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Investment Q&A

Not investment advice or solicitation to buy/sell securities. Do your own due diligence and/or consult an advisor.

Q: Hi 5i,
Just a comment. For anyone looking at historical returns to evaluate the future prospects for a balanced (equity + fixed income) portfolio, it is extremely important to consider that the next 30 years of fixed income returns are virtually guaranteed to be significantly different than the past 30 to 40 years. Bond yields (interest returns) were in a generally declining trend, originally from nosebleed levels, for about 35 years from approximately 1980, during which even government bond yields dropped from double digit peaks to the negligible rates available over the past couple of years. The portfolios of investors who held bonds of significant duration early in that period reaped high interest rate bond returns while they watched the paper value of their bonds increase with each downward tick in interest rates. The fixed income component was potentially a tremendous contributor to very good portfolio returns over much of that extended period of declining interest rates.
Looking out over the next 30 years, the prospect is vastly different. Bonds don’t have anything remotely approaching the same kind of return potential. Current interest rate returns are still very low as rates are recently just beginning to move off what may later be viewed as ‘the bottom.’ The prospect for people who hold bonds of any significant duration while rates rise is that their holdings become less valuable. Low interest instruments may need to be held to maturity in order to avoid a loss of principal. In the meantime, those low interest bond returns will be a drag on any better portfolio returns that may be generated by equity holdings. If you have 50% of your portfolio in bonds that pay 2%, and you hope for an 8% overall portfolio return, you have to generate a return of 14% from your equities. Maybe bond yields will return to levels where they are not so detrimental to significant portfolio returns over the next 5 to 10 years but maybe they won’t. If they do, then holding bonds while the rates are rising can be painful. If they don’t, then they may go through an extended period where the chief value in bonds is the secure return of capital at maturity but the return prospects until maturity are relatively dismal.
The fact that someone buying a 10-year Canada Bond in 1982 got a 16% annual rate of return on it is not an indication of what anyone putting together a bond portfolio or balanced portfolio today can expect it to realize. It is completely irrelevant.
To assess the return prospects of a balanced portfolio today, you need to consider the relevant details and prospects for today's bonds, not the irrelevant details and portfolio contributions of bonds that have long since expired.

(Please print only if you think doing so may be helpful.)
Read Answer Asked by Lance on July 19, 2017
Q: Hi 5i Team:
What are 5 pure Canadian growth companies that you will recommend for TFSA. Risk is not a factor. No need for dividends. 3 to 5 year horizon. Plan to add future contributions to this list in the next few years. Of course I will be reading your reports to see if there are any sudden changes in these companies and adjust accordingly.
Read Answer Asked by Savalai on July 18, 2017
Q: My tech portfolio includes the above plus full positions of SHOP, KXS and CSU. I am looking at topping up one of the above. At current prices which would you choose and why? The aim of this portfolio is growth with moderate stabiliy.
Read Answer Asked by Paul on July 18, 2017
Q: Is it possible that CRH sees competition to their roll up plan so they opt to buy controlling interest in a number of clinics to ensure a good market share and then over time pick up the NCI as the NCI partners sell out or move on. It would be nice to know what their game plan is. When did they make the switch from buying the complete business to just buying controlling interest?

Thank You
Clarence
Read Answer Asked by Clarence on July 18, 2017
Q: I am retired living off dividend income. In your income portfolio, Loblaw stands out as it only has a 1.52% yield and a relatively low 5 year DGR. It seem that it was originally included for growth vs. income in 2014, however it had a higher yield then of 2%.
Do you still recommend Loblaw in the income portfolio with only a 1.52% yield? Are you considering switching for a higher yield company?
What other consumer non-cyclical looks attractive at current prices with a higher yield for an income portfolio?
Read Answer Asked by Curtis on July 17, 2017
Q: hi folks:

I am curious as to your understanding of the passage below
(excerpted from stockhouse BB's)

is there a better than even chance that CRH is yet another company being brought to earth by 'creative' accounting or is everything simply been overblown?

thanks in advance


CRH'S CONFUSING ACCOUNTING? Help needed to understand this.

CRH has a unique acquisition model in that the company tends to purchase portions of businesses (typically 51%, sometimes more), recording 100% of the acquired business revenues and earnings on its consolidated financial statements with adjustments made for specific amounts attributable to shareholders and attributable to non-controlling interests. This acquisition practice, while compliant with GAAP and sound from an accounting standpoint, requires that investors pay more attention to the details within the company's financials to get a complete picture of what is going on.

The company's most recent financial statements show a quarterly net and comprehensive income increase of 9% year over year from $3.03 million in Q1 2016 to $3.3 million in Q1 2017. The breakdown of these earnings is where investors need to pay attention.

In Q1 2016, CRH reported that net income attributable to shareholders was $2.96 million (or 97.7% of total earnings).

In Q1 2017, CRH reported that net income attributable to shareholders was $1.54 million (or only 46.7% of total earnings).

Because of the company's acquisition model, stock-based compensation, and increases in finance-related costs, CRH is now paying out more than half of its earnings to non-controlling interests. This is a trend which has been ongoing for the past year with the shareholders portion of earnings consistently declining over time.

Looking at earnings per share (EPS), we can see that earnings have significantly underperformed expectations ($0.02 EPS attributable to shareholders compared to $0.07 EPS expected.

Consider this note from the most recent financial statements: The company has also stated its intention to acquire or develop additional GI anesthesia businesses. In the future, it may be necessary for the Company to raise additional funds for the continuing development of its business plan, including additional acquisitions.

Insiders selling large amounts of stock of late CRH directors David Johnson and Edward Wright sold a combined $5.71 million of stock at average prices between $7.45 and $11.05 in March, which amounts to nearly 1% of CRHs total float. As I have reported previously, insider selling is generally not an issue in large and very liquid equities with compensation structures reliant on stock options. In growth-related businesses, large stock option redemptions can be commonplace and may largely be ignored by the financial markets for those reasons. That said, any time nearly 1% of a company's stock is sold by insiders, questions undoubtedly come to mind.

Bottom line I am skeptical about CRHs growth strategy from the standpoint of a shareholder. It appears to me that the substantial dilution effect resulting from this growth strategy is one which will not benefit shareholders in the long run. My skepticism also extends to the recent large liquidation of stock by two company directors, making me more uneasy about this company's long-term prospects.

Read Answer Asked by Robert on July 17, 2017
Q: In answer to Febin's question on Friday you said that "The stock reaction (crh) is likely appropriate, though, putting its risk/reward in line: thus we would do nothing here". How did you determine the risk/reward of Crh? What metrics/rational did you apply? I'm currently down 48% on a 1/2 position and appreciate your response. Thankyou.
Read Answer Asked by Brad on July 17, 2017
Q: Greetings

You read my mind! I have been thinking of taking a position in BYD. To do so, I was planning on selling MX. I know that MX is a favoured stock.

I am not concerned about portfolio balancing but am looking for a bit more stability in my life now that I am retired.

Do you have a preference between these two stocks given my profile?

Thanks

Peter
Read Answer Asked by Peter on July 17, 2017
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