 8 in conjunction with the company’s annual meeting.
Pembina Pipeline (PPL) – Pembina was added to the S&P/TSX60 Index effective the market open on April 1. The S&P/TSX 60 is a capitalization-weighted index offering exposure to 60 large-cap Canadian companies in various industries and is also structured to reflect the sector weights of the S&P/TSX Composite. The S&P/TSX 60 represents 60 leading companies in the major industries of the Canadian economy and is generally regarded as the best single indicator of the Canadian equities market.
All-Cap Growth Basket
Auto-Canada (ACQ) – AutoCanada announced that it is acquiring an 80% non-voting equity interest in McNaught Cadillac Buick GMC in Winnipeg. ACQ will also purchase the dealership facility (land and building) sometime on or before March 31, 2016. The dealership has been in operation for close to 40 years, consisting of a 10-car showroom, 24 service bays, and 10 body shop bays. In 2013, the dealership retailed 593 new and 520 used vehicles. With the stock up over 50% since early February, we took partial profits on the position in the Basket. ACQ traded at a new high of $64.99 this week.
Surge Energy (SGY) – On Monday, Surge announced a strategic business combination with Longview Energy (LNV-TSX). Total consideration is $429 mln, including a $232 mln share exchange component (0.975 SGY/LNV exchange ratio equates to a LNV price of $5.99 or a 9% premium to close prior to announcement), prior ~20% toehold acquired through Advantage’s secondary offering (9.3 mln shares at $4.45/sh) and assumed debt of ~$155 mln (incl. transaction costs). The acquisition adds ~6,000 boe/d (82% liquids) on a flush basis with operating netbacks of ~$33/boe. Key selling points highlighted by management include: 1) overlapping operations (2,100 boe/d is from SE SK adjacent to SGY’s land base in the Midale play trend), 2) low corporate decline of ~20%, and 3) optimization opportunities. The deal will be completed by way of plan of arrangement with closing expected in early June. Surge also announced the dividend will be dividend will be increased by 11% to $0.60/sh (was $0.54/sh) and implies a 10.0% yield.
U.S. Growth Basket
Affiliated Managers Group Inc. (AMG) – announced two acquistions last week. The firm which manages about $544 billion in assets traded up 5% on the news. Affiliated Managers said it acquired all of Aviva PLC’s interest in U.S. equity manager River Road Asset Management LLC, as well as a minority stake in investment firm EIG Global Energy Partners LLC. Terms of both transactions weren’t disclosed. The two transactions are expected to add to Affiliated Managers’ earnings by about 50 cents a share annually, according to investment bank Jefferies, which estimated the deals will be “incrementally accretive.” Jefferies also said Affiliated Managers, which has stakes in various hedge-fund groups and other asset managers, might have more deals in the pipeline.
Micro Technology (MU) – Micron reported Q2 2014 results on Wednesday with a fiscal second-quarter profit as the chip maker reported sharply higher revenue, buoyed by the company’s acquisition of Elpida Memory Inc. last year. Micron is widely known as the last U.S. maker of dynamic random access memories, or DRAMs, long a key component in personal computers. Micron also is a major maker of NAND flash memory, which has become a faster-growing commodity as their use has expanded in smartphones and tablets. Micron’s acquisition of Elpida made Micron the second-largest producer of dynamic random access memory, or DRAM, chips after Samsung Electronics Co.
National Bank Goes West Amid Revival of Oil-Patch Deals
From Bloomberg, April 1, 2014
Under Chief Executive Officer Louis Vachon, the Montreal-based bank has increased its wealth-management business through takeovers, bolstered energy investment banking in Western Canada and won more mandates in corporate lending while leading its rivals in per-share profit growth.
“National is looking at growing from being a super-regional bank to having much more of a national presence,” Kash Pashootan, a portfolio manager with First Avenue Advisory of Raymond James Ltd., said in a March 24 interview. “There is a significant growth opportunity, if implemented properly, for National to grow across Canada, and really where they’re targeting is Calgary.”
NBF Asset Allocation Strategy: Stay invested…in stocks!
Volatility was high in March. U.S. equity markets pulled back after setting records at the beginning of the month, but managed to recoup losses resulting from uncertainty related to the Russia/Ukraine crisis. The big loser for the month was gold which, after rising steadily since the beginning of the year, reversed course and began plummeting following a change in tone at the Federal Reserve. In spite of the Fed’s tapering measures, emerging markets were the asset class that turned in the best performance with a monthly gain of 3.1% for March in USD terms, after rebounding 3.3% in February, buoyed by impending fiscal stimulus from the Chinese government. The Canadian equity market managed to keep its head above water despite a sharp drop in gold mining stocks. Volatility was also observed in the bond market, with yields on 10-year U.S. treasury notes moving in a seesaw trend between a low of 2.6% and a high of close to 2.8%, before closing out the month at 2.74 %.
Asset allocation strategy
Fixed income: As the economy is bound to improve, bottoming inflation should lead to higher rates. Therefore, we are recommending a short duration approach with an emphasis on riskier spread products.
Equities: Equities should be bought on dips. Lower expectations usually set the stage for positive surprises which lead to a favorable environment for risk assets. Emerging markets look more appealing with last week seeing the first inflows into EM equity funds. But the ongoing catching-up effect could be short-lived as numerous issues remain to be solved. Over the longer run, however, we continue to favour developed markets.
Commodities: Gold prices have been in correction mode following the trend for real short-term interest rates observed after the March 19th F.O.M.C meeting (chart 6). Bullion could fall to its technical support of around US$1200 per ounce.
Week at a Glance
Reads of the Week
Hot Charts – Canada: An economy in transition?
Monday April 7th – None
Tuesday April 8th – None
Wednesday April 9th – Canada Housing Starts; Minutes from US FOMC March 18-19 Meeting
Thursday April 10th – Canada New Housing Price Index; US Initial Jobless Claims
Friday April 11th – University of Michigan Consumer Confidence
Monday April 7th – None
Tuesday April 8th – Alcoa
Wednesday April 9th – None
Thursday April 10th – None
Friday April 11th – JP Morgan, Wells Fargo