Tag Archives: outlook

What Is Your Sell Criteria?

Every stock market cycle has its darlings – the stocks investors believe can do no wrong. I remember 1999 all too well. Microsoft (NASDAQ: MSFT ) and Dell (private since 2013) were two of the stocks that investors fell in love with during that era. However, those investors soon learned that loving a stock could have nasty consequences, because it is difficult to part with something you love. These stocks, and many others, were devastated in the ensuing months and years. The “unattached” owners of these stocks disposed of their holdings as prices dropped or earnings failed to materialize. These disciplined investors had pre-defined criteria to alert them it was time to sell. The stock lovers lacked such discipline and went through various stages of denial, justification, rationalization and other emotions as they watched their beloved stocks sink lower and lower. In the current market cycle, it’s hard to imagine a stock that is more loved than Apple (NASDAQ: AAPL ). Back in 1999, it was despised, and many analysts were not convinced the company would even survive, let alone flourish. Fast forward to 2012, it became the most valuable company in history in terms of market capitalization, surpassing Microsoft’s December 30, 1999, valuation. Yesterday, it was still the largest component of the S&P 500 Index, accounting for 3.17% of the Index. However, Apple’s stock price peaked 14 months ago at $133. On Tuesday, it closed below $105, and yesterday it closed below $98. That is more than 26% drop in 14 months. Apple released its quarterly earnings report, which is the reason for the new downdraft. Earnings fell short of expectations by coming in at $1.90 per share, which was 10 cents below expectations and 18.5% below a year ago. Revenue fell by 13%, marking its first revenue decline in 13 years, and the first ever since the stock achieved “darling” status. Apple also reported that iPhone sales fell for the first time in history. Now might be a good time to ask yourself if you are an investor or lover of Apple stock. It is already in a bear market, so if you haven’t sold it yet, then when will you sell it? You didn’t sell when it dropped 15%, and you didn’t sell when it dropped 25%. What will it take? A 50% drop? A 70% drop? Two quarters of declining revenue? Many people are selling their Apple shares, perhaps because it posted its first revenue decline in 13 years or perhaps because its price dropped below $100. Then again, an equal number of shares are being bought. It’s a high volume day for Apple. I’m not predicting further demise for Apple stock, as this could turn out to be a great buying opportunity. What I’m suggesting is that you objectively consider your criteria for selling Apple or any other stock. Be sure to have an exit plan, preferably before you buy. As expected, the Federal Reserve took no action at the conclusion of its FOMC meeting yesterday. Analysts are parsing the contents of the press release, so you can expect to see some forecast revisions for when the Fed will make its next move. Sectors: Signs of a significant sector rotation are visible again this week. The smokestack group of sectors, discussed here a week ago, are firmly in the leadership role again today. Energy and Materials swapped the top two positions, with Energy now completing its climb from last to first in the span of three weeks. Materials, now in second, has been no lower than fourth place for eight consecutive weeks. The Industrials sector rounds out the trio by maintaining its third-place position. Financials was a big upside mover, jumping from eighth to fourth. Healthcare also climbed four spots higher to grab sixth. These ascents forced the higher yielding sectors lower with Telecom sliding one place to fifth, Real Estate dropping to eighth, and Utilities plunging to tenth. Technology lost momentum, but it was able to hang on to its ninth-place ranking. Consumer Staples is now the weakest sector and sits on the bottom for a second week. Styles: Small-Cap Value assumed the lead, ending Mid-Cap Value’s seven-week stint at the top. Small-Cap Value has been the most volatile of the style categories, bouncing between second and sixth during these past seven weeks. Mid-Cap Value did not fall far, easing just one spot lower to second, while remaining prepared to resume the lead if Small-Cap Value’s volatility returns. Micro-Cap was the big upside mover, climbing three spots to third after being in last place just two weeks ago. Mid-Cap Blend fell four places to seventh, becoming the largest casualty of the relative strength rankings. However, it only gave up two momentum points in the process, while Mega-Cap lost six points and held its decline to a single spot. Large-Cap Growth is on the bottom for a second week. Global: The upper tier of the global rankings remains very steady with Latin America and Canada supplying the one-two punch for nine consecutive weeks. Pacific ex-Japan and Emerging Markets have not been as consistent as the top two, but the third and fourth place duo have held those spots the majority of these nine weeks. The top three are all resource-rich regions, and they are benefiting from strength in the Materials and Energy sectors. Fifth through tenth-place categories are compressed, allowing Japan to jump four places higher without much effort. A week ago, China was above this grouping, but it plunged six places lower and now sits at the bottom. Disclosure: Author has no positions in any of the securities mentioned and no positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) is received from, or on behalf of, any of the companies or ETF sponsors mentioned. – See more at: http://investwithanedge.com/what-is-your-sell-criteria#sthash.AfaA2gBD.dpuf

Loans, Write-Downs And Shares…Oh My!

