The A Wealth of Common Sense investing site provided an interesting thought exercise by attempting to predict industries and trends that will fade away along with the baby boomer generation. Some of the answers were predictable – cable television, for example – while others like traditional brick-and-mortar bank branches and conventional home ownership were more of a surprise.
The sports landscape is set to change dramatically if the predictions are correct. The National Football League was forecast to succumb to its concussion issues, shrinking into a niche sport like boxing. Both golf and baseball were deemed too slow and archaic for their current popularity to continue.
The most contentious forecast involved major changes in home ownership. Blog author and portfolio manager Ben Carlson writes, “Whether it’s trading a piece of your equity for help with a down payment or going in with professional investors to buy a home, it’s possible the idea of conventional home ownership, especially on the expensive coasts, could look different to make it more affordable to buy. Residential real estate is an enormous market so the finance industry is going to find unorthodox ways to make money in the space at some point.” The "trading a piece of your equity" involves pledging a portion of the price upside of the home to a company that finances the initial down payment.
Admitting that the transformation is a long way off, the article predicts that banking will become increasingly dominated by technology and face-to-face meetings with customers will end. Goldman Sachs and J.P. Morgan were cited as companies that are already moving in this direction.
Other trends and institutions forecasted to dwindle along with the boomer population include organized religion, high-interest rates, movie theatres, voice mail and (I think they were kidding with this one) gold. There’s a quote I heard when working in finance – one I’ve never been able to attribute despite numerous attempts – that goes something like, “during periods of widespread change, it’s hard for investors to pick the winners, but it’s often easy to identify the losers.” DVD manufacturers were an obvious example a decade or so ago.
The A Wealth of Common Sense discussion represents the sentiment of the quote in action, and it’s a good practice for investors looking to project the risks of technology on their holdings.
-- Scott Barlow, Globe and Mail market strategist
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The Rundown
Why this Canadian fund manager of $5.5-billion is betting big on health care and tech stocks
David Arpin will pass on predicting what stock markets will do next. Investor sentiment certainly hasn’t been a good predictor lately. “I haven’t seen a lot of evidence that it’s easy to forecast where markets will head over a short period of time,” says Mr. Arpin, a senior vice-president and portfolio manager with the Bluewater team at Mackenzie Investments. He points out that investors were bullish a year ago, then the fourth-quarter correction happened. Investors were grim at the start of 2019, and markets have since surged. “You get sideswiped when you try to guess where [the markets] will go in the next three to six months,” says Mr. Arpin, who manages about $5.5-billion in assets. “Our view is that you’re always better off if you invest in companies that should do well over time, and do that consistently.” He tells Brenda Bouw what sectors he's been buying and selling. (Story for subscribers).
Expected rate cuts could help revitalize Canadian and U.S. bank stocks
U.S. and Canadian bank stocks have been struggling over the past year, but there’s some historical evidence that looming interest-rate cuts by central banks will give the sector a much-needed boost, David Berman writes (for subscribers). He says double-digit gains could be coming if banks on both sides of the border follow the path of previous rate-cutting years over the past two decades. Still, the yield curve is a big concern. "Three-month Government of Canada bonds are yielding more than 10-year bonds, which is an unusual event known as a yield-curve inversion," Mr. Berman writers. "The U.S. yield curve inverted earlier this year, pointing to a potential recession ahead."
Golden blunders: How a string of technical mishaps has hampered Canada's junior gold miners
Globe mining reporter Niall McGee looks at how some junior mining stocks have soared and then sank after technical reports overestimated the amount of gold in a deposit. Mr. McGee examines a handful of mining companies that "have shocked the market with nasty technical surprises." (Story for subscribers).
Five indicators to see where the market moves next
Are you baffled by where the stock market is headed next? You’re not the only one, writes Ian McGugan (for subscribers). In recent weeks, he says stocks have advanced based on the "dubious logic that bad news is good news." This way of thinking should mean weaker global growth will help lift share prices because fading growth will pull already low-interest rates even lower and increase the attractiveness of stocks. " If that makes sense to you, you are a very trusting soul. Or a money manager in need of comfort," he writes.
