Monday, January 2, 2017

Top Investments for 2017

2016 Year in Review

2016 was a continuation of the bull market that is now the second longest on record.  If it continues into March of this year it will be the longest bull market ever.  Buyer beware. 

2016 Market Returns



 
Market returns were strong, with the technology heavy Nasdaq up by the smallest amount.  The TSX had a strong year as commodities roared back from two year lows.  Agricultural commodities were still weak in 2016.

Owning US Dollars (USD) assets was a small detractor for Canadian investors.  That said, I am still a USD bull, so no need to hedge the currency yet.  In currencies, remember the trend is your friend, and the stronger USD and weaker Canadian Dollar (CAD) trend is still intact.  There is almost no argument for a stronger Canadian dollar unless oil prices rise significantly.


2016 Stock Recommendations


So how did the stock recommendations for 2016 turn out?  Total returns include dividends and I also included what the total returns were in Canadian Dollars.  This year, the five stocks picks hit it out of the park with an average gain of 59%, or 57% in CAD. 
 












EZPW had a huge year, more than doubling.  That result wasn't really surprising given how cheap it was.  PKX, PEY, and RUS all came back to life with the recovery in the energy markets.  IBM is still a solid pick that constantly churns out cash.  RUS was so cheap last year it was like shooting fish in a barrel. 

So how has the growth of $1000 been since I have been doing these annual predictions?  Overall they are up at a 19.1% compounded annual growth rate (CAGR) for the past six years, or close to doubling every 3 years.  Relative to the market averages, that return is more than double the S&P 500 in USD, or almost 5 times the Toronto Stock Exchange (TSX) over that period. 

 

The results have been lump but I will gladly take a lumpy 20% CAGR over a steady 10% CAGR.  Linear investment returns are not for this value investor. 

Top Investments for 2017

Hold some Cash

IBM (NYSE – IBM, $165.99)

Ezcorp (NASDAQ - EZPW, $10.65)

Vanguard Emerging Markets Stock Index ETF (NYSEARCA - VWO, $35.78)

Cameco Corp (NYSE - CCJ, $10.47)

Global X Uranium Fund (NYSEARCA - URA, $12.87)


As I said last year, I would be back to comment if the markets tank.  They didn't tank and rallied hard after the Trump election victory.  Everyone is talking about huge economic growth coming from the new policies, which I believe will be beneficial, but will take time to work. 

I definitely am not a bull this year.  I cannot find many companies that are cheap, so that is why I recommend cash.  As already mentioned the US markets are now into the second longest bull market of all time.  For myself, I have been a net seller during the past year.  I have a lot of cash and will only hold long term high quality companies that continue to compound and grow capital at a high rate.  If now isn't the time to raise cash, when is?  Valuations are too high for this value investor.  I will gladly sit in cash and be patient if I have to.  I can be stubborn for years.  My methods work and I have crushed the markets over the past decade.  The most important thing is to understand what you are doing and hold true to those principles.  Most people have no idea what they at doing. 

Looking at the list for this year, IBM and Ezcorp are carry overs from last year.  Both are still cheap.  I added some new ideas that are statically cheap but difficult areas to pick stocks. 

The first is emerging markets which have been struggling for the past several years due to the fallout of commodity prices.  It is a great area to look for value as emerging markets have been left for dead and are selling for cyclically adjusted price to earnings ratios that indicate value.  Russian stocks were up big in 2016 and yet only sell for 6 times earnings.  Don't look for individual names, but a buy solid low cost index ETF like the one from Vanguard... and hold it for a couple years.

Last but not least... Uranium.  As a value investor I have to go where the value can be found and Uranium stocks are down 75% over the past 5 years and are down 90% since 2010. 

Cameco is a very solid Canadian company who owns some of the best uranium assets in the world.  They have a very strong management team and a lot of depth in the company.  A few classmates in my MBA program were from Cameco.  Investors shouldn't be overly worried about the lawsuit with the Canada Revenue Agency (CRA), the company did nothing illegal and could set up the same transfer agreement today.  The problem is in hindsight, it looks like it was set up to avoid taxes, and that is why the government is looking for part of the gains.  Overall, Cameco is cheap selling for book value.  I guarantee you that if you wanted to replicate their assets you couldn't if you tried.  And why would you?  You can buy them at today at cost in the market... and this after rising 40% in the past two months. 

Global X Uranium Fund holds a basket of uranium stocks.  It is also poised to do very well if uranium rebounds.  Cameco also happens to be the top holding in the fund.  Buy this basket if you want diversification. 

Well 2016 turned out to be a huge year for returns, and I certainly didn't expect it.  I definitely do not expect 2017 to be a repeat of 2016 but you never know.  Both Canadian and US stock markets are selling at very high valuation levels so buyer beware. 

Cheers to another great year!


Best Regards,

Kevin


Disclosure – I own IBM, EZPW, & PEY.