As always, stock picks of the week can be found at the bottom of our newsletter.
Quote of the week
“Ask yourself who you’d want to spend the last day of your life with and then meet with them as often as you can.”
Warren Buffett (at this weekend’s Berkshire Hathaway shareholder meeting)
Sell in May or stay and play?
With the arrival of May, the often cited adage “sell in May and go away” is once again making the rounds. The idea here is that the summer months historically have seen lower returns than the rest of the year. The seasonal concept suggests selling stocks ahead of the May to October stretch, in favor of investing between November and April.
Considering the S&P 500 had started to look wobbly after gaining roughly 25 percent off its fall lows, we decided to look at how helpful this adage is in practice.
So, we looked back at S&P 500 performance since the financial crisis in 2008.
In reviewing 16 years worth of data, we found 6 years during which overall performance was better when investors were out of the market between May and October – 2023, 2022, 2015, 2011, 2010 and 2008. Now, if you do the math on that – it’s just over a third of the time. The quick conclusion would have to be that selling in May doesn’t pay most of the time. In addition, looking closer at those 6 years we cited, there were two years – 2010 and 2015 – where the outperformance from selling in May was only marginally better. So if you take those years out of the equation, the “sell in May” strategy has really only worked 25% of the time since 2008.
Stock market on healthier footing
One of the other reasons, perhaps, not to “go away” would be the current dynamics in the market.
The latest jobs report in the U.S. came in softer than expected and got investors once again talking about the possibility of interest rate cuts this year.
Alec Young, Chief Investment Strategist of MapSignals, saw that as a bullish sign for rate sensitive stocks.
Meanwhile, he notes most of the earnings stories have been positive.
He notes the S&P 500 seemed overbought at its recent peak, but the subsequent pullback leaves it on “much healthier footing.”
“U.S. stocks aren’t cheap, but that doesn’t drive the trend,” Young told me. “It just means the pace of the upside won’t be the same. This feels more like a 10-15 percent gain year — and I think most investors would take that.”
Best bets in the bond market?
Fixed income watcher Ed Devlin of Devlin Capital has long believed interest rate cuts are inevitable.
When I spoke with him this week, Devlin — Former Head of Canadian Portfolio Management at PIMCO — reiterated his call to be long U.S. agency mortgages. He notes they yield more than 6% and he believes the spread to U.S. Treasuries will tighten significantly when the Fed cuts rates and the yield curve becomes “normal” (i.e. has a positive slope). If that happens, it will add approximately 10% of capital gains on top of the yield.
Number of the week: $25 billion
Amazon’s latest results were cheered on Wall Street.
And the company’s cloud business, AWS, seemed to receive the most applause.
Quarterly revenue topped $25 billion!
The club of corporate software companies generating annual run rates of $100 billion is pretty small, outside of Microsoft.
And for Amazon, AWS has become the profit machine.
For a company that has always operated razor thin margins for e-commerce, AWS margins are approaching 40%.
Amazon is still in the early days of its AI rollout, but it seems to be rocket fuel for the business.
Matt Wood, who leads the AI team at AWS, said as much to me in an interview this week.
Meanwhile, CEO Andy Jassy earned bonus points on the company’s conference call with analysts, noting much of Amazon’s additional AI spending will be matched with equal monetization efforts (perhaps a lesson learned from the poorly received messaging from Mark Zuckerberg after Meta’s results).
Apple keeps breaking stock buyback records
Apple was in the headlines for announcing the biggest stock buyback plan in U.S. history, saying its board approved the re-purchase of an additional $110 billion worth of stock. Apple likely hoping the move – coupled with news that it has raised its quarterly dividend for the 12th year in a row – will appease investors who were starting to worry about cooling growth for the company.
It got us wondering about what the broader buyback list looks like, when it comes to the record books.
Well, it turns out, Apple’s latest move simply leaves the company topping its own record for largest buyback by value. In 2018, the tech giant authorized $100 billion worth of share repurchases. And all told, Apple is responsible for six of the top ten largest stock buybacks in the U.S. ever announced.
Here are some other big ones on the list:
Chevron: $75 billion (2023)
Alphabet: $70 billion (2022)
Microsoft: $60 billion (2021)
GE: $50 billion (2015)
Which pot stocks are a good bet?
Marijuana stocks have been on the move, with the DEA recommending that marijuana be reclassified in the U.S. as a less dangerous drug. Several steps remain in the process of decriminalizing for recreational or medical use.
But in light of all the interest, not to mention how volatile the sector can be, we asked industry analyst Frederico Gomes of ATB Capital Markets which stocks he would recommend in the sector.
His top picks are: Trulieve, Verano, and SNDL.
Chipotle’s stock surge leads to stock split
Chipotle has been one of the most impressive stocks over the past 15 years, having seen its shares climb from around $50 to their current level of $3,155. I spoke to the CEO Brian Niccol this week and he positioned the company as being well placed for continued growth.
Part of that strategy involves making employees happy. He cited Chipotle’s low staff turnover rates compared to the restaurant industry average.
In our interview, Niccol noted that Chipotle gives stock compensation to employees and the company received feedback that employees did not want to own partial shares.
