We’ve got a jam-packed e-mail for you this week with a ton of content, including Bull List removals, Watchlist additions and removals, some fund flow reviews, and a new focus for our Dividend Bull List.
Regardless of the market conditions, we continue to develop and make Premium the most comprehensive investment tool in the country. Our goal with Premium is to make it even more valuable during this bear market than in a bull market.
In reality, these are the types of situations and market conditions that separate the long-term winners from the long-term underperformers.
This past month has not been easy for anyone, as the market has fully retraced its June 2022 low.
However, now is not the time to give up on investing or your portfolio, no matter how challenging the environment is. Remember, as stocks get cheaper, they ultimately become more attractive to buy for long-term returns.
First off, let’s go over some Bull List removals.
We’ll be removing Algonquin Power & Utilities, Dialogue Health, and Manulife Financial from the Bull Lists.
We view all of these companies as being strong holds in this environment. However, they’ve been on the Bull Lists for quite some time, and to keep the shortlists fresh and up to date, we will be removing them.
Manulife and Algonquin have withstood the volatility quite well this year, as both are outperforming the TSX in 2022. The forward environment may not be the best for Algonquin, as it is a heavily indebted utility, but Mat and I plan to hold and accumulate for the long-term.
On the other hand, when we highlighted Dialogue Health, we stated it was by far the highest risk company on the Growth Bull List. And, its current drawdown is not that surprising considering this. Both Mat and I own Dialogue, with zero intentions to sell. However, we realize that in the environment moving forward, there are possibly better additions to one’s portfolio.
Once sentiment returns for small-cap stocks, you could easily see Dialogue back on the Bull List.
Watchlist removal
We’ve decided to remove Galaxy Digital Holdings (TSE:GLXY) from the watchlist.
Galaxy is a longstanding company on the watchlist. We couldn’t find an opportunity to commit to adding it to the Bull List. The stock has extensive volatility, and with cryptocurrencies being down significantly, we can’t see a promising opportunity to buy the company in the short term.
Two Watchlist additions
Market drawdowns aren’t pretty. However, with a glass-half-full attitude, we can see some opportunities worth keeping an eye on.
Look no further than 3 of our most recent Bull List additions in Telus International (TSE:TIXT), Aritzia (TSE:ATZ), and TFI International (TSE:TFII). These companies were former watchlist stocks that eventually graduated to the Bull List when we felt the timing was right.
The new stocks? Let’s have a look.
Jamieson Wellness (TSE:JWEL)
We’ve had our eye on Jamieson for quite some time now. However, we always felt the company was too expensive to pull the trigger. Currently, valuations have come down as the company has lost around 14% since mid-August.
Jamieson is expected to grow earnings and revenue at a double-digit pace over the next few years. It has a very “sticky” product base that consumers are unlikely to cut out of their budget if a recession hits.
It has raised dividends for 5 consecutive years. It is posting profit margins and returns on invested capital much higher than its typical averages, highlighting that the company is becoming more efficient.
Are we buying right now? Not necessarily.
More market volatility could lower prices, much as we witnessed with high-growth options like Telus International or Aritzia. However, if this does happen, we will waste no time adding JWEL to the Bull List as the company provides strong growth on both the share price and dividend end of things.
Brookfield Asset Management (TSE:BAM.A)
We know you’ve heard it many times before, but it is worth repeating. Buy good companies at fair prices. Brookfield Asset Management fits this description perfectly. Up until now, we have preferred to invest in the individual holdings making up one of the largest investment management companies in the world.
Why? We believe companies like Brookfield Renewables have higher overall upside given expected growth rates. It also yields more than double the parent company.
That said, Brookfield Asset Management has lost 21% of its value this year, 10% of which came in the last month. As a result, the company is trading at a double-digit discount to historical averages. At only 14 times forward earnings, the risk-to-reward ratio for a company the size of Brookfield Asset Management is tough to ignore.
While there may be further downside ahead, Brookfield is akin to a mini Exchange Traded Fund (ETF). This will make it less volatile than some of its subsidiaries.
While it does pay a dividend and is a Canadian Dividend Aristocrat (10 consecutive years of dividend growth), don’t expect to generate a ton of income. The company has a low yield of 1.24% and its dividend growth rate (high single-digits) isn’t high enough to make up much ground.
Worth noting, Brookfield Asset Management is about to divide itself into two companies as it spins off 25% of its asset management business.
