MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING FRIDAY, JANUARY 2, 1998 (2)
The year of the high roller
by John Greenwood -- The Financial Post
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Investors who went looking for hot returns were rewarded in 1997, with the Toronto Stock Exchange 300 composite index climbing a respectable 13%. But for those fortunate enough to pick stocks in a handful of truly top-performing segments, it was a great year.
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The TSE's financial services subindex cranked out a return of 51.5% for the year. Utilities had a gain of 37.5%, just ahead of technology software companies at 33.9%.
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One of the year's best performances was put in by CGI Group Inc.(CIBa/TSE), a thinly traded Montreal-based information systems consultancy, which cranked out a gain of 728.3%
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Not far behind was Vancouver-based Ballard Power Systems Inc. (BLD/TSE). The company attracted the attention of auto industry heavyweights Daimler-Benz AG and Ford Motor Co. with its environmentally friendly fuel cell technology. Since the start of 1997 Ballard rocketed $81.35, or 294.2%, placing it close to the top in both percentage gain and net gain rankings.
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Just behind Ballard, also on both tables, is JDS Fitel Inc. (JDS/TSE), anOttawa-based maker of fibre optic communications products. Its stock rose $62.25, or 273%.
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Markham, Ont.-based Geac Computer Ltd. (GAC/TSE) put smiles on the faces of many investors, locking in a gain of 243.8%. Geac, which designs and markets computer systems, has built a solid reputation for buying poorly performing companies and turning them around. Analysts also like Geac because of its habit of beating its own earnings estimates.
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Then there were the major banks, traditional haven of the conservative investor. Over the year financial institutions as a whole fared well, with Bank of Montreal (BMO/VSE) and (BMO/TSE) vaulting to the top of the Vancouver Stock Exchange's ranking of net gainers with a price increase of $22.65, just ahead of Canadian Imperial Bank of Commerce (CM/VSE) at $17.40. The banks also starred on the TSE list of most actively traded companies.
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Topping the TSE's rankings for net gainers was E-L Financial Corp. Ltd. (ELF/TSE). The Toronto-based insurance underwriter and provider of investment advisory services gained $100.50 during 1997.
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Mutual fund companies also shone. Mackenzie Investment Management Inc. (MCI/TSE) gained a hefty 366.7%, making it the No. 4 net gainer on the TSE. Mackenzie Investment is a subsidiary of Mackenzie Financial Corp. which manages stock and bond portfolios for clients including mutual fund companies, corporate pension funds, religious organizations and individuals with high net worth.
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The tobacco company subgroup on the TSE gained 50%. Rothmans Inc. (ROC/TSE) led the way. The Toronto-based subsidiary of tobacco giant Rothmans International N.V. climbed $54.50 over the year.
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Auto makers and parts suppliers came in just below tobacco companies, delivering a return of 47.3%. Linamar Corp. (LNR/TSE), based in Guelph topped the list, with a gain of $39.
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A year for nuts and bolts
By PATRICK BLOOMFIELD -- The Financial Post
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The peril of making forecasts for the new year's issue of a financial newspaper is that one has to prognosticate a week or two in advance. Since stock markets have a proven tendency to rise from the ashes in the days before and after the Christmas break, maybe things will be looking up for investors, at least temporarily, by the time they read this piece.
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All the same, there are some fairly safe predictions to make about the year ahead. The first half of 1998 could prove a period investors would prefer to forget, but the second half seems likely to be better.
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That is because at the end of 1997 there was still rather too much complacency about the effects of the Asian financial collapse -- and too little realization that these events will likely cut the double-digit corporate profit gains of past years to single-digit gains this year at best.
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Even in the closing weeks of 1997, U.S. financial analysts watching individual stocks collectively forecast a 14% profit gain for 1998. As this rosy outlook gives way to reality later in the year, earnings expectations stand to be reduced and stock prices to be knocked down with them.
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We have already seen the start of this. On Wall Street it has been selective, but in Canada it has manifested itself in a general assault on commodities, particularly golds and base-metal miners, as markets have adjusted to weakening Asian demand. Expect this painful process to continue in the early months of this year.