In response, Chipotle in March announced a 50-for-1 stock split, which will take effect on June 26th, assuming shareholders approve the move early next month.
How to reach $1 million by age 65
In the investing world, they often talk about the benefits of starting early – socking away money when you’re starting out your career to help build a nest egg for the future.
There are lots of numbers you can crunch to highlight the dramatic differences over the long term, associated with such commitments.
Let’s take the goal example of $1 million saved by the age of 65. For the purposes of this exercise, let’s use a 7 percent annual rate of return. Here’s how the monthly savings would change, depending on when you start:
How to Reach $1 Million By Age 65
(Monthly Savings Needed)
Age 24: $354 per month
Age 34: $757 per month
Age 44: $1,751 per month
Age 54: $5,051 per month
Age 64: $80,963 per month
(Based on 7% Return)
A list of reliable dividend names
Obviously a lot of investors lean on dividends for steady income. And one of the popular measures to track is a company’s dividend yield, which measures how much a company pays out in dividends each year, relative to its stock price.
Of course, sometimes higher dividend yields spark worries about the sustainability of such payouts, since the yield in theory rises as a stock declines – and a declining stock price is often a measure of sentiment around the business itself.
So we wanted to pair our dividend yield analysis with the dividend payout ratio, which measures the amount of dividends being paid, in relation to the total net income a company generates.
Analysts often say a good rule of thumb for the dividend payout ratio is something in the 30 to 50 percent range (because if it were 100 percent, the obvious question is how long can a company afford to be paying out all of its net income as dividends).
With all that said, we wanted to identify TSX stocks that sport dividend yields that are higher than the average dividend yield for the benchmark – so north of 3 percent.
Then, we wanted to select companies that have those higher dividend yields, but have dividend payout ratios that are less than 40 percent.
And finally, from that group, we selected only the companies that have a majority of buy ratings among the analysts who cover them.
With that said, here are the stocks that standout on the TSX: Whitecap Resources, Parex, Canadian Western Bank, Tamarack Valley Energy, iA Financial, Crescent Point Energy and Secure Energy.
We did similar analysis for the S&P 500. One difference – the average dividend yield for the S&P is much lower than the TSX, so we used the TSX average dividend yield for our S&P company analysis (more than 3 percent). After that, we looked at dividend payout ratios that were less than 40 percent. And finally, we limited our list to companies that have a majority of buy ratings among the analysts who cover them.
With that said, here’s what our S&P company list looks like: Comcast, Devon Energy, Citigroup, retail operator Tapestry (formerly known as Coach), CVS Health and Diamondback Energy.
Popular stocks in the materials sector
Materials stocks have gained traction this year. The rally in gold prices and copper have been contributors to that. Those aren’t the only kinds of stocks that make up this group, but with some momentum behind the sector, we wanted to get an updated view on how analysts feel about the outlook from here.
We looked at stocks within the key materials sub-groups on the TSX and S&P 500.
Our criteria was:
*has to be covered by at least 10 analysts
*has to be recommended by at least 55% of the analysts who track the stock
*average estimate for share gain in the next year has to be at least 10%
*has to be profitable
*has to have a P/E ratio below the average stock in its index
Here are the stocks that made the cut:
PPG Industries
Agnico Eagle Mines
Barrick
Nutrien
Kinross Gold
CCL Industries
Alamos Gold
B2Gold
Osisko Mining
Lundin Gold,
Dundee Precious Metals
MAG Silver
Strategist call: Canadian stocks could outperform U.S. equities
The S&P 500 has been outperforming the TSX this year, but the strategy team at Bank of America thinks Canadian stocks are poised to catch up. I spoke to strategist Ohsung Kwon about it. Here’s a recap of his view:
* inflation and geopolitics are among the biggest risks to equities. Canada offers a great hedge against those risks.
*he TSX offers an attractive entry point at just 15x EPS. (GRAPH #1)
B of A predicts the Bank of Canada will start cutting interest rates in June vs. just one cut in December from the Fed — lower rates in Canada vs. the U.S. have historically been a tailwind for the TSX vs the S&P
* many cyclical stocks offer higher dividends and increased exposure to those names could create higher total returns (stock appreciation plus divided payouts)
Stock Picks of The Week
David Nelson, Belpointe Asset Management: Meta, Spotify
Diana Avigdor, Barometer Capital Management: Eli Lilly, NextEra Energy, Alphabet
Bob Iaccino, Path Trading Partners: Walmart, Western Digital, Alphabet
Garnet Anderson, Tacita Capital: Cameco, McDonald’s, Boardwalk REIT
Ryan Bushell, Newhaven Asset Management: Aecon, TC Energy, Fortis
Dennis Mitchell, Starlight Capital: Chartwell
Sadiq Adatia, BMO Global Asset Management: Eli Lilly
Sam Stovall, CFRA Research: BJ’s Wholesale Club; Molson Coors, Cenovus, Murphy Oil, NextEra Energy, American Electric Power
Tyler Ellegard, Gradient Investments: Apple, Berkshire Hathaway
Brian Belski, BMO Capital Markets: Brookfield Infrastructure Partners, Fortis