Brookfield Asset Management will be renamed Brookfield Corp following the split, and own 75% of the asset management business, while the second company, called the Manager, will be owned by “holders of Brookfield’s class A limited voting shares, class B limited voting shares and Series 8 and 9 class A preference shares” and will hold the 25% distributed by the board.
Shareholder vote is expected to take place on November 9.
Much like JWEL, we’ve added Brookfield to the Watchlist to keep an eye on future volatility and add when we feel the time is right.
U.S. Stocks coming to the Dividend Bull List
As always, when members speak, we listen. Right now the main focus for many is capital preservation and steady income. This makes sense, as the growth market is taking a large hit and its timeline to recovery is relatively unknown.
We will be focusing a lot more on dividend growth companies that are cash flow positive at this current time. But it is difficult for us to do so strictly from a Canadian point of view. Why?
There simply are not enough quality dividend growth companies here in Canada to develop a well-diversified portfolio. Many of our strong dividend growers are in the financial or oil and gas sectors.
So as a result, we are very happy to announce that we will now be including US companies on our Dividend Bull List.
This will open us up to a much wider selection of companies to highlight to members.
As for the Growth Bull List, there are still a plethora of rock-solid Canadian growth companies. So, US stocks are not on the radar yet. However, it is very possible they could be in the future.
Fund Flow Reports
Over the past year, we have been actively providing the Fund Flow reports by Ycharts to members in Discord. These comprehensive reports compile the latest fund flows data, historical flows, and performance at both the category and individual fund levels.
In just a few pages, these reports give insight into where the market is trending which can be a useful tool to gauge market sentiment. Moving forward, we will do a summary of these reports in our weekly newsletter.
There are four reports in total:
• US Fund Flows Report Click here to download
• Canada Fund Flows Report Click here to download
• US Strategy Flows Report Click here to download
• Canada Strategy Flows Report Click here to download
The latest reports were released this past week and data is reflective as of the end of August.
Let’s start with Canada. For the purpose of our report, we’ll focus on the Strategy Flow document as it reflects the combined outflows & inflows of both Mutual Funds and ETFs. For a more detailed breakdown, you can always check out the individual Fund Flows reports which we’ve linked above.
Here is a snapshot of the two most important tables.
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Continuing a trend we’ve seen over the past months, Canadians are moving towards a fixed income strategy. In August, the Canadian Fixed Income category saw a net addition of $3.52B in inflows. This was by far the most pronounced as no other category topped $1B of inflows.
When it comes to equities, Canadians opted for an indexed approach with the “Canadian Equity” strategy. This strategy is, for the most part, reflective of funds that track the S&P/TSX Composite or S&P/TSX 60 Indices.
Is any of this surprising? Not really. In times of uncertainty, investors tend to lean towards Index investing as many consider it less risky. Likewise, with rates not seen as high in decades, investors are jumping at the opportunity to lock in higher yields.
In the US, it was much of the same. Investors showed clear favoritism towards Fixed Income funds and moved $17.5B into the category, more than all other categories combined.
There was also a clear shift towards less rate-sensitive equities as value stocks (predominantly large caps) dominated US Equity Inflows.
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There was one interesting chart on the US side, that of Sector Equity flows. In August, Real Estate saw $1.7B in outflows, the largest amount despite the fact it has historically been a good hedge against inflation.
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The reason for this? Hyperinflation has caused rates to rise at an exponential pace.
In an environment where there is a steady, less aggressive rate of increases, real estate benefits from inflation as at a high level, higher inflation leads to higher property value. Rising rates can also be offset with rent increases.
However, today hyperinflation has caused rates to rise much faster than the norm and combined they are causing a recession (don’t let the Feds in the U.S. fool you, we are in a recession which is defined as two consecutive quarters of negative GDP, despite the fact they claim otherwise).
As a result, this is likely to result in a cooling of property values which in turn will have a negative impact on Net Asset Value (NAV). Landlords also can’t raise rental rates fast enough to keep up with higher rates and capital expenditures are becoming more expensive by the day.
It is turning out to be a perfect storm for real estate and while they will ultimately stabilize and potentially benefit, it is important to understand the short-to-medium term impacts of our current environment.
Because of all of our other additions in this newsletter, we did cut the fund flow analysis a little short to prevent information overload. However, we plan to dig into these documents way more in-depth in future newsletters and provide our opinions to help educate members about the current market conditions.
