Mid Month Overview
In terms of monthly performance, both of our Bull lists have put up very strong numbers halfway through August.
Our Dividend Bull list has returned 7.89% halfway through the month while the TSX has posted returns of 2.02%.
This significant outperformance comes from solid earnings reports from Manulife Financial and Exchange Income Corp (TSX:EIF), along with our most recent pick CCL Industries (TSX:CCL.B) continuing its upward momentum. Of note, since our addition of CCL.B 15 days ago, the stock has gained just under 12%.
Overall, due to the heavy weighting of financials, our Dividend Bull list is still underperforming the overall market. However, we have confidence in the stocks currently on the list, and financials will rebound.
In terms of our Growth Bull list, we’re actually seeing strong outperformance midway through the month as well. Halfway through August, or Bull list has returned 4.68% while the TSX has posted returns of 2.02%.
The main driver of growth for the Bull list has been Park Lawn Corp (TSX:PLC) which is up 14.45% over the course of the month. Since recommendation only 133 days ago, the stock has returned members over 75%. Another notable gainer on the list was NFI Group (TSX:NFI).
The company is still struggling significantly in 2020, but has managed to post 9% gains midway through August and our outlook is still bullish.
The worst performer in August has been recent Bull list addition Kirkland Lake. Although the stock has gone up over 27% since recommendation, it’s lost 5% midway through the month because of what we feel is short term pressure on the price of gold. However, more on that later.
Before we get to our most up to date analysis and outlook on the gold sector, we’d like to speak on quite possibly the most important concept of self-directed investing, and that is avoiding making emotional decisions.
You need to avoid getting emotional when investing
If you were to list all of the reasons self-directed investors lose money, I’d venture to say the purchase or sale of a stock based on short term emotions is near, if not at the top of that list.
Emotional decisions that take seconds to execute can have lifelong consequences on your portfolio. Lets go over a pretty simple example, and one that really drives home our point.
Say two investors, both of which have $10,000 to invest, buy a stock that is fundamentally sound and has strong growth prospects. However, the stock is fairly volatile, and is prone to swings.
After purchasing the stock, it falls 15% in a week. The reasons unknown, as a lot of short-term market dips are, Investor A understands that nothing has fundamentally changed with the company, and holds on to their shares. Investor B however sells their shares in fear of further “losses”, all of which are just paper losses as of now.
The stock, being volatile, makes a quick recovery back to its original price.
Now, lets say, just for the point of this example, Investor B learns their lesson and never makes another short-term emotional decision. Both investors go on to earn 8% annually over the next 30 years on that money.
Investor A:$110,108
Investor B:$85,645
We can quickly see that what seems like a small $1500 loss can snowball into a significant amount of capital over the years. Investor A has earned nearly $25,000 more.
Emotional sales aren’t the only way to set yourself back
Much like the untimely sale of a stock based on short term swings can result in significant consequences, the untimely emotional purchase of a overvalued stock can have the same effect.
FOMO, or Fear Of Missing Out, plays a huge part in these types of losses. There have been a multitude of “bubbles” over the last while in the stock market. Some would argue that the stock market crash of 2020 was the bubble finally bursting on the longest bull run in history.
I personally would chalk it up to extraordinary circumstances, and urge investors to take whatever bears say with a grain of salt. Especially considering the fact that most of these bears had been calling for a crash for half a decade, missing out on an insane level of growth in the markets. Ever heard the phrase “a broken clock is still right twice a day?”
Regardless, if you’re looking for examples of how untimely purchases can kill your portfolio, look no further than the Canadian cannabis sector. Riddled with exponential growth estimates and a “too big of an industry to fail” mentality, investors who missed out on the first wave of profits couldn’t bear the thought of missing out on the next.
They purchased companies like Canopy Growth and Aurora Cannabis at times when these company’s total market caps exceeded the potential revenue of the entire sector.
Investors who purchased $10,000 of Aurora Cannabis in October of 2018 at its peaks are now left with $855. To put this into perspective, you’d need to invest that $855 and earn 8% annually for 32 years just to recover your initial capital.
