Posted by Frances Horodelski on September 30, 2009

The third quarter officially ends for most companies today. But the real story of that period will begin next week when Alcoa kicks off earnings season.  Over the next five weeks, according to Credit Suisse, 77% of the companies in the S&P 500 will be reporting results with the heaviest days being October 22nd and October 29th when 45 companies report on each of those days.

Profit expectations for the third quarter are now running at a decline of about 25%, according to Thomson Reuters. This compares with the second quarter when profits for S&P 500 companies were down a little more than 27%.  The sectors where analysts are looking for the best earnings improvement include financials, up 60% from last year, followed by consumer discretionary with a more moderate, but still attractive, 18% gain.

The worst performers are expected to be materials and energy where earnings are looking to collapse some 70% and 65%, respectively, off of huge levels of profitability last year.

Some further interesting things to remember when earnings season begins:  analysts have been modestly revising upwards their expectations over much of the third quarter after companies handily beat their views in the second.  While upward revisions eased a little in September, they were still positive (i.e. more analysts were increasing estimates than they were cutting them).

The second thing to keep in mind is how stocks have been performing into reporting season.  With the U.S. indices up about 15% for the quarter, a lot of good news has been built into valuations.  It is important to look at each company and place the earnings expectations (and whether they have risen or fallen) in the context of what the stock has done.  For example, IBM said in early September that it is "well ahead of pace" for meeting its 2010 EPS goal.  The stock is up about 13% for the quarter – in line with the market and it's currently valued at about 11 times expected 2010 earnings versus 14 times for the market.  

On the other hand, names such as Valero and Sunoco, both refining companies, have told investors that their earnings would be lower than previously anticipated.  Despite this, shares of these two companies are higher by 16% and 23%, respectively, since the end of June.  In this case, bad news has been good for the stock.  Will it continue?   Earnings season provides a lot of surprises, both up and down.  The games begin October 7th with Alcoa.

For more on this topic watch the latest edition of Stock $ense.

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Posted by Frances Horodelski on September 28, 2009

Sometimes the best investments are found in the dustbin of sector performance.  The sectors and stocks that have lagged can emerge as the new leaders.  Indeed, it has happened this year. Sector performance for the first five months of 2009 saw the information technology, energy and financials sectors leading the way.  The losing groups included utilities (-8.4%), telecom (-5.5%) and healthcare (-4.6%).

A few short months later, at the end of September, leaders continue to be in technology and financials. But healthcare, previously the third worst performing sector, became the third best performer. The S&P/TSX healthcare sector is now up almost 30% on a year-to-date basis versus the negative performance noted above.

Could a reversal be available in telecom which remains in the cellar in terms of year-to-date performance (-6.6%)?  

The negative story on telecom companies includes the worries that competition in wireless will get tougher with the potential for a more open landscape as Globalive Wireless fights for its licence from the CRTC.  Even without this competitor, the fight between Rogers, BCE and Telus remains intense with margins potentially suffering across the group. But this isn’t a new story and some of these risks may already be reflected in current valuation.

Right now, the S&P/TSX telecom sector has one of its lowest price/earnings multiples in years (11.6 times 2009's estimated profits).  This compares to the S&P/TSX composite which is presently trading at an estimated 18 times 2009's estimated earnings and less than 16 times 2010's forecast.  

On a dividend yield basis, the average yield for the sector is 5.9% (excluding Bell Aliant’s 10.6% yield but including Rogers Communications 3.9% yield) while the TSX yields about half that at 3%.  These are simple valuation measures but are a good starting point for uncovering value.  It’s time to do your homework and look for opportunities in a sector where the laggards could be the next leaders.

For more on this topic watch today's edition of Stock $ense.

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Posted by Andrew Bell on September 18, 2009

Imax (IMAX-Q) shares dipped 6% to $8.91 US today after an analyst warned of a menace to its strategy of rolling out screens that are much smaller than the traditional multi-story format.