My family and I recently went to see the musical Wicked . Having already been with my wife when it first opened in 2003, I was thrilled to relive the awesome and spine-tingling performance with my kids. The creative genius of Wicked is its backstory – the plot that no one hears throughout the Wonderful Wizard of Oz . Turns out, the wizard isn’t really all that wonderful, and the witch isn’t so wicked after all. This got me thinking about parallels to the world of finance and how things aren’t always as they seem. We all know that the S&P/TSX Composite Index is heavily skewed toward the financials (37%), energy (20%) and materials (12%) sectors, but attitudes towards these industries have become rather split lately. In the past few years, financials have been all aglow thanks to consistently improving quarterly results, whereas the resource sectors have been a source of pain amid lower earnings, dividend cuts and write-downs. While faith in the financial sector may be justified, investors might not realize just how dependent the Canadian stock market has become on its earnings and dividends. According to data compiled by Bloomberg, while financials make up more than a third of the market cap, the sector accounts for more than 50% of the earnings and slightly less than half of the dividends paid on the S&P/TSX Composite Index. Click to enlarge Something wicked this way comes? Outsized dependencies are rarely a good thing in investment portfolios. For example, in the late 1990’s investors became overly dependent on technology companies trading at ever higher multiples, and then found themselves in a post-financial-crisis love affair with emerging markets. In both of these cases, investors paid too little attention to the backstory: technology had become more than a third of the S&P 500 and paid no earnings, and emerging markets had become reliant on leverage and an ever-expanding China. Investors also became overly dependent on U.S. financials a decade ago when the sector contributed more than 50% of the S&P 500’s earnings and dividends in 2006 only to fall off a cliff when the financial crisis hit two years later. The financial sector also grew to almost a quarter of the listed market in 2006, well above today’s level of 17% (still high but just not as high). Does this mean Canadian financials are due for some sort of rude awakening? Not necessarily. It depends on whether Canadian banks will report more bad loans and will have to incur larger write-downs than are currently reflected in loan loss provisioning or the share price. Intuitively, the nearly 70% decline in oil prices over the past two years and the broadening difficulties in the Canadian energy patch would imply a greater risk of loan defaults. Moreover, banks could see declining revenue growth and weaker revenues as the indirect consequences of low oil prices work through the extensive supply chain. But for now, these worries are the backstory. Canadian share prices are following the lead story: The banks’ exposures are manageable, the banks are prepared, and they continue to stress-test their loan book. Importantly, investors should know what their exposures are. Right now, investors in Canadian stocks are highly dependent on earnings and dividends from the big banks. If Canadian financials were to dip, investors could be in for a rude awakening. With any luck, the energy and materials stocks won’t seem as wicked if the rise in commodity prices in recent weeks supports upward earnings revisions in the next few quarters. The best outcome for reducing dependency on the financials is growing earnings from other sectors, not falling earnings from the banks. What can Canadian investors do to help reduce dependencies and limit outsized domestic exposures to the financial, energy and materials sectors? I would recommend considering allocations to two sectors that are underrepresented in the Canadian equity markets, such as global healthcare and technology, where there has been better dividend growth and stronger secular growth trends. Source: Bloomberg. This post originally appeared on the BlackRock Blog

Loans And Write-Downs And Shares… Oh My!

My family and I recently went to see the musical Wicked . Having already been with my wife when it first opened in 2003, I was thrilled to relive the awesome and spine-tingling performance with my kids. The creative genius of Wicked is its backstory – the plot that no one hears throughout the Wonderful Wizard of Oz . Turns out, the wizard isn’t really all that wonderful, and the witch isn’t so wicked after all. This got me thinking about parallels to the world of finance and how things aren’t always as they seem. We all know that the S&P/TSX Composite Index is heavily skewed toward the financials (37%), energy (20%) and materials (12%) sectors, but attitudes towards these industries have become rather split lately. In the past few years, financials have been all aglow thanks to consistently improving quarterly results, whereas the resource sectors have been a source of pain amid lower earnings, dividend cuts and write-downs. While faith in the financial sector may be justified, investors might not realize just how dependent the Canadian stock market has become on its earnings and dividends. According to data compiled by Bloomberg, while financials make up more than a third of the market cap, the sector accounts for more than 50% of the earnings and slightly less than half of the dividends paid on the S&P/TSX Composite Index. Click to enlarge Something wicked this way comes? Outsized dependencies are rarely a good thing in investment portfolios. For example, in the late 1990’s investors became overly dependent on technology companies trading at ever higher multiples, and then found themselves in a post-financial-crisis love affair with emerging markets. In both of these cases, investors paid too little attention to the backstory: technology had become more than a third of the S&P 500 and paid no earnings, and emerging markets had become reliant on leverage and an ever-expanding China. Investors also became overly dependent on U.S. financials a decade ago when the sector contributed more than 50% of the S&P 500’s earnings and dividends in 2006 only to fall off a cliff when the financial crisis hit two years later. The financial sector also grew to almost a quarter of the listed market in 2006, well above today’s level of 17% (still high but just not as high). Does this mean Canadian financials are due for some sort of rude awakening? Not necessarily. It depends on whether Canadian banks will report more bad loans and will have to incur larger write-downs than are currently reflected in loan loss provisioning or the share price. Intuitively, the nearly 70% decline in oil prices over the past two years and the broadening difficulties in the Canadian energy patch would imply a greater risk of loan defaults. Moreover, banks could see declining revenue growth and weaker revenues as the indirect consequences of low oil prices work through the extensive supply chain. But for now, these worries are the backstory. Canadian share prices are following the lead story: The banks’ exposures are manageable, the banks are prepared, and they continue to stress-test their loan book. Importantly, investors should know what their exposures are. Right now, investors in Canadian stocks are highly dependent on earnings and dividends from the big banks. If Canadian financials were to dip, investors could be in for a rude awakening. With any luck, the energy and materials stocks won’t seem as wicked if the rise in commodity prices in recent weeks supports upward earnings revisions in the next few quarters. The best outcome for reducing dependency on the financials is growing earnings from other sectors, not falling earnings from the banks. What can Canadian investors do to help reduce dependencies and limit outsized domestic exposures to the financial, energy and materials sectors? I would recommend considering allocations to two sectors that are underrepresented in the Canadian equity markets, such as global healthcare and technology, where there has been better dividend growth and stronger secular growth trends. Source: Bloomberg. This post originally appeared on the BlackRock Blog