Well, that was an interesting week. After a big 2019 and a blistering start to the year, markets worldwide collectively posted their worst weeks since the financial crisis.
Unless this is the first time you’ve checked the news or the markets in over a week, the COVID-19 virus is on the verge of becoming a pandemic. On Friday, the World Health Organization raised the risk of coronavirus spread to very high.
There was panic and blood in the streets so to speak. The North American markets entered correction territory – although the TSX posted a slight bounce to end the session on Friday to pull it out of correction territory.
On the week, the NASDAQ, S&P and Dow Jones were down 10.5%, 11.5% and 12.3% respectively. For its part, the TSX Index fared a little better as it lost only 8.9% of its value. Since the TSX is home to a large number of gold stocks, it held up better than most.
Usually, we would talk about the monthly performance of our Bull List. However, there is no point – we all know it was ugly. Most all of our yearly gains were wiped out and the majority of stocks are in correction territory.
Since the Bull List is focused on growth stocks, we expected this. In a market correction, the TSX Index is poised to outperform. Does this mean investors should run out and sell their growth stocks? Absolutely not.
We remain confident in every stock tagged as ‘bullish’ and would be comfortable buying any of them at these levels. When we add stocks on our Bull List, we do so with both valuation and growth in mind. If we believed they offered good value then, we still do today. Unless of course, the investment thesis changes.
The important takeaway for investors is to stay invested, don’t panic, don’t sell or try time the market bottom.
Don’t let emotions guide your decisions
One of the main reasons retail investors underperform is because they let emotion guide their decisions. This leads to selling into a downtrend and buying when stocks are on an uptrend. Although these actions in of themselves aren’t necessarily a bad thing, doing so on emotion leads to mistakes.
This past week was dominated by emotions. We’ve received several questions about around selling this past week and waiting for the bottom to get back in.
The problem is, no one knows when we will hit bottom. Anyone who says otherwise is giving you bad advice.
Ever hear the term ‘dead cat bounce’?
It is when a stock bounces for a short period of time before continuing its downtrend. Experts will warn investors of the dead cat bounce in the coming weeks.
By the time you realize we are not experiencing a dead cat bounce or that we are in the midst of another uptrend, it may be too late.
This is why we prefer to stay invested. Not even the greatest investors in the world can time the markets – we don’t pretend to be the chosen ones. The only thing we know with certainty is that it is not a matter of IF but WHEN the markets will rebound.
What should investors do?
If you are anxious about the markets and are prone to emotional decisions, the best advice would be to do nothing. Although it is important to be informed on the markets, constantly checking your portfolio is not healthy. It will only increase anxiety and the risk of making an emotional decision. Simply hold, and ride it out.
Personally, I (Dan) haven’t even opened my Questrade account once this week.
If this isn’t your first rodeo, or you can objectively look at the markets then you will recognize the buying opportunity.
First up, an important rule – don’t buy just for the sake of buying. Just because a stock lost 10% or more of its value this week, doesn’t mean that the company is all of a sudden cheap.
Case in point, we have been looking at Brookfield Renewable Energy Properties (TSX:BEP.UN) for some time now. However, after a meteoric rise in 2019 we just could not get past current valuations. Despite a 9% drop, the company is still trading at a 145 times forward earnings and is actually still up 9% in year to date.
Our investment thesis on the company hasn’t changed, nor has our opinion on valuation.
To re-iterate, we believe any of the stocks on our Bull List with a bullish tag are good buys today. If you are worried about further downside, the best approach would be to average into a position.
We recommended this when we added Air Canada (TSX:AC) to our Bull List, and we’ve had numerous members e-mail us to tell us they’re still currently averaging down on their Air Canada positions.
We knew the potential existed for further downside as we weren’t convinced that the market was fully discounting the potential impacts of COVID-19. Turns out, we were right. That being said, five years from now, investors will be happy whether they bought it at $44 or $34 per share.
With the price of oil hitting lows not seen since 2018, we would caution against an investment in that sector. The negative sentiment towards the industry began well before COVID-19 took center stage and it will most likely persist once virus fears subside. It will take an industry macro-event such as a new pipeline to really improve industry outlook.
The Financial sector is one that investors should be taking a close look at. All of Canada’s big banks are trading at levels not seen since the financial crisis.
Remember, the regulations for banks were changed in the years that followed the Financial crisis, and they all better suited to withstand sudden shocks to the financial system.
Even at that, the Canadian Banks came out of the crisis relatively unscathed and were some of the only financial institutions in the world not to cut their dividend. Speaking of which, only twice in history have they collectively yielded above 4% – briefly in early 2016 and during the Financial Crisis. Both times proved to be excellent buying opportunities.
Let’s put things into perspective
Since we launched StockTrades Premium, there have been 15 stocks which have been added to our Bull List for more than a year. As of close on Friday, only five of those are in negative territory. This is despite the massive selloff experience this week.
The average return of those 15 stocks is 30.42% which is almost double the TSX Index average of 15.62% over the same period.
It is all about perspective. True, the recent downtrend has wiped out most of the gains from the past year. However, the TSX Index is still up 1.7% over the past year and has gained 13% since January 1, 2019.
We’re still going to be identifying opportunities to members, and we’re still going to be providing in depth investment analysis as to why these companies and their stocks are worth looking at. Because we believe that the best solution is to stay invested, and to continue to invest.
We’ve seen numerous “I told you so” remarks from those who thought stocks were expensive in January of 2019.
The funny thing is, the Index was at 14200 then and now sits at 16200. All they’ve done by trying to time the market is pay even more on this “dip”!
Corrections are a normal part of the market cycle. COVID-19 fears have simply accelerated what many viewed was overdue.
Make no mistake – the impacts of the COVID-19 virus are real. However, this too shall pass and investors can learn from history.
Stay calm. Stay invested.
