We’re going to cover our final set of portfolio reviews in this e-mail, our Late Stage Portfolios.
Before we do, we have a removal from our Dividend Bull List we’d like to go over, along with some general thoughts on the market and what they call the “September effect” which is likely causing some negative pressure overall.
Power Corporation (POW) removed from the Bull List
We’ve decided to finally remove Power Corp (TSE:POW) from the Bull List after an impressive run up in price.
For quite some time, the company was trading at a steep discount to NAV and is still one of the best asset managers in the country.
However, if you’ve been a Stocktrades Premium member for a while now, you do know we like to keep our Bull Lists short, and the value gap for POW has certainly narrowed compared to when we first added it.
With one year returns in excess of 71%, it’s simply been an outstanding performer. As always, we do not suggest selling a stock once it has been removed from our Bull Lists. In fact, POW is a great long term income option for Canadians.
Current market & the September effect
There are many anomalies in the stock market today, one of them being the “September effect”. September is generally thought of as a month in which the stock market declines, no matter what the environment.
Surprisingly, there is data spanning over 70 years that backs this up. Since 1950, the Dow has lost on average 0.8% in September and both the S&P 500 and the NASDAQ have lost on average 0.5%.
In the new age of investing, investors are often obsessed with checking their portfolios multiple times a day. Throughout the start of September, they’ve been somewhat disappointed as every major North American index has declined.
The Dow Jones is down over 2%, The TSX just shy of 1%, the NASDAQ 1.73%, and the S&P 500 2.01%.
When we look to the average losses of the markets in September, it’s easy to see we are facing much larger volatility than we’ve seen on average throughout the month.
It is also important to note that we are in a situation where the markets have been on a torrent run in 2021. Given this, as the markets touch all time highs and companies continue to increase in value, we’re bound to have increased volatility during sell-offs.
What causes the September effect? No one really knows, but it’s likely a combination of things. For one, some of these situations tend to be self fulfilling, much like a lot of technical indicators on stock charts. What we mean by that is if everyone is predicting a sell-off in September, they’re naturally going to start selling off in August or early September to avoid it.
The most important thing to take away from this is situations like “Sell in May and go away” or the “September effect” should have absolutely no impact on long term investors.
Yes there is a good chance, backed by over 70 years of data, that the markets will dip in September. However, the value of the underlying businesses you hold has not changed, and short term movements like this should neither be worried about, or acted upon.
Will we see a correction? There is the potential for one, but overall it should be welcomed, not feared. After all, the S&P 500 is now exceeding 210 days without a 5% correction.
Would we avoid buying stocks at this time because of this? Absolutely not. You’ll end up losing more money attempting to time the market than you would just buying and holding strong companies.
Late Stage Portfolio Overview
Our last set of portfolio overviews is complete, and all of them are available on the website here. Remember, you can download the portfolio overview, or the complete portfolio pack which contains all of the individual stock reports and our thoughts on the changes.
Any questions, feel free to utilize the Discord or the Q&A.
Late Stage Conservative
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The Late Stage Conservative portfolio is by nature, the most conservative of all our portfolios. It has 60% exposure to bonds and the portfolio yields near 3.3%. Since most individual holdings are essentially foundational stocks, there really isn’t a need to make too many changes.
That being said, we decided to swap out the Bank of Nova Scotia (BNS) for Toronto-Dominion Bank (TD). We are effectively trading one underperforming bank for another. One of the primary reasons for shifting away from BNS is that the company’s exposure to Latin America continues to weigh on the stock and it looks like it’ll take longer to recover.
We believe TD Bank is better positioned to rebound faster than BNS and is still one of the best banks in the country. It is well capitalized with a Common Equity Tier (CET) 1 ratio of 14.5% – the best among all Big Six Banks. It also has one of the lowest payout ratios (~35%) and is one of the best positioned to provide outsized dividend growth when the cap on dividend raises is lifted.
With the change, this portfolio now holds the two biggest banks in the country (the other being Royal Bank of Canada).
Outside of this, there are no changes. The portfolio continues to post strong results and has pretty much tracked its benchmark since inception. Also worth noting, while it trails slightly over the past year, it is beating the benchmark over the past 1, 3, and 6 month periods.
This is likely due to the slowdown in growth stocks and resurgence of blue-chip value plays in 2021.
Other reasons for this outperformance are strong rebounds from CN Rail (CNR) and Brookfield Infrastructure Partners (BIP.UN). Interestingly, both positions were weighed down by acquisition activity. CN Rail eventually walked away from the Kansas City deal and Brookfield finally won the Inter Pipeline stakes. Both results were viewed positively by the markets.
Late Stage Moderate
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While there aren’t many changes to the Late Stage portfolios, the Moderate version is seeing the most change. It also happens to be the only one of the three that is underperforming.
Until the big market crash in March of last year, the Late Stage Moderate portfolio was tracking its benchmark quite well. Post crash, it has been a different story. The portfolio has underperformed over the past 6, 9, and 12 month periods.
The good news is that the portfolio is starting to turn it around. It has outperformed over the short-term (1 & 3 month periods) as some of the hard-hit stocks are beginning to show signs of life.
Speaking of hard-hit stocks, Suncor (SU) has been a significant drag on returns. Ever since the company cut the dividend last year, it has yet to rebound to the extent of its oil-producing peers. Given this, we decided to sell the position in Suncor in favor of another beaten up stock – Parkland Fuel (TSX:PKI).
While negativity surrounds Suncor, there is plenty of positives around Parkland despite the fact it has been mired in a negative downtrend. It is trading at excellent valuations and while it isn’t a pureplay producer like Suncor, it does still give us exposure to strong oil prices and a rebounding economy.
The other change we are making is a simple bank swap. We are selling our position in the Bank of Nova Scotia (TSX:BNS) in favor of the Bank of Montreal (TSX:BMO).
Again, the Bank of Nova Scotia’s exposure to Latin America continues to be a drag while BMO has been one of the best performing banks over the past year.
We expect this to continue as it has one of the highest expected growth rates and has better fundamentals (ROE, Tier 1 ratios, payout ratios) than BNS.
Late Stage Aggressive
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In terms of performance and the measure of risk to reward, at the time of this update this is officially our best performing Stocktrades Premium Model Portfolio. Has it returned the most? No.
But with a Sharpe Ratio more than 1.52, it is showing that it has been able to drive outstanding returns all while reducing risk more than, for example, our Early Stage Aggressive Portfolio.
The portfolio is well balanced, growth focused, and yet still yields just shy of 2.9% at the time of writing. Our Shopify position does remain high at 7.68%, but we’re comfortable with this in an aggressive portfolio.
We’re also comfortable holding on to The Bank of Nova Scotia inside of this portfolio, despite the sale in other portfolios due to its underperformance. The bank has a lucrative yield and if it can turn things around, the company does have the potential to outperform. It’s a situation that we feel makes sense in a more aggressive portfolio.
With this being a late-stage portfolio income is still the primary goal, so we don’t have an issue with keeping Scotiabank in here.
Overall, this portfolio is a situation where if it isn’t broken, don’t fix it. At the time of update, it’s outperforming significantly on a 1, 3, 6, and 12-month basis and it is crushing its benchmark by a 50%+ margin.
