Trade war tactics and other worries
Five frequent recent queries from investors
One of the things we offer at 5i Research is a question-andanswer service for investors. Our customers can ask us anything. We don’t always know the answer, but so far, we’ve answered more than 77,000 investment and company questions, in less than seven years. Every once in a while, for this column, we highlight some of the most common questions our customers have had, which can give one a good sense about what individual investors are worried about these days. Let’s take a look at five frequent questions we’ve had in the past two weeks.
❚ What’s going on at Crius Energy Trust?
For a relatively small, somewhat boring company, Crius (KWN.UN on TSX) sure causes a lot of investor anxiety. Perhaps investors were attracted to its high 13.5-per-cent yield, or liked its frequent distribution increases (the last one was in January). Regardless, the stock has not done well at all this year, and is now down 31 per cent year-to-date. The stock has had a brutal couple of months, and we have been bombarded with questions on it. There has, in fact, been no negative news, but the company must have been getting tired of inquiries as well. This week it put out a press release announcing there was no material information to report, and the stock rose 12 per cent on Tuesday.
❚ Should I go to cash because of the ongoing trade wars?
Every time President Trump tweets about trade wars, we get a question on the topic from our customers. Many are worried about Canadian manufacturers, and see costs rising, margins falling and stocks suffering. This could indeed happen. We don’t like the ‘escalation’ of the trade war that is currently ongoing. Everyone’s costs tend to go up when tariffs are added. One way to fight this is to buy more small companies. Small companies have less international business, and thus are far less vulnerable to disputes between companies. This is one reason why iShares Russell 2000 Growth is one of our favourite ETFs (IWO on NYSE). It is up 14 per cent this year (more in Canadian dollars) as it invests in smaller companies, leaning toward growth companies over value.
❚ Is Knight Therapeutics ever going to do anything with its cash?
Knight (GUD on TSX) is a $1.2 billion market cap company, with the distinction of holding $766 million in cash. The stock is down 10 per cent over the past year, but at least has had a good July, up 10 per cent this month at the time of writing. Investors have gotten excited about Knight in the past, as it is run by the former management team of Paladin Labs, which was a huge value creator for investors prior to its takeover in 2013 for $3 billion. Investors expected Knight to use its cash hoard to quickly go on an acquisition spree and try to duplicate the success at its prior venture. Alas, while Knight has made a few deals, it has not made the ‘big one,’ and the revenue base remains very small. Impatient investors want something to happen, and we get near-daily questions on this one. Our answer: Be patient. It may still take a while for Knight to spend much of its money, but there is a very solid chance its acquisitions, when it does act, will be very solid.
❚ Will my dividend stocks ever go back up?
The ongoing interest rate hikes in Canada have wreaked havoc on dividend stocks. Stalwarts such as BCE Inc. (BCE on TSX) and Enbridge Inc. (ENB on TSX), are down 7 per cent and 8 per cent, this year, respectively, as investors flee income stocks in search of growth and/or inflation protection in other sectors. Even some consistent dividend increases have not really resulted in big share price gains. But, interest rates are not going to go up forever. When there is a market correction (not if, when) or a recession (again, not if, but when) you are going to be glad you own some of these dividend-payers. Keep an eye on company fundamentals, but in most cases, these are fine. It is also very rare for a company to raise its dividend and then quickly experience financial difficulty. If you are not massively overweight the sector, enjoy the payments, ignore the share price fluctuations, and take comfort in the regular cash flow you receive from these companies.
❚ Should I sell or increase my technology holdings?
It has been nearly impossible to not make money on technology shares over the past few years. And why not? Earnings growth for the sector is very solid (30 per cent this year expected), most companies have tons of cash and no debt, and valuations (with a few outliers such as Amazon) are fairly reasonable. But, whenever investors make lots of money they are always looking for problems, and a reason to sell. This may be human nature, but with the TSX Composite Index at less than four per cent technology and the S&P 500 Index pushing 26 per cent, we would certainly, for Canadians, side with more technology rather than less, The drivers of the sector, such as artificial intelligence, augmented reality and autonomous cars, to name just a few, are not going away. Plus, new technologies are being developed every day. Some of our favourites in Canada are Constellation Software (CSU) and Photon Control (PHO on TSX) and in the U.S., Nvidia (NVDA on Nasdaq) and Square Inc. (SQ on Nasdaq).