Jul 252019
 

The Canadian federal election is coming up soon. And after that the U.S. presidential race will be in full swing for the 2020 election. Will the incumbent Donald Trump stay for another 4 years? It’s hard to make that call at this point. But perhaps there are some investment opportunities we can look at in the meantime.

Unfortunately the financial market as a whole isn’t particularly attractive right now. The S&P 500 currently has an Earnings Yield (EY) of just 4.45%. So if we put money in a stock market index fund today, we will likely receive an annual return of 4.45% based on corporate earnings, and assuming all other factors stay the same. This is noticeably lower than the long term average EY of 7.35%. Although 4.45% isn’t the worst return you can get, after paying maybe 1% of that in tax, and losing another 2% to inflation, the net real return on investment would be less than 1.5%.

That’s why I’ve decided to be more selective about which assets to buy. One thing you can always count on during an election is uncertainty. The market hates that word. One whiff of uncertainty and investors leave the stock market faster than a guy after hearing the results of the pregnancy test. This upcoming election comes at a time when the U.S. economy is slowing due to record amounts of debt weighing it down. According to the New York Fed, household debt increased for 19 quarters in a row, and is now nearly $1 trillion above the previous peak. Student loans have doubled since 2006 as a percentage of GDP. This will most likely lead to interest rate cuts in the United States to help bolster the economy. And my assumption is that the Bank of Canada will take similar action soon after, as it often did in the past. Lower interest rates usually boosts the stock market and commodity prices.

So for the next 6 to 18 months, I think the best asset classes to be in are bonds, prime real estate, and precious metals. Long term bond funds are highly sensitive to interest rate changes. But as long as we’re quite confident that rates aren’t moving up, then bond funds should provide a low risk option to earn some interest income, with the added potential for capital gains if the price of borrowing become cheaper.

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Feb 192018
 

A few years ago I bought 50 shares of Avigilon Corp (TSE:AVO) at a price of $25 per share. Avigilon is a surveillance and security company based in Vancouver. The idea for the trade was to ride the momentum up and then sell it for a profit. Soon after however, instead of continuing to climb, the stock price dropped. 🙁 “Oh no”, I thought. But rather than admitting defeat and selling my shares at a loss I decided to buy even more at $14 per share. 😮 This is a fairly risky move. I would only double down on a stock if I was really confident about its long term profitability. Doing this averaged down my cost per share.

Because I bought 100 more AVO shares when it was cheaper, my average cost dropped from $25 to $18 per share on 150 shares total.

Well this swing trade had gone on for long enough. I recently decided to get out of this trade and take my profit. 🙂

Overall this has been a successful trade. My cost was about $2,600 including fees and interest charges. I used a small amount of margin to leverage my gains. I was able to sell all 150 shares last week at roughly $27 each with a total proceeds of $4,026.

That’s a decent 55% return on investment over the past 3.5 years, or annalized to 13% per year. 😀 Not too shabby, considering the broad market TSX composite index returned 2% per year over the same time.

Earlier this month AVO announced that it has a definitive agreement to be acquired by Motorola Solutions Inc. The takeover would value the company at $27 per share. This represents a generous premium for AVO and the stock price rose 17% immediately following the news. There doesn’t appear to be another company interested in making a better offer. This is probably the best price I’m ever going to get for this trade, which prompted my decision to sell last week. 🙂

AVO doesn’t pay a dividend so now I can use the cash proceeds from selling the stock to either pay down debt, or invest in some dividend stocks to buy and hold. I haven’t decided what I’ll do with the extra money yet.

 

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Random Useless Fact:

In a study by Psychology Today, about 80% of people who have received mental health treatment say it was effective for them.

Nov 292017
 

According to businessman and author Seymour Schulich, investors should ask themselves 5 questions when screening a potential deal. 🙂 Here’s an excerpt from his book, “Get Smarter.”

  1. How much can I make?
  2. How much can I lose?
  3. How do I get my money back?
  4. Who says this deal is any good?
  5. Who else is in the deal?

I think these are good points to remember and I certainly use them before I make any financial decisions.

Normally we want a large margin of safety between how much we can make (upside) and how much we could lose (downside.) If the odds are not at least 75% in our favour then it is better to look elsewhere. To increase our chance of success we must know how to accurately assess the odds, and have the discipline and patience to act only when the odds are heavily in our favour. If our analysis are accurate then we can be certain this strategy will work due to the law of large numbers theory.

