Q&A: Norm Rothery on the Top 200 for 2013

Jon Chevreau: So, Norm, when did you buy your first stock and how closely does your personal portfolio resemble your picks in MoneySense? Norm Rothery: I bought my first stock or—if I recall correctly—my first three stocks in the early 1990s. That was back in the days that the Financial Forum was going strong and one of the brokerages would sell small amounts of stock to those at the show for a very small commission. I picked up stock in firms that also offered Share Purchase Plans, which allow for further purchases for no/low cost from the company itself. BCE was one of the stocks and I slowly built up a modest stake in it until I sold all but a few shares when Nortel was shooting skyward.?? ?I tend to hold a deep-value portfolio with a good portion of smaller and less followed names. As a result, there usually isn’t a huge overlap between my personal portfolio and any particular screen that I do for MoneySense. But there are some similarities, for instance, I’ve held E-L Financial (ELF) for a few years and it is on this year’s Top 200 All-Star list. I use such screens as idea generators. JC: You’ve been doing the Top 200 in MoneySense for 8 years now, as well as the Top 500 US Stocks and The Retirement 100. How much do these portfolios change year over year, compared to the turnover in the average mutual fund and how is it you’ve beaten the relevant indexes? NR: It depends very much on the year. Sometimes the stock list doesn’t change too much from year to year, while at other times nearly everything is changed. As a result, there is more turnover than some active and passive funds while there is sometimes less than others. This matters when it comes to fully taxable accounts where trading triggers capital gains taxes. Typically, it is best to keep higher turnover methods in tax sheltered accounts.? ?The answer to the question of how we beat the various indexes is actually rather simple. The methods are all spelled out in the accompanying articles. So, everyone knows the factors that we look for, which, in turn, were selected largely based on long-term studies of past performance. For instance, stocks with low price-to-book-value ratios have generally beaten stocks with high ratios over the long-term. Simply sticking with such stocks tends to gives investors a boost over the long term. Not every year to be sure, but they have done well over the long-term. That’s why we included the factor in the Top 200 methodology. JC: You tweaked the Top 500 US stocks this year in two ways. First, you’ve expanded the list to 1,000 stocks? NR: We’re sticking with the Top 500 large stocks in the magazine. But, as you say, we also added another 500, slightly smaller, stocks as an extra in our online package. JC: Plus you’ve also added 25 “sector diversifier” American picks for Canadian investors. How important is this to consider when looking at the U.S. market? Or to put it differently, how risky is it to concentrate in the big three sectors most Canadians already have: energy, materials, financials? NR: The issue here is to try to promote more sector diversification for Canadian investors who tend to hold portfolios dominated by resource and financial stocks. It’s an important issue because under-diversified portfolios tend to be volatile and can be hard to hold for many people. So, we highlighted the best of the Top 500 stocks in sectors that are underrepresented in Canada. That way Canadians will know where to start their search for U.S. firms that can help to boost diversification. JC: Speaking of volatility, even since you finished analyzing this year’s Top 200/Top 500, stocks have been hard hit since Obama was re-elected. Do you think all this hype about the fiscal cliff is going to bring better values still to your screens? NR: Well, the decline since election night hasn’t been particularly large to this point. It’s more of a blip than a plunge. But stock buyers can always hope for a much more significant collapse, which isn’t out of the question given the lofty level of Shiller’s cyclically-adjusted P/E ratio. A reprise of the 2008 decline would be good for buyers.? The problem with the so-called fiscal cliff is that the U.S. will eventually have to get its financial house in order. Running huge deficits isn’t a path to long-term prosperity. So, some combination of tax increases and spending cuts will be put into place at some point. However, I suspect some deal will be made to, once again, put off much of the immediate pain. We live in interesting times. JC: Indeed! Most of your MoneySense picks have been U.S. or Canadian stocks. How do you feel about international and emerging markets? Do you pick these too for your own account or use ETFs? Or do you prefer ADRs trading on American exchanges? NR: International stocks are getting interesting these days as various markets implode in Europe and elsewhere. I expect to address some of the issues with picking international stocks in an upcoming column for MoneySense, which should appear in the new year. I personally tend to opt for low-fee funds in this space and tend to avoid emerging markets most of the time. Hyper-growth countries have a bad habit of disappointing investors but they can be quite attractive after big crashes. JC: Thank you, Norm. NR: My pleasure. To find out which stocks made Rothery’s lists, pick up the December/January 2013 issue of MoneySense or download the Top 200. The premium package comes complete with PDF articles and Excel tables showing grades for the Top 1,000 American stocks, the 100 bonus Canadian stocks as well as The MoneySense Guide to Investing in Stocks. The basic package includes the Top 200 Canadian stocks and 1,000 U.S. stocks.

About Jonathan Chevreau

As MoneySense’s Investing-Editor-at-Large, he is also author of Findependence Day and co-author of Victory Lap Retirement. Reach him at [email protected], where he is the founder of Financial Independence Hub.