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So where can an investor hide? On a broad-market basis, it is easier to identify sectors that offer uncertain sanctuary. For instance, base-metal prices normally stage their seasonal advance through the winter and early spring. If that does not happen in the early months of this year, the stock prices of the companies that produce them could languish for months.
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That said, there will be a bright side to the Canadian market. Behind the obvious negatives lurk many relatively undervalued and neglected individual stocks that should offer welcome sanctuary to investors.
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I did a cursory search based on the yardstick of the going yield on Government of Canada 30-year bonds, which was about 6% at the time of writing. That is equivalent in stock-market terms to a price-earnings ratio of about 17.
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I looked for stock names that I know and trust, that were trading at P/Es of 17 or less. By merely running my finger down the list of quotes on the Toronto Stock Exchange, I came up with 15 companies in as many minutes.
Space precludes discussing them all, but here are some illustrative examples.
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Air Canada (AC/TSE) hardly looked expensive at $13 and change. Its earnings of $1.86 a share for the first nine months of 1997 suggested a P/E on 1997 earnings of no more than 7.5, give or take a few cents either way in the often-unrewarding third quarter. One could badmouth the stock as being too economically sensitive, but in the long run an aging population is traveling more, and Air Canada is the dominant Canadian carrier.
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Quebec-based food and pharmaceutical distributor M‚tro-Richelieu Inc. (MRU/TSE) has a useful earnings growth record that hardly seems adequately reflected in a P/E of less than 15 on likely 1997 earnings.
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In the banking sector, Quebec-based National Bank of Canada (NA/TSE) looks relatively cheap at a P/E on 1997 earnings that should be in the vicinity of 13.
Trading at a P/E of eight or less on likely 1997 earnings, Noma Industries Ltd. (NMA/TSE), the Toronto-based manufacturer of basic electrical fittings for homes and industries, looked relatively fireproof.
So did Toronto-based H. Paulin & Co. (PAP/TSE), quite literally a nuts and bolts maker, which was trading at a P/E on likely 1997 earnings of around 10.
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In general, 1998 could well prove a profitable year for careful investors
to pick from an assortment of "nuts and bolts" stocks.
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Battle for supremacy
By WILLIAM HANLEY --The Financial Post
After the turbulent end of 1997, analysts are stepping lightly in their predictions for '98
Is the Street having trouble making up its mind which way the stock market will go in 1998? Well, yes and no.
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After three years of a remarkable upleg in the secular bull market that is widely judged to have begun in 1982, North American market watchers are torn between wondering how long this splendid party can last and wondering if they will be punished for being wallflowers, as those of bearish persuasion have been in the past.
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At one end of the spectrum is the gung-ho approach embodied in a statement from TD Evergreen president Jeff Carney, who declared: "The only risk for investors in the year ahead is not being invested at all."
investors in the year ahead is not being invested at all."
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Contrast that breezy assessment with the prophets of doom who see -- and, to be fair, have been seeing for some time -- all the signs of an "a-stock-alypse" in the making. Some doomsters are forecasting falls of 50% or more for equities.
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More typical of the Street's iffy mood is Merrill Lynch & Co.'s chief market analyst, Richard McCabe. He told reporters that a 25% decline in stock prices is possible this year, yet he steers clear of making an outright prediction.
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"The October decline was likely a wake-up call that markets, like trees, do not grow to the sky," McCabe said, referring to Oct. 27, when the Dow Jones industrial average plunged 554 points, its biggest one-day point drop in history.
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McCabe says the current bull market began in late 1994 and that bull markets usually run no longer than 31 1/82 years. He says stocks would be vulnerable to a "cyclical decline" in 1998.
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Even the Toronto-based Successful Investor newsletter, successfully bullish for the past three years, has reservations. "Stock prices are likely to move sideways to downward through the middle of [1998]," it said, adding that volatility will increase. Although the year may prove as profitable to many investors as past years, "it's also likely to be much more unnerving," the report continued.
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Merrill's chief investment strategist, Charles Clough, says bonds will be the best investment in 1998. He predicts global economies and U.S. corporate profits will slow because of economic turmoil in Asia. "The definitive financial event in 1998 will be lower interest rates," Clough said.
