Algonquin Power & Utilities Corp.’s Riviere-du-Loup hydroelectric generating facility in Quebec.Handout
'High quality stock' is among the most misused investing phrases. Ask someone what they mean by it – often someone trying to sell you something – and you'll get vague, unverifiable answers like, 'well, they're a good company' or 'solid management.' This ambiguity is unfortunate – legitimately high quality stocks are historically the best way to protect portfolios from the expected jump in equity market volatility.
Standard and Poor's developed an academically defensible quality ranking technique for stocks, based on sustainable growth and dividends, but those are not freely available to investors.
Practically speaking, credit ratings are the best way for investors to rate the quality of potential investments, despite the justifiable shade thrown at the ratings agencies during the financial crisis. Even here, access to corporate credit scores is not handed out freely but for most companies a Google search will uncover them for most major Canadian and U.S. stocks.
In terms of individual stock metrics, return on assets (ROA) and return on equity (ROE) can indicate quality but the readings can also be volatile over medium time frames.
Why all this talk about quality? The quantitative strategy team at Merrill Lynch recently wrote (link is to the relevant Merrill Lynch chart I posted on social media), "Our work suggests that quality is the best hedge against rising volatility, and rising interest rates and a flattening yield curve suggest that volatility is likely here to stay.
Importantly, Merrill Lynch is bullish on quality not only because of volatility, but also because they believe quality stocks are undervalued. If high quality stocks outperform, they could attract enough investor interest to push valuations into prohibitively expensive territory.
-- Scott Barlow, Globe and Mail market strategist
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Stocks to ponder
Algonquin Power & Utilities Corp. (AQN-T). One of the best ways to build wealth is to buy great companies when their shares are struggling. For Algonquin Power & Utilities Corp., now is one of those times. Shares of the renewable-power producer and utility operator have tumbled nearly 10 per cent year to date, hurt by rising bond yields and fears about the impact of U.S. tax reform. Yet, Algonquin recently released strong fourth-quarter and full-year 2017 results, and the outlook for 2018 and beyond is favourable for the Oakville, Ont.-based company. John Heinzl reports.
ATS Automation Tooling Systems Inc. (ATA-T). The Contra Guys explain their investment in this company, why they have held on to the struggling stock for so long, and they ask whether ATS's time just might have finally arrived as its quarterly results have picked up.
The Rundown
Rob Carrick's 2018 ETF Buyer's Guide: Best U.S. equity funds
The Canadian investor's most glaring investor error of the past five years would arguably have been to underplay or ignore the U.S. stock market. Stock-wise, we got smoked by the U.S. market. With its heavy weighting in surging technology stocks, the S&P 500 index delivered an annualized five-year total return of 20.5 per cent in Canadian dollars to Dec. 31, while the S&P/TSX Composite Index made 8.6 per cent. The U.S. market looked shaky in early 2018, but it's a proven way to diversify a Canadian market dominated by banks, oil companies and miners. Rob Carrick outlines his best U.S. equity fund picks.
Why investors should celebrate the oddly absent post-earnings bounce in Canadian bank stocks
Canada's biggest banks sailed past expectations with their latest quarterly financial results, but bank stocks have gone nowhere since the reporting season wrapped up last week. But investors should celebrate the market's indifference: Ignored stocks make better buying opportunities, should be less susceptible to economic bumps ahead and are well-positioned for rallies. David Berman reports.
What a $3-billion dividend fund manager is buying, selling and predicting for the TSX
As a manager of dividend funds, Michele Robitaille is used to playing defence in the market. However, given the current market volatility and signs that the current business cycle is nearing an end, Ms. Robitaille is getting even more conservative in her approach. For the managing director at Guardian Capital Group, which has more than $25-billion in assets under management, that partly means more emphasis on individual stock picking to help protect the portfolio. The Globe and Mail recently spoke with Ms. Robitaille about what stocks she's buying and selling as well as her take on the turmoil around NAFTA talks. Brenda Bouw reports.