Others (for subscribers)
Morgan Stanley: S&P 500 rally will top out at 3000
U.S. rail earnings in the spotlight as investors try to assess the impact of trade wars
Expectations are low for second-quarter U.S. bank earnings but investors still say 'buy'
Facebook's David Marcus says regulatory concerns to be 'fully addressed' before Libra launch
InBev turns focus to selling more beer after canceling Asian division IPO
Insiders buy as Exco Technologies approaches 4-year bear market
Monday's small-cap stocks to watch
Monday's analyst upgrades/downgrades
The Globe's stars and dogs for last week
Others (for everyone)
Rising temperatures due to climate change providing new opportunities for investors
Bitcoin drops more than 10% as scrutiny of cryptocurrencies grows
China's growth slows to a 27-year low as trade war bites, more stimulus seen
Globe Advisor
India provides 'compelling' long-term opportunities
India is back in the spotlight as an attractive, longer-term emerging-markets play now that Prime Minister Narendra Modi has won re-election with a landslide victory in late May. Both the S&P BSE Sensex index and National Stock Exchange Ltd.’s Nifty 50 index rose to record highs in early June shortly after Mr. Modi’s Bharatiya Janata Party regained power for a second five-year term. Although stock markets have since pulled back on profit-taking, they’re still up by about 7 per cent year to date. Story
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Ask Globe Investor
The Question: I am a long-term holder of Microsoft stock. It has tripled in value in recent years and I am in a quandary as to whether I should take the profit or continue to hold the stock. I hold it in my registered retirement savings plan and I do not need the proceeds. What do you think?
The answer from John Heinzl:
First, let’s get something straight. The fact that Microsoft Corp. (MSFT) has tripled in value is, in and of itself, not a reason to sell the shares. Those gains are in the past and should have no bearing on your decision. All that matters now is how you expect Microsoft’s shares to perform in the future. I see too many investors with itchy trading fingers who “take profits” because a stock has risen in value, only to watch with regret as the shares zoom even higher.
There is a name for this sort of behaviour – it’s called “anchoring," and it refers to the use of irrelevant information to make investing decisions. In your case, the anchor is the low price you paid for Microsoft several years ago. But – to continue the nautical analogy – you are in the same boat today as every other Microsoft investor. The fact that you are sitting on a large capital gain is nice, but it’s not relevant to what you should do now.
So the question you should be asking yourself is: Based on Microsoft’s future prospects, do the shares offer attractive return potential at their current price?
The answer, according to Wall Street, is a resounding yes. Of the 36 analysts who follow the company, 33 have buy recommendations on the shares, with two holds and one sell, according to Refinitiv. Even after a 37-per-cent increase in the share price this year, analysts see further gains ahead: The median 12-month price target is US$146 – 5.1 per cent higher than Friday’s close of US$138.87.
Does this guarantee that Microsoft’s shares will continue to rise? No. But analysts make a compelling case that the company has lots of growth ahead thanks to strength in products such as Office 365 and Azure, a cloud-computing platform that provides a wide range of services to supplement or replace on-premise servers.
“As these businesses grow within the mix and as margins improve (especially in Azure), we expect revenue and gross profit growth to accelerate,” RBC Dominion Securities analyst Ross MacMillan said in an April note after Microsoft posted strong fiscal third-quarter results that sent its stock sharply higher.
Just this week, brokerage Cowen & Co. initiated coverage of Microsoft with a buy rating and US$150 price target. Cowen analyst Nick Yako said Microsoft has the potential to post an additional US$100-billion of revenue by fiscal 2025, with Office 365 and Azure the key growth drivers. “Despite its recent success, we see further opportunity ahead, as we believe double-digit annual revenue and earnings growth [from fiscal 2020 to fiscal 2025] is more than achievable,” he said in a note.
Notwithstanding such glowing endorsements, it’s important to remember that every business faces risks and even great companies can stumble. For that reason, if your Microsoft investment has grown to the point where it accounts for an unduly large percentage of your portfolio, there may be a case for trimming part of your position and reinvesting the proceeds elsewhere simply to improve diversification and control your risk. Because you hold Microsoft in your RRSP, there would be no capital-gains consequences from selling a portion of your shares. Whether to trim or not is a judgment call; in my own portfolio, I generally aim to cap each security at about 5 per cent of my equity exposure, but if I really like a stock I’ll let the weighting go higher than that. The old Wall Street saw – “Let your winners run” – is often good advice.
Tweaking your portfolio to control risk is one thing. But selling your entire Microsoft stake because the shares have tripled and you want to lock in your profit does not strike me as a prudent strategy given the company’s bright prospects.
Do you have a question for Globe Investor? Send it our way via this form. Questions and answers will be edited for length.
What’s up in the days ahead
Poor Warren Buffett. Home Capital Group shares have surged more than 50 per cent since the chief executive of Berkshire Hathaway sold his stake in the Canadian alternative mortgage lender in December. But more important, Home Capital’s stunning comeback over the past six months, as Canada’s Big Banks plod along, raises questions about whether recent regulatory changes to Canada’s housing market are benefiting some of the smaller players. David Berman will take a closer look.
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- Compiled by Brenda Bouw