Why price matters more than quality in investing, a ‘triple threat’ stock, and how to set up a dividend reinvestment plan
Berkshire Hathaway shareholders listen to CEO Warren Buffett and vice-chairman Charlie Munger seen on a projection screen in the background at the annual meeting in Omaha. (RICK WILKING/REUTERS)
I’m going to use quotes from two of my favourite thinkers on finance to prove an important, counterintuitive point about successful investing – the price matters more than the quality of the investment.
The Farnham Street blog recently presented a series of quotes by Warren Buffett’s business partner Charlie Munger that represented a wealth of investing wisdom. Among the quotes was this gem:
“You’re looking for a mispriced gamble," says Munger. ‘That’s what investing is. And you have to know enough to know whether the gamble is mispriced. That’s value investing."
The second quote is from Michael Mauboussin, prolific author, current managing director of investment banking at Credit Suisse and also chairman of the board of directors at the Sante Fe Institute. In his paper Decision making for investors (as I’ve mentioned previously, this paper is my pick for the best ever written for individual investors), Mr. Mauboussin cited horseracing expert Steven Crist to make a point about pricing stocks:
“The issue is not which horse in the race is the most likely winner, but which horse or horses are offering odds that exceed their actual chances of victory … There is no such thing as ‘liking’ a horse to win a race, only an attractive discrepancy between his chances and his price.”
The premise in both cases is the same – price matters most. It is possible, of course, that a high quality company is trading at valuation levels that under-estimate its growth path, but it’s also possible for a low quality, struggling company to have a stock trading so cheaply that it will easily exceed expectations and become a successful investment.
One of the keys to investing is to look beyond the so-called ‘best companies’ in search of stocks representing a mismatch between valuations and future prospects.
Stocks to ponder
Slate Office REIT. The unit price of Slate Office REIT (SOT.UN-T) has performed relatively in-line with the S&P/TSX real estate sector year to date. However, the REIT stands out from its peers based on its yield, writes Jennifer Dowty. The Trust pays unitholders a monthly distribution of 6.25 cents per unit, equating to a yield of over 9 per cent. The Trust has maintained the distribution at this level since 2013. From a technical perspective, the chart for Slate Office REIT looks interesting with a bullish "golden cross" pattern potentially forming.
McKesson Corp. The pharmaceutical sector has been beaten down by accusations of blatant overpricing, including Donald Trump’s comment in January that drug companies “are getting away with murder,” writes Gordon Pape. The uncertainty over what the Trump administration is going to do about it has tempered the market’s enthusiasm for health care stocks. Share prices are rising, but not to the extent they would without the cloud hanging over them. That creates a buying opportunity. One of the stocks Vitaliy Katsenelson, Chief Investment Officer of Investment Management Associates of Denver, likes is McKesson. While it is a giant, few outside the health-care industry are familiar with it. The company provides a variety of services to the industry but one of the main ones is drug distribution. It acts as the middleman between drug manufacturers and dispensers such as pharmacies, hospitals, doctors and others.
Savaria Corp. This company is a triple threat – realizing revenue and earnings growth, management recently raised its guidance, and the stock has delivered dividend growth, declaring a 30-per-cent dividend increase several months ago, writes Jennifer Dowty. Quebec-based Savaria has two core operating divisions. The Accessibility segment, which manufactures and markets stairlifts, wheelchair lifts, and elevators for residential and commercial use, and the Adapted Vehicles segment, which reconfigures minivans to make them wheelchair accessible. It recently raised its dividend to 26 cents on a yearly basis, or an annualized dividend yield of 2.5 per cent. The Street is forecasting steady growth for the company. The consensus one-year target price is $13.30, suggesting a potential price return of 30 per cent over the next 12 months.
Aurora Cannabis Inc. This marijuana producer is up 14 per cent this year, writes Jennifer Dowty. The federal government’s upcoming tabling of the recreational use of marijuana, depending on the timing and outcome, could result in a potential pop in the share price. This small cap stock, with a market capitalization of $795-million, is currently only covered by one analyst, Neil Maruoka from Canaccord Genuity. He has a ‘speculative buy’ recommendation and his one-year target price is $3.15, suggesting a potential price return of 20 per cent.
Canadian Imperial Bank of Commerce. CIBC wants to expand into the United States with a deal to acquire Chicago-based PrivateBancorp Inc., but investors will do just fine if the Canadian lender walks away, writes David Berman. CIBC announced the deal last June, when the price tag for PrivateBank, as it is called, was set at $4.9-billion (Canadian) or about $47 (U.S.) a share. Since the deal was announced, the share price has surged as investors bet that U.S. financial firms will benefit from an improving domestic economy and rising interest rates. PrivateBank shares now trade at about $57, or more than 20 per cent above CIBC’s offer. The rally puts CIBC in a difficult position: raise its takeover price significantly or face the strong possibility that PrivateBank shareholders will vote against the deal. A vote originally scheduled for December was postponed, and a new date has not yet been announced.