Remove the emotions out of investing if you have any hopes of succeeding
We felt this topic was an absolute necessity this week primarily because of the e-mails/concerns and overall anxiety/panic that was occurring with members over their gold holdings. And as we can see this week, they are already starting to recover.
In fact, at one point last week popular stocks like Endeavour Mining were down as much as 9%. A short 3 days later, and Endeavour closed the week pretty close to even, and is now up.
I watched my portfolio shrink by just over 40% during the market crash of 2020. At that point if I had sold my holdings, I would have spent the better part of a decade trying to recoup them with my remaining capital. Instead, a short 5 months later, my portfolio is in the green.
Why? Because by eliminating all emotions, I was able to identify strong companies I owned, and continued to purchase them to lower my average costs down. Something that will add significant capital to my portfolio down the line.
The number one way to eliminate emotions while investing? Know what you’re buying, and why you’re buying it. If that hasn’t changed, you have no reason to sell.
**Written by Daniel Kent**
Gold Update
Last week, we received several questions about gold stocks. It seems subscribers are nervous as gold stocks had a tough week. Last week, the price of gold lost ~4% – dropping from just above USD$2,000 to close the week at ~$1,950 per ounce. Not surprisingly, gold stocks also suffered.
On the week, the iShares S&P/TSX Global Gold Index (XGD) lost 6.3% of its value and investors began to question their investments.
First and foremost, one week is a VERY short period and selling at the first sign of weakness is not the best way to make money. We advocate investing, which requires patience and a mid to long-term horizon. Like Dan stated in the emotional investment portion of this piece, this can end up costing you money.
Furthermore, gold stocks are more volatile than the price of gold. This means that when the price of gold drops, they are likely to underperform as was the case this past week. The flip side is also true. In a bull run, gold stocks outperform. Case in point, the price of gold is up by ~29% in 2020 while XGD is up by 41%.
Gold stocks are known to be volatile
This is especially true of small to mid-cap producers or development and exploration companies. Those invested in the industry must be prepared to accept this volatility.
Another key point – we view gold as a hedge against uncertainty and is but one asset class as a part of a well-diversified portfolio. We don’t recommend going overweight the precious metal and like to allocate approximately 5% of our portfolios to the asset class.
In terms of the price of gold – all signs point to sustained prices around the $2,000 level if not more. Here are a few key reasons why:
• Unprecedented amount of money being pumped into the economy
• Low interest rates
• Risk of rising inflation
All of these have historically supported high gold prices.
Although the prices remain elevated, much of the easy money has likely been made.
Unless of course, the price of gold makes another strong run towards USD$2,500-$3,000. Anything is possible, but it may also start to weaken. It is for this reason that we have a few principles when investing in gold stocks.
We’ve shared these before, but they are worth repeating for new members:
• Historical earnings/revenue growth
There are some high-quality gold stocks that managed to perform quite well in the last prolonged bear market. This means they did not rely on a spike in gold prices to increase shareholder value.
• Increasing production
How do you offset a potential dip in price? Increased production and long mine lives.
• Low all-in sustaining costs (AISC)
The lower the AISCs, the better. Even those with a higher than average AISC may be worth a look if they have a proven track record of lowering AISCs.
• Attractive debt-profile
Look for stocks which have a better than average debt/equity. When the price of gold crashed in the early 2010s, the highly leveraged producers suffered most. It led to big write-offs and dividends were essentially wiped out across the board.
One way to limit this risk, is to invest in streamers. They have much lower capital requirements and leave all the costs of exploration, development and operations to the producers. This is exactly why Franco Nevada (TSX:FNV) is one of our Foundational Picks of 2020.
• Safe mining jurisdictions
Those with high exposure to geologically volatile countries carry more risk. Case in point, Oceana Gold (OGC) has been the source of a few member requests. The company looks cheap, but its flagship mine is sitting idle. It is currently feuding with the Philippine Government and it has dragged on for longer than analysts have expected. There are still no signs of a resolution.
When investing in gold stocks, following these principles should ensure that your holdings to well in both a gold bull and gold bear market.
Most importantly, don’t make rash decisions because of a down week. Gold exposure is a key part of a good diversification strategy.
**Written By Mat Litalien**
**Daniel Kent is long Kirkland Lake Gold, Park Lawn Corp and Manulife Financial**
