Bears are bullish for buyers

Forget expensive cauliflower, snap up some cheap stocks instead

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The Canadian stock market tumbled into bear market territory early this year. The S&P/TSX Composite peaked at 15,685 in the fall of 2014 and swooned to a low of 11,531 last week. It bounced back to 12,331 on Tuesday. Where it goes from here is anyone’s guess.

Put into percentage terms, the index declined 26.5% from its 2014 high to last week’s low and ended Tuesday down 21.4%. Mind you, those figures do not include dividends, which would have reduced the losses by a few percentage points.

Bear markets can be painful for investors, but the good news is that they’re usually short lived. For some data on the topic, I turned to Dan Hallett, V.P. and Principal at Highview Financial, who wrote a piece in 2014 called “It is time to prepare for the bear.”

He examined bear markets in Canada and the U.S. over the course of many decades. He found that markets tend to fall to their lows in about a year and then recover over the next couple of years.

Mr. Hallett figures that it took an average of 11 months for Canadian stocks to fall from their highs to lows in bear markets based on monthly data from 1957 to 2013. It then took an average of 24 months for them to recover to their former highs.

On the U.S. side of the ledger, stocks took an average of 15 months to fall from their highs to lows and then another 31 months to recover based on bear markets from 1876 to 2013.

So far, we’re a little over 16 months into the current Canadian bear market. Only one Canadian bear took longer to hit bottom in Mr. Hallett’s data set and that was the Nortel-aided debacle that started in 2000 and lasted for 25 months before bouncing off its lows.

Alas, no one rings a bell when the market hits a bottom. But bargains can be found today and long-term investors should think about loading up while prices are low.

Just take a look at this week’s list of Safer Dogs for some ideas. It’s an easy matter to build a portfolio with a dividend yield in excess of 4%. (Some banks sport yields of almost 6%.) That’s pretty good barring financial Armageddon.

For my part, I’ve purchased more shares over the last few months–including some of the Safer Dogs–than I have over the last few years.

So, forget about buying expensive celery and cauliflower at the grocery store. Snap up some cheap stocks instead.

Safer Canadian Dogs

Investors following the Dogs of the Dow strategy want to buy the 10 highest yielding stocks in the Dow Jones Industrial Average (DJIA), hold them for a year, and then move into the new list of top yielders.

The Dogs of the TSX works the same way but swaps the DJIA for the S&P/TSX 60, which contains 60 of the largest stocks in Canada.

My safer variant of the Dogs of the TSX tracks the 10 stocks in the index with the highest dividend yields provided they also pass a series of safety tests, such as having positive earnings. The idea is to weed out companies that might cut their dividends in the near term. Just be warned, it’s a task that’s easier said than done.

Here’s the updated Safer Dogs of the TSX, representing the top yielders as of January 26. The list is a good starting point for those who want to put some money to work this week. Just keep in mind, the idea is to hold the stocks for at least a year after purchase – barring some calamity.


Name Price P/B P/E Earnings Yield Dividend Yield
National Bank (NA) $37.13 1.31 8.14 12.28% 5.82%
CIBC (CM) $87.00 1.7 9.8 10.21% 5.29%
Bank of Nova Scotia (BNS) $53.26 1.31 9.33 10.72% 5.26%
Shaw (SJR.B) $23.76 2.15 13.5 7.41% 4.99%
BCE (BCE) $55.51 3.87 18.26 5.48% 4.68%
TELUS (T) $37.64 3.04 15.95 6.27% 4.68%
Royal Bank (RY) $67.62 1.71 10.03 9.97% 4.67%
Bank of Montreal (BMO) $72.78 1.29 11.03 9.07% 4.62%
Power (POW) $28.18 1.04 7.06 14.16% 4.42%
TransCanada (TRP) $47.13 1.98 19.89 5.03% 4.41%

Source: Bloomberg, January 26, 2016

Notes

Price: Closing price per share

P/B: Price to Book Value Ratio

P/E: Price to Earnings Ratio

Earnings Yield: Earnings divided by Price, expressed as a percentage

Dividend Yield: Expected-Annual-Dividend divided by Price, expressed as a percentage

As always, do your due diligence before buying any stock, including those featured here. Make sure its situation hasn’t changed in some important way, read the latest press releases and regulatory filings and take special care with stocks that trade infrequently. Remember, stocks can be risky. So, be careful out there. (Norm may own shares of some, or all, of the stocks mentioned here.)

Reproducibility

The Experiment Experiment

 

One comment on “Bears are bullish for buyers

  1. Excellent information. Thank you

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