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Which way the stock market will swing this year appears to hinge on a combination of interest rates, bond prices, earnings growth, Asia and that most indefinable and most important of elements, sentiment. In Canada, throw in the shaky C$ and the outlook for natural resources.
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And yet as strategists and traders assess the risks and the rewards of staying in stocks, the buy-and-hold investor, rewarded for his patience these past three years with a doubling of his money in the U.S. market, is sticking to his plan despite a market that has been looking vulnerable now for months. If the new-age pundits are correct, the buy-and-hold brigade will continue to fare well into the next millennium.
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The Dow added 1459.98 or 22.6% to 7908.75 in 1997, but failed to recapture the high close of 8259.41 set all the way back on Aug. 6. The broader S&P 500-stock index fared even better, but also struggled to keep its gains toward the end of the year.
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On Bay Street, the Toronto Stock Exchange 300 composite index -- the
benchmark for the Canadian market -- rose only 772.41 or 13% to 6699.44, the victim of a lacklustre resource sector that was supposed to be kicking in at this late stage of the economic cycle and providing the afterburners to catch the U.S. market.
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But analysts by and large are sticking to the script. A recent Reuters poll has found that analysts believe the Toronto market will gain substantially this year and into 1999 as commodities stocks rally. On average, the analysts see the TSE 300 up 17% from the close of 6641.9 on Dec. 12.
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While the TSE's 1997 gain of 13% (plus dividends reinvested) beat GICs and term deposits, the gap is not that great when, say, mutual fund fees are taken into account.
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Many of those in stocks were GIC refugees who had been persuaded to overcome their fear of risk by the lucrative rewards available in equities and equity dominated mutual funds. But as the Canadian market stumbles along about 10% below its record high, interest rates rise and RRSP season looms, it would be reasonable to expect that some refugees will return to GIC country.
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And if not out entirely out of stocks, a defensive position may suit. As 1997 drew to a close, mutual fund operators noted a lowering of risk tolerance.
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The North American bulls point to the following factors to explain their bullishness:
* Continuing favorable demographics see millions of baby-boomers pouring their savings into equity mutual funds and making rich returns.
* The lack of an alternative to the stock market while fixed-income instruments, such as GICs, are paying peanuts.
* An environment of solid growth and low inflation promises continued gains
in earnings, which in turn fuel stock prices.
* Continued outstanding productivity gains for industry through technology applications.
* Continued benefits from globalization of trade, despite the warning signals thrown up by the Asian crisis.
* The relatively stable world geopolitical scene.
The bears, having spent most of the past three years in the wilderness
living off scraps, are more than ever convinced their time is coming in
1998:
* The market is overvalued, and that indisputable fact will finally sink in
with investors, although it has yet to do so on a consistent basis.
* Earnings growth cannot be maintained and earnings will not support such
high valuations.
* Along a similar line, the Asian crisis is not about to go away, meaning
that deflationary pressures -- not inflationary ones -- will set the agenda.
* The market has had three remarkable years. The odds against a fourth are very high.
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For Michael Metz, chief investment strategist at CIBC Oppenheimer Inc., the odds are stacked against the U.S. market, because earnings expectations are far too high as conditions deteriorate in the face of the Asian crisis and a possible run-up of wage inflation in the services sector.
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As Moody's Investor Services Inc. said in a recent commentary: "The current mix of very low bond yields and steep price-to-earnings multiples
underscores the vulnerability of both asset classes to a labor-cost driven rise by inflation risks." Metz envisions a choppy market that could end up flat on the year.
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For some investors, the TSE's 13% gain in '97 will feel like a flat performance versus the Dow and the S&P 500. But the average annual total return since 1982 has been just 11% on the TSE against 15% for the S&P 500.
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One recent Wall Street poll suggested the consensus expectation was for U.S. stocks to fall back below a 10% return this year.
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Indeed, a return to more normal rates of return would not be surprising. But the market's mounting volatility as 1997 progressed was likely a precursor to a wild ride in 1998, a year in which anything can happen and probably will.
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