Famed Wall Street quantitative strategist Richard Bernstein has long believed that successful investing depends on gauging the supply and demand for capital. Investing where capital is scarce, where few others are allocating funds, allows an investor to demand better terms – attractive valuations or a higher dividend yield – which makes gains more likely.
In his most recent research report for the asset management firm he founded, Mr. Bernstein argues that investment in the Magnificent Seven stocks is a recipe for capital destruction - allocating funds to where capital is abundant and unnecessary due to popularity. He finds it analogous to investing in the Nasdaq in early 2000, after which it would take investors about 14 years to break even.
The report details the “earnings expectation life cycle” model, which tracks the change in market sentiment that every stock goes through eventually. At 12:00 on a hypothetical clock diagram is the “unstoppable” stage of extreme optimism where investors believe nothing can stop stock price appreciation. At 6:00 is the “contrarian” phase where most investors believe a company to have an unviable business.
Analyst estimate revisions are at both 3:00 and 9:00 on the diagram. This emphasizes how analysts are always late to realize that growth for the popular stocks is failing (3:00) and similarly late to trust that the formerly hated companies are recovering quickly. Tellingly, stocks where analysts drop coverage are often outperformers in ensuing years.
Mr. Bernstein believes that the Magnificent Seven stocks are close to the 12:00 “unstoppable” stage. The next one at 1:00 is ‘torpedoed” – his term for a rapid, precipitous fall in stock prices.
Stocks or sectors that are most likely to outperform in this model are those lying between the 6:00 contrarian stage and the 9:00 point where analysts belatedly increase their earnings expectations. Mr. Bernstein lists U.S. energy, materials, industrials, small caps and emerging markets stocks as lying in this potentially lucrative zone on the earnings expectations clock.
-- Scott Barlow, Globe and Mail market strategist
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Stocks to ponder
CGI Inc. (GIB-A-T) The share price of the IT consulting firm has been under pressure since reaching a record high on March 13. Is it a buying opportunity? Jennifer Dowty looks at the investment case.
Fairfax Financial Holdings Ltd. (FFH-T) Portfolio manager Asheef Lalani thinks the stock is on the other side of an inflection point in its earnings and valuation that position it for an extraordinary run over the next decade. In his view, it’s following in the footsteps of Warren Buffett’s Berkshire Hathaway, which shot up 27 times after it reached the size Fairfax is now in 1995.
Apple Inc. (AAPL-Q) Its plan to add generative AI to its iPhones and revive sagging sales in the crucial Chinese market will be in focus on Thursday, when the tech giant is expected to report its biggest quarterly revenue decline in more than a year. Apple shares have underperformed other Big Tech companies in recent months, falling more than 10 per cent year to date as fears mount about its slow roll out of AI services and as a resurgent Huawei takes market share in China. Reuters looks at the tech giant’s risks and opportunities ahead of earnings.
The Rundown
Investors scour the globe for shelter as Wall Street shakes
Reuters reports that global investors are eyeing European and emerging market assets to protect themselves from further turbulence in U.S. stocks and bonds as stubborn inflation causes bets on the timing of Federal Reserve interest rate cuts to be revised.
TD’s Beata Caranci on where economic growth, interest rates, real estate and stocks are heading
Jennifer Dowty speaks with TD’s chief economist Beata Caranci in this wide-ranging interview. She notes that the Bank of Canada is far more optimistic than TD when it comes to where economic growth is heading. She also warns against underestimating how much housing demand will bounce back later this year if rate cuts unfold.
Crypto washout sends bitcoin into a bear market
The value of the world’s most traded cryptocurrency fell by nearly 16 per cent in April, as investors booked profits on a sizzling rally that has taken the price to record highs above US$70,000. Reuters takes a look at what’s behind the selloff.
Inflation hasn’t lost its grip on bond markets yet
Government borrowing costs across developed economies saw their biggest jumps in months in April, evidence that bond markets are not yet out of the woods when it comes to inflation and the threat of higher-for-longer than expected interest rates.
Also see: Bond markets face struggle to surf ‘Treasury tsunami’
A strong U.S. dollar weighs on the world
Every major currency in the world has fallen against the U.S. dollar this year, an unusually broad shift with the potential for serious consequences across the global economy, reports The New York Times.
Others (for subscribers)
John Heinzl’s model dividend growth portfolio as of April 30, 2024
Wednesday’s analyst upgrades and downgrades
Tuesday’s analyst upgrades and downgrades
On commodities: Copper just passed US$10,000 a tonne again – Now what?
Globe Advisor
Where to look beyond the Magnificent Seven for exposure to AI
How three fund managers are playing the energy bull market
How Ottawa’s hike to capital gains inclusion rate affects trusts
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Ask Globe Investor
Question: Regarding John Heinzl’s article about Canadian depositary receipts for U.S. companies, are CDRs considered foreign property? And do they need to be included on a T1135 Foreign Income Verification Statement?
Answer: Yes, and yes. According to an FAQ prepared by CIBC Capital Markets, which manages CDRs representing more than 50 U.S. companies, CDRs are considered “specified foreign property” for purposes of the Canadian tax reporting rules.
“T1135 reporting in Canada would be required for an investor that is a taxpayer resident in Canada and whose cost of CDRs of all series, plus any underlying shares of those series that are held directly, plus the cost of any other specified foreign property, exceeds $100,000,” CIBC says. (Read the full FAQ, which also discusses U.S. estate tax, under “resources” at cdr.cibc.com).
The good news is that CDRs – or any other foreign property – held in a registered account (such as a registered retirement savings plan, tax-free savings account or registered education savings plan) are excluded from Form T1135 reporting requirements. Canadian-listed exchange-traded funds and mutual funds that hold foreign property are also excluded. The same is true for personal use property such as a car or vacation home.
--John Heinzl (E-mail your questions to jheinzl@globeandmail.com)
What’s up in the days ahead
Should Robert Shiller’s Cyclically-Adjusted-Price to Earnings (CAPE) ratio, the widely used valuation metric for stocks, be recalibrated? There’s now evidence it should be. Robert Tattersall will tell us more.
Click here to see the Globe Investor earnings and economic news calendar.
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Compiled by Globe Investor Staff