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Million Dollar Journey editor and Canadian Financial Summit founder Kyle Prevost shares financial headlines and offers context for Canadian investors.
Making sense of the nonsensical
I’m one month into writing “Making sense of the markets” when this happens: everything and anything.
Is there like a dollar sign-shaped bat signal we can use to summon Dale Roberts back? (Roberts is the original writer of this column.)
Making sense of the short-term movements in asset markets is never exactly easy. But for the last two years, forecasting most of the world’s stock markets has meant deciding which beautiful sky was the sunniest. We had it pretty good. Recent headlines, though, have proven that the outlook just got a lot cloudier.
The first thing to keep in mind when looking at the stock market’s serpentine moves over the last week is that prices really are pretty rational in the long term. Over the short-term, however—not so much. How do we justify a stock price dropping 10% or more of the price evaluation before its earnings announcement, despite meeting earnings expectations for the last three months? The lesson being, of course, that while markets are generally efficient, it can take them a while to realize that efficient pricing mechanism’s full potential.
If stock prices aren’t responding to the fundamentals, such as earnings, then why are they going down so fast? Well, it’s probably a combination of many things. And they’re probably not particularly relevant in the long run. Here are some of the plausible theories I believe are impacting investor sentiment.
- Rising interest rates make safer investments more attractive. If you can find a five-year guaranteed investment certificate (GIC) for 4.15%, suddenly those dividend stocks don’t look quite so unbeatable right?
- Rising interest rates make equity in indebted companies much less attractive. When central banks were begging for business to borrow money and throw it at the economy, no one was bothered much by huge loans used to fuel growth. It turns out that when a bigger and bigger percentage of a company’s revenues go towards paying interest, shareholders don’t get as much put in their collective pocket.
- New-age algorithmic trading combined with traditional investor panic can quickly build downward momentum that isn’t really justified by anything other than it’s physiologically really difficult to see the value of your portfolio go down.
- Investors have become more and more comfortable with borrowing money in order to invest in stocks, or to speculate on stock movements using options. This is referred to as “leverage.” And when asset prices are going up, it allows you to make money using other people’s money—which is a pretty good deal. The problem: Just as leverage can accelerate the good times, it can also hit the gas on the bad times. As lenders see asset valuations drop, they worry about defaulted loans, and they force leveraged investors to sell via a demand called a “margin call.” If the bank gets worried that you won’t be able to pay your loan, they will force you to sell the assets you currently have. Of course, the more people are forced to sell, the lower the prices go. And the cycle can quickly become supercharged.
Even with the above four points, there comes a point when an honest market commentator has to simply throw up their hands to say, “I don’t know. It’s just weird right now, and I don’t really get it.”
I admit that it’s not the sort of bold pronouncement that TV financial gurus love to make.
But what else is there to do after the following sequence of events:
- The U.S. Federal Reserve (a.k.a. “the Fed”) decides to implement the exact 0.50% interest rate increase it forecasted.
- The chairman of The Fed says he was just kidding about a more aggressive 0.75% rate hike.
- Stock prices go up. Experts say this is because investors were afraid of the more aggressive hike, which is now off the table.
- The next day, without anything new and noteworthy happening, stocks plummet.
If nothing else, we can safely say that inflation has decisively captured the attention of both the general public and the markets (as evidenced by this Amazon find).
And, how’s this for a head-scratcher? On top of all this, it seems there are more jobs than people who want one!
Sometimes the markets just don’t want to be made sense of.
Is the shine off Shopify?
Once upon a time, back in 2020, Shopify (SHOP) was Canada’s little tech company that could. It even managed to briefly top the banks, and mining and energy companies to become the largest company on the Toronto Stock Exchange (as measured by market capitalization).
Since then, things haven’t exactly stayed on track.
With shares down more than 70% YTD, SHOP has many investors wondering what it did to deserve such a drastic penalty.
As I wrote last week, the problem with tech company stocks at the moment isn’t necessarily the underlying companies or their ability to earn a lot of revenue. The issue is that investors have paid ever-increasing premium prices for these shares because they anticipated revenue and earnings would continue to grow at unprecedented rates. The math isn’t quite the same as owning a utility stock, like Fortis (F), where a conservative growth rate is almost locked in for the long term.
