FIVE SIGNS INVESTOR FATIGUE MAY BE SETTING IN
Don’t get us wrong, we here at 5i Research are generally bullish on the market. Corporate earnings are solid, interest rates are low, and the economy seems to be getting back on track. But, that being said, we might welcome a bit of a market setback, as investors seem to have forgotten that markets can go down, as well as up.
With large embedded gains, investors might be quick to take some profits at the first hint of trouble. If this resulted in a quick decline in the market, we think (because as mentioned, fundamentals look good) that might create a solid buying opportunity.
Recently, we have noticed a few things that might indicate investors are indeed getting a little antsy, at least in Canada. Let’s take a look at five possible signs of investor fatigue with the current rally.
TOO MUCH WORRY ON DIVIDENDS
Everyday, we get questions along the lines of “is this company’s dividend sustainable?” The most recent cause for worry was Altagas (ALA on TSX). Its recent acquisition of WGL Holdings looks good, and its dividend payout ratio is below 50 per cent. But its yield is 7 per cent, indicating perhaps investors are indeed worried. No matter that it has consistently paid (and grown) dividends for the past 10 years at least, right through the financial crisis. Now, no dividend is guaranteed, but we can think of other things to worry about than ALA’s dividend.
TOO MUCH FOCUS ON QUARTERLY EARNINGS
This is not necessarily a new trend, but investors these days seem to be watching quarterly earnings reports very, very closely. Of course, we do not think any investment should be made just for one quarter, so we would rather look at longterm trends. In addition, as Amazon (AMZN, NASDAQ) has proven time and time again, sometimes you have to spend money and impair quarterly earnings in order to achieve better longer-term success.
ENTIRE SECTORS BEING WRITTEN OFF FOR DEAD
Be it retailing or energy, investors have left a few sectors dead at the side of the road. It does not matter if Best Buy (BBY on NYSE) reports stellar results: if you are a bricks-and-mortar retailer, investors view you as a dinosaur. Many expect Sears to restructure, and if not that — at best — your retailing stock gets a very low valuation multiple. The same with energy. Energy-sector investors are basically despondent: we get questions every day along the lines of, “Why do I need any energy exposure at all?” A contrarian might view this as bullish, of course, but when investors ignore entire sectors they might one day decide to ignore the entire market for a while.
THE MARIJUANA STOCK BUBBLE HAS POPPED
Between unreasonable valuations and self-dealing from brokers involved with company financings, the pot greed show continues, but the party may be over. This week, a marijuana IPO gave Canada its worst IPO debut in 16 years. MedReleaf
We do not think any investment should be made just for one quarter, so we would rather look at longterm trends.
Corp. (LEAF on TSX) went public at $9.50 and closed its first day of trading at $7.40. Horizons Medical Marijuana ETF (HMMJ on TSX) has fallen from $12.40 in early April to $8.40 at the time of writing. Sometimes, a reality check in one sector can bring out sellers in all sectors.
RUMOURS BEATING FUNDAMENTALS
Element Financial (EFN on TSX) fell nearly 50 per cent in one day recently, on a rumour — yes, a rumour — that it was about to be the target of a short sell attack. When contacted, the purported seller said, “we have never even heard of Element.” But the stock has still not fully recovered. When investors get so nervous that they hit the sell button on a solid company, even when there is no fundamental news, that can sometimes be a sign that the market might pause — at best.
For long-term investors, conditions are good for equities. Shortterm traders and ‘greedy’ types, however, might want to exercise a little market caution over the summer, though, in our view.