Merriman Curhan Ford analyst Eric Wold reduced his rating to Neutral from Buy, warning of a growing competitive threat from the "Cinemark XD" theatres, a new large screen digital format being rolled out by movie-theatre giant Cinemark Inc. ( CNK-N )

"Cinemark XD will allow the company to penetrate the large-format segment," Wold cautions. "We believe this could impact IMAX box office results."

He’s also concerned about valuation, noting that Imax stock has doubled since he called it his top pick for 2009 in January.
 
Imax’s new smaller screen size has drawn controversy. James Hyder, editor and publisher of LF Examiner, a large-format cinema magazine, said earler this year that moviegoers "see the IMAX name on the theater and have no idea until after their ticket has been torn and they walk into the auditorium that that [sic] screen is about the same size as the one in the adjacent 35mm auditorium… People who have been to a true giant-screen theater will realize they have been misled, and will be disappointed, if not angry." You can see his comments here.

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Posted by Niall McGee on September 17, 2009

Don’t buy it. That’s the advice of Bradley Kay, ETF analyst with Morningstar for investors who are thinking of buying shares in the U.S. Natural Gas Fund (UNG-N). Watch Niall's video report -- ETF Update, 11:30 a.m. ET.

That’s despite the fact that this fund is very big and very liquid. Kay says Contango is punishing returns. Contango exists when futures trade at a premium to the spot price. That premium is currently around 10%. 

This fund gets most of its exposure to the natural gas market by buying near term natural gas futures. So, for example, when this fund sells its September futures and buys October futures it is doing so at a loss of 10%.

After months of Contango in the natural gas market, those losses add up, Kay says. This year, the natural gas fund is down 50% while spot natural gas is down only 42%. 

Kay also says the NYMEX is now limiting how many futures it issues to the U.S. Natural Gas Fund on a monthly basis because the exchange is concerned about being overexposed to the fund.

Kay says the fund is increasingly getting its exposure to natural gas by buying swaps from investment banks instead of futures contracts. The fund currently has $3.5B US in assets, $2.7B exposure through futures and $800M through swaps.  For investors in the fund, this introduces an extra layer of counterparty risk.  If any of these investment banks runs into trouble the swaps they issue could lose value.  It also adds an extra expense as buying swaps is costlier than buying futures.

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Posted by Frances Horodelski on September 14, 2009

Nine months ago, I wrote a blog for BNN.CA that focused on the disparity that was developing within diversified portfolios between equity and fixed income asset allocation.  Because of the huge out-performance of bonds versus stocks over the previous year (a position that was aggravated further over the following few months into the March 2009 lows), I suggested that portfolios were probably increasingly inefficient relative to targeted asset weightings and an investors' investment policy statement.

At the time, I suggested that it would be a good time to review one’s asset allocation with a view to rebalance toward the underperforming asset class – in that case, equities.

After a huge rally in stocks versus bonds since early March, it may be time again to review one’s asset allocation.

Portfolios aren’t static entities.  They are meant to be managed within the context of a well thought out investment plan.  With a 50% move in stocks and something considerably less than that in bonds (Canadian government bonds are actually down 2-3% since March while the XCB, an ETF that tracks Canadian corporate bonds is up a modest 9%), many investors may find their portfolios now overweight stocks as compared to their target allocations.

As a simple example, a $100,000 portfolio that was 50% stocks and 50% bonds at the market lows in March, would now be closer to 60% stocks and 40% bonds today.  To move back to target, 10% of the total portfolio would have to be shifted out of equities and back into bonds.

While this is important on an individual investor basis to ensure that his/her portfolio remains consistent with the long-term investment plan, the disproportionate rise in equities versus bonds over the past six months is likely having a similar impact on larger pools of capital managed by pension and other institutional investors.  Watch out for the inevitable "asset allocation" discussions that could materialize as we move both into the ends of the third quarter and the calendar year.

For more on this topic watch today's edition of Stock $ense.

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Posted by Michael Kane on September 14, 2009

I loved that little program.