Calls for a market correction are getting louder by the day
The latest leg in the eight-year bull run in stocks has brought on a renewed rash of warnings over heightened valuations, writes Tim Shufelt. The Dow Jones Industrial Average ended Monday’s trading with a 12th consecutive record high, matching the longest such streak first set in 1987. Meanwhile, the S&P/TSX composite index, despite a broad sell-off on Friday and a further 70-point drop on Monday, is on its own record run, on track to post a 13th consecutive positive monthly return on Tuesday. The stock market’s red-hot streak is “an unprecedented run warranting an equity downgrade,” Canaccord Genuity’s head of North American portfolio strategy, Martin Roberge, said in a recent note.
Contra Guys: Why we’re almost ready to give up on Warren Buffett’s Berkshire Hathaway
The Contra Guys, Benj Gallander and Ben Stadelmann have great admiration for Berkshire Hathaway and its leaders, Warren Buffett and Charlie Munger. But they were taken aback by their recent investments in airlines, and their bolstering of their position in Apple Inc., all at very high stock valuations. Ultimately when investing, to achieve success it is critical to have a disciplined methodology. Looking at Berkshire’s recent stock plays, it appears the modus operandi has shifted dramatically. This is giving them pause and making them strongly consider selling their position.
Six stock picks for the ‘Joe Six Pack’ investor
The Great Rotation theory, the idea that the financial assets that thrived during the last 10 years of slow growth, low interest rates and non-existent inflation are now being eclipsed by those that had been languishing – more mainstream assets such as commodities and banks, writes John Reese. The ‘Davos Man’ represents a hypothetical investor who typically gravitates toward global businesses and bonds and is swayed by central bank policy. Joe Six Pack” is another concocted investor but one that is more domestically focused and Main Street-oriented – and has gained momentum in the Trump policy landscape. Reese outlines six stocks that may benefit from the shift toward "Joe Six Pack" investing.
I was burned by the markets – how can I get back into investing?
A cry for help: She and her husband were burned in the last stock market crash and now have most of their money in savings accounts. “How,” she asks, “can I get back into investments?” This question is worth delving into for two reasons, the first being that it taps into the fears of all investors holding large amounts of cash out of fear that the stock markets are too dangerous, writes Rob Carrick. The second is the insights offered on the investment advice business, and its inability to address the worries of this particular high net worth investor.
There’s more than one way to set up a dividend reinvestment plan
John Heinzl looks at the ways to set up a dividend reinvestment plan, and looks at the pluses and minuses to them, via a company or brokerage.
Gen Y: Your guide to getting started saving for retirement
Rob Carrick lays out four easy portfolios for young investors to help them get started investing. These portfolios are easy to set up, easy to maintain, can be done with a small amount of cash initially and low on fees.
Ask Globe Investor
I have a good dividend paying stock and would like to move part of it into a TFSA where I have accumulated a few years of contribution room and the remainder into my self-directed RRSP, to which I haven’t contributed for years. If my intention is to reinvest the money back into the same company, but under both the TFSA and the RRSP umbrellas, am I making a sensible move or should I leave things as they are? I’m 60 years old and drawing a pension. My spouse won’t retire for another five years and we manage well with our combined incomes for now.
For starters, you don’t have to sell the stock to make the transfers. You can contribute it in kind, assuming you have self-directed plans.
If you move the stock into either plan, it will be deemed a taxable event by the Canada Revenue Agency and you will be taxed on any capital gain. The same will apply if you sell the shares. You should take that into account before you act.
If you decide to proceed, your dividends and capital gains will be fully sheltered in the TFSA. The RRSP will give you a tax deduction when you contribute but you’ll be taxed at your marginal rate when you make any withdrawals, including on the original contribution.
— Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters.
Do you have a question for Globe Investor? Send it our way via this form. Questions and answers will be edited for length.
What’s up in the days ahead
Is it time to sell Canadian Real Estate Investment Trust and lock in profits? Dividend guru John Heinzl will share his advice in Tuesday’s Globe Investor. And David Milstead will put Fairfax Financial in the spotlight. The company has recently gone all in on the Trump-rally by exiting its equity hedges. It may be time for contrarian investors to look elsewhere for an investment.
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Compiled by Gillian Livingston