How we get our money back should be considered before making any deal. There are two parts to this: liquidity, and exit strategy. A rental property is not very liquid, but a publicly traded REIT that holds rental properties usually is. As for exit strategy, we need to come up with a systematic plan to sell the investment and commit to it. This prevents us from trading on emotions. One stock I bought this year is Royal Bank (RY.TO.) It has a growing dividend year after year, and trades at a decent valuation with a P/E ratio of 13.6. I plan to exit my position in this stock either when I retire, or if RY cuts its dividend by more than 35%. Those are my only conditions. So if there’s market correction and the stock price falls 50% I will continue to hold it. This way, I don’t sell prematurely and miss out on future gains.

I look at reports and opinions by stock analysts to determine if other people think the investment has potential. One good source for this is stockchase.com. It curates professional opinions about any company on the market. Here’s a blurb for RY.

As for who else is in the deal, I look at how many institutional investors are holding the investment. These are large pension funds and endowment funds that have to scrutinize all possible aspects of a security before buying it. According to Google Finance, Royal Bank has 53% institutional investor ownership. That’s pretty high so I am more confident that RY is a good long term investment.

There are tons of potential assets we can buy. But by asking ourselves these five questions we can screen our options and narrow down our options which makes the process a lot easier. 🙂

 

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Random Useless Fact

The world’s largest broccoli are grown in the United States.

Jun 222017
 

The Largest Name in Retail Continues to Grow

Amazon.com (AMZN) recently announced it’s taking over the trendy supermarket chain, Whole Foods. At the beginning of this year I wrote an article which included a prediction that this would happen. Maybe Amazon’s CEO Jeff Bezos got the idea from reading my blog. 🙂

Whole Foods sells healthy, organic products. Most items in the stores can be expensive, but  if you want to grab a quick and healthy lunch, you can buy half a pizza for $7 CAD, which isn’t bad. I remember my first time visiting Whole Foods. I didn’t really know what it was so I had no idea what’s in store. 😉 But after going in I quickly understood why the retailer attracts so many yuppies and hipsters like myself. Shopping there is an experience. 😀

This acquisition is a very good deal for both companies. Whole Foods Market Inc has been suffering from declining same-store sales year after year. Whole Foods stock (WFM) peaked in 2013 and has been falling every year since. 🙁 So it needs a larger company to help turn things around. Amazon has already been experimenting with grocery stores since last year with its Amazon Go project. The idea is consumers can walk into a store, buy the food they want, and leave without lining up or checking out. The in-store scanners do everything automatically so people can just walk out of the store and get charged the correct amount. It’s a really neat concept, but the service is only in the U.S. for now. By merging with a grocery chain, Amazon can expand its grocery business, and can also transform unused Whole Foods real estate into Amazon warehouses. 🙂

Whole Foods stock is up about 25% in the last 5 trading days and now sits at $43. Amazon stock is now at $1,002 per share. I like shopping with both retailers, and I look forward to see how they collaborate.

Disclaimer: I own 10 shares of AMZN, and no shares of WFM.

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Random Useless Fact:

 

May 082017
 

How to Invest in U.S. Infrastructure 

Donald Trump’s policies focus on building infrastructure and prioritizing America first. With the U.S. economy growing stronger than Canada’s, I believe this is a good time to look south of the border for opportunities. Thanks to the Trump rally, the S&P 500 market index in the U.S. is up about 7% year to date. It appears the market could reach even higher by the end of the year. 🙂

One way to invest in a country’s growing infrastructure is to buy ownership in stable, and profitable cement and construction companies! But the concrete business isn’t always what it’s cracked up to be. 😄 There is a lot of competition in this space so it’s important to invest smartly. I have done research into several companies such as Martin Marietta Materials (MLM), Vulcan Materials (VMC), and others. But the company I liked most was Summit Materials Inc (NYSE:SUM)

Summit Materials is in the business of cement and small rocks called aggregates used to make roads and buildings. In addition to supplying aggregates to its customers, the company also uses its materials internally to produce ready-mix concrete and asphalt paving mix production. I like the widespread geography that Summit is operating in. It conducts business in over 20 states, including Texas, which borders Mexico. I’m looking forward to that wall being built. 🙂

I guess you can say this company rocks. 😄 Valuation wise SUM is slightly expensive, but is actually fairly valued when compared to its competitors in the market. Over the last year the company earned $0.88 per share. According to analysts, the company is expected to grow its earnings at 10.5% a year over the long run. We can use the Graham Formula which I’ve explained here, to determine the fair market value of this stock.

Doing so will give us a Graham value of $25.96 per share. (V = 0.88 x (8.5 + 2 * 10.5)

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