Investors are making a big mistake when it comes to Donald Trump
The bull market hit its ninth anniversary on Friday, making it the second-longest in U.S. history. Don't bet on it reaching the age of ten. The caution lights are flashing, writes Gordon Pape.
RBC launches first gender-diversity ETF that tracks only Canadian companies
RBC Global Asset Management is joining the roster of firms that now offer gender diversity exchange-traded funds for investors looking to promote women in the workplace. On Thursday – International Women's Day – the RBC Vision Women's Leadership MSCI Canada Index ETF began trading on the Aequitas NEO Exchange Inc. With the ticker RLDR – and management fee of 0.25 per cent – the fund will look to replicate the MSCI Canada IMI Women's Leadership Select Index, which tracks companies based in Canada that have demonstrated commitment to gender diversity as part of their corporate social responsibility (CSR) strategy. Clare O'Hara reports.
Don't delay if you want to lock in a 3% yielding GIC
Safe alternatives to volatile stock markets are starting to look more palatable than they have in a while. You can now lock in a 3-per-cent return on five-year guaranteed investment certificates sold by online brokerage firms. Yields of 3 per cent have been available for a while now from alternative banks and credit unions, but these players tend not to show up in the lists of third-party GICs sold by online brokerage firms. Rob Carrick reports.
I love Spotify, but should I buy its stock?
When Spotify recently announced it was going public, through a direct listing some time in late March or April, my first thought was that maybe I should buy some stock. I know many wealthy people who have done well off tech stocks, but I've never wanted to take the risk on these often-volatile companies. But then I think about legendary investor Peter Lynch's famous advice of "buy what you know." I get how Spotify works: Pay a monthly fee and then listen to music. It feels like less of a risk to buy shares in the company, and maybe it's a good way to give my portfolio a boost. But buying an IPO is a risk. Bryan Borzykowski reports.
Top Links
The more you trade, the more money you lose
There was one very important sentence from the Bank of Canada
RBC says 'no thanks' to foreign investment in housing market
Others
The week's most oversold and overbought stocks on the TSX
Wednesday's Insider Report: Companies insiders are buying and selling
These Canadian dividend mutual funds are ETF-beaters
Blown earnings calls started bull market and one day will end it
Trump's tariffs prompting some U.S. fund managers to look overseas
U.S. bull market aging but still has juice to break record
Number Crunchers
Seven dividend-paying spinoffs that offer profit growth and takeover potential
Twelve tech stocks with strong earnings and price momentum
Ask Globe Investor
Question: What is your opinion of making early withdrawals from an RRSP?
Answer: It's usually not a good idea – for a few reasons. First, the amount of the withdrawal will be added to your income and taxed when you file your return. Second, your financial institution will withhold a portion of tax on the withdrawal: 10 per cent for amounts up to $5,000; 20 per cent for withdrawals from $5,000 to $15,000; and 30 per cent for withdrawal amounts of more than $15,000. (Withholding tax rates are higher in Quebec.)
You might get some of this money back after your file your return, or you might owe more, depending on your particular tax situation. Third, when you make an RRSP withdrawal, the contribution room is not restored (unlike withdrawals from a tax-free savings account, which are added back to your contribution room on Jan. 1 of the following year).
There are, however, situations where an RRSP withdrawal may make sense. If you expect to have very low income in a particular year, say, because of a job loss or parental leave, that might be a time to consider an RRSP withdrawal because you'll pay less tax.
There are also two federal government programs – the Home Buyers' Plan and Lifelong Learning Plan – that allow tax-free RRSP withdrawals with the stipulation that the money must be gradually repaid to the RRSP over many years.
--John Heinzl
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What's up in the days ahead
Ian McGugan will reveal two innovative solutions to funding your retirement. Meanwhile John Heinzl looks at resources you can turn to when researching stocks.
Click here to see the Globe Investor earnings and economic news calendar.
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Compiled by Gillian Livingston