Full episode: Market Call for Tuesday, March 19, 2019
Keith Richards, president and chief portfolio manager, ValueTrend Wealth Management
Focus: Technical analysis
In my view, the market is overbought on a broad basis. However, this doesn’t imply that all stocks are overdone. There is value to be found in some oversold sectors. At ValueTrend, we are attempting to buy into the oversold sectors and sell the less attractive securities. We're buying “out of favour” securities — particularly those looking like they are breaking out of their former downtrend. We're also keeping a tight watch on our existing stocks. Downside tolerances are being tightened, meaning that we are more willing to sell a stock if it shows signs of breaking down in technical trend.
While we don't want to be out of the market entirely, we do continue to hold some cash. We’re about 24 per cent cash at the time of writing this — although that cash allotment is dynamic. We are constantly looking for opportunities to buy under-loved sectors and stocks. Here is an excerpt from my website that summarizes ValueTrend’s current strategy:
"In the end, I don't know for sure what will happen on the markets at any given time. But I do know that I hate losing clients' money...along with my own. I hold my families wealth in the ValueTrend platforms. So I eat my own cooking. In fact, I hate losing money more than I like trying to squeeze every last bit of return from the market. Buying into an overbought market is similar to Admiral David Farragut’s famous order to “Damn the torpedoes, full speed ahead!"
Still, one does have to hold some money in the market. Today’s Top Picks are a few areas where we see value. These are overlooked markets with charts that are breaking out after a downtrend. In our way of looking at it, right now it's better to bet on an undervalued sector with an emerging chart versus buying into a momentum play that is looking long in the tooth.
BMO BASE METALS ETF (ZMT.TO)
This sector play buys the producers that largely focus on base metals. Some of the holdings, such as Teck Resources, are diversified into other commodities like gold and energy. But overall it's a fairly concentrated base metals index play. The chart looks to be breaking out of a base. We bought a five-per-cent position. This ETF is currently hitting first resistance at around $46. If that is broken, the upside is significant — I’m looking at $54-$55 if or when we see $46 taken out.
Following our oversold stock thesis, we bought into Encana (three-per-cent weighting) after it issued an encouraging earnings report. This stock appears to have broken its downtrend, and it's in the commodity space — something we have been legging into. Encana recently acquired NFX, and this move is expected to offer better synergies than originally forecast. The free-cash-flow yield it is expected to deliver in 2019 will make it among the highest in North America. ECA has assets in Canada and the U.S. Our first technical target is about $11.30 per share — but the stock could move higher if that level is broken. We will trade accordingly.
Onex is a conglomerate. The stock got hammered in 2018, falling from $100 per share down to the low $70s by December. It's been basing and breaking out of that tailspin nicely, although it has not yet broken out of its base. We bought a five-per-cent weighting at just over $75 per share. This is another potential value play. The company is currently being priced under book value. For a financial conglomerate, this often represents good value. Some of the private-equity businesses held by Onex struggled in 2018, but we anticipate the necessary changes are being made. A return to more normal financial results is expected to move the stock higher. This stock is probably going to be held for several months or longer, versus many of our stocks which are viewed with somewhat shorter trading horizons. My technical target is around $87.
PAST PICKS: JANUARY 24, 2019
FAIRFAX FINANCIAL (FFH.TO) – still own, target is $700+
- Then: $616.04
- Now: $610.34
- Return: -1%
- Total return: -1%
BMO EMERGING MARKETS ETF (ZEM.TO) – still own, target is $21-$22
- Then: $19.41
- Now: $20.21
- Return: 4%
- Total return: 4%
CASH – we are currently just under 25% cash
TOTAL RETURN AVERAGE: 1%