So, when SHOP announced its adjusted earnings per share was only $0.20—when analysts predicted $0.65—it shook investor confidence at a time when overall sentiment was already in freefall in regards to tech stocks.
That said, this is the same company that is growing revenues pretty darn quickly! SHOP reported, even as many retail customers were moving back to in-person versus online shopping, that their revenue went up 21.4%, to 1.2 billion.
While it is logical that the company’s value would drop after revealing its profits weren’t growing as quickly as shareholders had hoped, this brutal correction seems a bit overdone when we consider that growth trajectory still looks pretty good.
It’s too soon to say for sure whether purchasing shares of SHOP is more akin to purchasing early Amazon shares at a discount. Or even buying into Blackberry in its heyday. With a price-to-earnings (P/E) ratio now down to roughly 15, the stock appears to be trading as if earnings won’t outpace inflation going forward.
That’s a bold assumption.
As we were putting the final touches on this week’s column, several Shopify executives launched a Twitter-based PR campaign expressing that they believe the company was undervalued, and consequently that they were going to put their money where their tweets were by privately purchasing millions of dollars in company shares. The market responded by rewarding the company with a one-day return of 11.55% in a single day. Betting against Shopify’s CEO Tobias Lütke and Co. still looks like a bad long-term idea to me.
Always sunny for Suncor?
While much of the stock market is realizing painful losses, Canada’s energy companies are a rare bright spot.
On Suncor’s (SU) earnings call this week the company revealed that high commodity prices had led to net earnings of $2.9 billion compared to $821 million in Q1 2021. This windfall allowed Suncor to pay down $728 million in debt, as well as raise its dividend to the highest level in the company’s history.
You’d think shareholders would have only good things to say after hearing that, but activist investment fund Elliott Investments Management LP (which owns 3.4% of Suncor) had other ideas.
Elliott made a public push last week for Suncor to focus more on its core business of oil production, by selling off downstream assets such as Petro Canada retail stations. This made a big noise with shareholders, as share prices increased 12% in a single day. Suncor’s management pushed back on these plans this week, with CEO Mark Little stating:
“We think it’s key to maximizing the value across the integrated business chain and it’s also one of the reasons we’ve been able to deliver twice the profitability versus our next closest peer, particularly through COVID.
According to the Financial Post, he continued: “We think we have the best downstream business in North America and we think it’s important that it stay together.”
It appears that for the time being, Suncor will continue operations throughout the lucrative energy supply chain.
If you’re looking for a broader play on Canada’s energy sector, the following three ETFs are a quick way to get instant diversification that include Suncor.
- iShares S&P/TSX Capped Energy Index ETF (XEG)
- Horizons S&P/TSX Capped Energy Index ETF (HXE)
- BMO Equal Weight Oil & Gas Index ETF (ZEO)
Questrade sheds light on fractional trading benefits
Finally, in Canadian ETF news this week, Questrade announced that it would begin using fractional shares of ETFs on their Questwealth Portfolio platforms. This doesn’t mean users of Questrade’s main online brokerage platform will be able to trade fractional shares of individual companies (such as Wealthsimple Trade allows investors to do), but it is a great little perk for hands-off Questwealth Portfolio clients.
The main benefit of fractional shares is that more of your money can remain working for you at all times. If you only deal in whole unit shares, you’ll likely always have some investment money “left over,” because was not able to purchase a full unit at the time of purchase. With fractional shares (as seen above), that small amount of “leftover money” will be automatically invested into part of an additional unit.
With inflation eating away the value of cash faster than at any point in decades, being fully invested should add up quick for Canadian investors.
Check out my Questrade review, and MoneySense’s too, for more info on not only the Questwealth platform, but everything else that Questrade brings to the table as well.
Kyle Prevost is a financial educator, author, and speaker. When he’s not on a basketball court or in a boxing ring trying to recapture his youth, you can find him helping Canadians with their finances over at MillionDollarJourney.com and the Canadian Financial Summit.
The post Making sense of the markets this week: May 15 appeared first on MoneySense.
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