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. 

6 comments:

  1. Thank you, Kevin.
    I would appreciate your thoughts on US banks.

    I wish you and all the subscribers a great year.

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    1. Hi Dawn,

      I like the US banks and still own BAC and WFC, either commons or warrants. Both have very low cost of funding, a relatively easy business model with little risk of change, and both banks have more capital than ever before in history. I urge you to compare to the Canadian banks and you will realize what I mean.

      Now the easy money has already been made in the banks, and in particular after the Trump election, but like every good company, they are worth holding for the long term. Both banks that I own are among the top holdings of Berkshire Hathaway as well. Why does Buffett own a large portion of both? Because time is the friend of a good business and both banks can earn high returns on capital indefinitely into the future. With changes to US regulations, both banks will also be more in control of returning capital to shareholders.

      The US banks today are radically different than those back in 2008. Keep in mind that this trend has just changed and now everyone loves the US banks. A bigger question to ask yourself is why was I not investing in the US banks back when they were cheap, and obviously cheap.

      I will continue to hold as the bandwagon jumpers are just beginning to climb aboard. Bank share will trend higher for years as momentum and growth investors buy up the shares.

      Thanks,
      Kevin

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  2. Hi Kevin,
    Thank you for sharing your stock recommendations. This is very interesting. Especially after your successful 2016 picks.
    I've looked into them carefully and have some questions.

    - US versus Canadian securities
    Your 2017 picks are all listed on US stock exchanges. Even if there's a canadian counterpart (VWO vs TSE:VEE, NYSE:CCO vs TSE:CCO).
    I'm wondering whether this is deliberate - because you think the USD will keep on being strong relative to CAD - or this is just convenient for you because you have USDs in your account.
    Would you recommend to convert CAD into USD to proceed with those purchases ?
    Would you stick with the canadian security if you had only CAD ?

    - International markets rebound
    When it comes to investing in foreign markets that have been crushed lately (like Russia), did you consider GVAL ? http://www.etf.com/GVAL
    This is Meb Farber's ETF that focuses on global value. It contains countries like Russia, Austria, Brazil, Portugal...
    This might be of interest to you.
    The MER is 0.69%. This is an ETF for contrarian investors i guess.

    Wish you a lot of success - and profit - in 2017.

    Thomas

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    Replies
    1. Hi Thomas,

      Great insights. I am bullish on USD and bearish on CAD, so that is why I would purchase in USD. This year that subtracted slightly from returns but I still believe that the trend of a weaker Canadian dollar will continue. I am extremely bearish on oil. There are some serious headwinds for oil and I believe the shift to electric vehicles will accelerate very quickly in the coming years. The cost of EV are coming down, similar to computers, so once we reach the tipping point, conventional combustion engine autos will decline, along with oil. Regardless, of this secular headwind, shale oil technology will only improve and drive down oil prices. This along with three to four rate hikes buy the US FED in 2017 will definitely put pressure on CAD. The Canadian economy is too weak for the BOC to raise rates. So, I am buying USD and USD listed securities.

      Since you like Meb Faber, whom I also respect, apply a trend following technique to USDCAD and ride the wave until the trend is broken.

      As for GVAL, I would recommend it. I actually was also thinking of recommending EYLD, Faber's emerging market shareholder yield ETF, which is an alternative choice to the Vanguard ETF, but liquidity appears to be low. I prefer low cost and the Vanguard ETF is 0.15%, as low as it gets. Vanguard and Cambria are both fantastic.

      Regards,
      Kevin

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  4. Hi Kevin,

    I just discovered your blog and I think you're doing a great job. Value investing from a Canadian perspective in refreshing.

    What are your thoughts regarding the recent supply contract cancellation with Tepco and Cameco? It appears it will have a large impact on Cameco's revenue in the coming years and the surprise that the company showed from such a large event would have concerned me had I been invested.

    Alex

    ReplyDelete