In 2001, when I first arrived at BNN (then known as ROBTv) I sat in the main studio, watching in awe as Janis Mackey Frayer hosted Lunch Money. She had had some television experience before, but I believe this was her first business program. I was amazed at the way the words flowed. That first day, I think she spoke for seven or eight minutes before I realized there was nothing written in the Teleprompter. I watched Janis again this morning, still with that easy flow and descriptive phrasing, reporting for CTV from Afghanistan.

Lunch Money was the little half-hour show used to build a bridge between the morning programming and the enormously popular Market Call. It had to get by with few resources and no budget.

And what characterized its programming may have been something almost too subtle to detect: flow.

Right at the top were the headlines… short, sharp and frequently quirky.

The construction of the program itself was a labour of love for Alicia Harvey, my producer. And she was very good at it.

Due to the need for me to exit the studio at the end of the 8:00 to 9:00 a.m. show and be at the far end of the BNN newsroom for a report on CTV just a couple of minutes later, Alicia would jump from behind her desk near the studio door and walk with me, floating ideas the whole time. Within one minute, we would be at the back of the newsroom near the CTV camera… and she would have the show all planned out.

And it would flow.

The stories and special reports would take us on an easy little ride through the most important business themes of the day. And by the time we arrived at the end, you would feel as though you had learned something.

That was evident from the emails we received. While there was the occasional rant, most notes were thoughtful, sensitive descriptions of what was going on in the minds of people in Business News Nation.

One show that Alicia and I are both very proud of came together just as the depth of the crisis in the automotive industry was becoming apparent. General Motors Chief Financial Officer Ray Young sat with me for the whole half-hour, helping us to understand how executive decisions were being made and giving us treasured insight into one of the world’s most important industries.

And there was that moment when I realized what we had in common: we were boys from small-town Ontario -- Ray from Port Elgin and me from Fergus -- and now his office is on one of the upper floors of General Motors headquarters in Detroit, and I’m on several television networks.

It was, uh, exciting to have programming like that. The pictures may fly magically through the air, but as a show, Lunch Money… and the process used to create it… was tangible.

And that will be missed.

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Posted by Frances Horodelski on September 4, 2009

Leo Grohowski, as Bank of New York Mellon's chief investment officer, is responsible for $142 billion US in assets.

When he speaks, I listen.  

During our conversation on BNN this week, he advised that he was rejigging portfolios "back to target." Better advice couldn’t be given! (Click HERE to watch the interview).

What does he mean?  Well, first, it suggests that he has a plan for managing portfolios. Most of us just buy a bunch of things independent of one another, hoping that we’ll make some money along the way. The most savvy investors think about things like asset allocation. And then, within each asset class, the portfolios are balanced among different sectors and then stocks or bonds or other securities.  The second thing it says is that he acts on his planning, reviewing and rebalancing back to his recommended allocation.

Earlier in the year, I discussed the importance of balancing back to some strategic weighting for assets. In that way, given the severe underperformance of stocks relative to bonds, an investors could get back into the stock market without specifically worrying about timing or valuation.  Indeed, government bonds have been a relatively poor performing class and stocks soared.  It may be time to again review your asset weighting.

But additionally, each investors should take a look at the sector weightings and, within sectors, the weightings for each security to ensure that any one area of your portfolio is neither under-represented over overweighted. Rebalancing back to target can again be the simplest way to sell high and buy low.

Let’s look at an example.  Since the March lows, the S&P/TSX financial index is up more than 120 percent while consumer staples and telecoms are up a more modest 25 percent and 31 percent, respectively.  If, for the sake of argument, these were the only sectors you owned, almost half (47 percent) of your portfolio would now be concentrated in financials versus a beginning allocation of 33 percent. Consumer staples and telecom would be about 25 percent each. This might be the time to trim financials and reallocate the proceeds to the lagging staples and telecom sectors. 

On a stock specific basis, a reweighting opportunity could be found in reducing positions in Royal Bank, which has doubled since the March lows, and moving proceeds into Rogers (+17 percent) or Weston (down 5.5 percent).  These aren’t specific recommendation but give a flavour of the kinds of portfolio adjustments that might make sense right now.

If it’s good for $142 billion in assets, rebalancing to targets looks like a good strategy for me – and maybe you too.

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