The M&A threat to energy shares, a case for bond ETFs, and research that may spook pot stock investors

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Courtesy of Globe and Mail

Carlota Perez, an economist and current Centennial Professor at the London School of Economics, is one of my favourite thinkers. Ms. Perez’s theoretical framework for the economic and political cycles of technological advancement will inform public policy for decades to come.

Ms. Perez’s research also provides a potentially dire warning for Canadian investors in marijuana stocks.

In, “The Advance of Technology and Major Bubble Collapses,”  the professor notes that all eras of major technological advancement follow the same pattern  — a 20- to 30-year period of installation and then and a process of deployment of equal duration. During installation, “investment is led by financial capital, which funds the technological transformation and, in the excitement, also intensifies its casino-type activities until it decouples from the real economy building a major asset inflation boom that ends in a catastrophic collapse.”

This sequence was evident in the Industrial Revolution, railway expansion, the early 20th Century lead up to the great depression, and more recently the technology and housing bubbles.

Marijuana is not technology. The almost-certain broad proliferation of legal marijuana, the deployment phase of the trend,  is a social revolution so Ms. Perez’s template may not hold in all particulars.

There are, however, signs of over-exuberance in marijuana stocks. There a numerous companies with market capitalizations between $700-million and $1-billion with no earnings expected in the near future while significant regulatory risks hover over the sector.

Like technology investors in the late 1990s, the ‘buy at any price’ investors in marijuana stocks are probably not wrong about the future size of the industry. If Ms. Perez’s research can be applied, however, the large portfolio gains will come during the deployment phase, after a financial and market reckoning. 

–Scott Barlow

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Stocks to ponder
Brick Brewing Co. Ltd.
The stock has been a strong performer, rising 23 per cent year to date, rallying over 50 per cent last year, and soaring 77 per cent in 2015, writes Jennifer Dowty. In addition, the company pays shareholders a quarterly dividend, currently yielding 1.7 per cent.

Algonquin Power & Utilities Corp. This utility is seeing positive price momentum, writes Jennifer Dowty. The company offers its shareholders a 4.6-per-cent yield with a dividend that has been rising at a double-digit growth rate.

The Rundown

Smaller banks worth a look after Home Capital woes sideswipe shares

The crisis at Home Capital Group Inc. has affected other Canadian lenders in at least one way: Some smaller banks are offering higher rates on deposits, which could weigh on the banks’ profits as they prepare to report their second-quarter results this week, writes David Berman. For investors who thrive on uncertainty, though, this Home Capital spectre offers a good reason to give some of the less obvious names in the financial sector a closer look than they might usually demand. Laurentian Bank of Canada reported its results on Tuesday, followed by Canadian Western Bank on Thursday.

Branching out investments in search of value

Investors should look up from their portfolios, from time to time, to gauge the state of the market. To do so it is useful to break down the market by sector to see which ones are faring the best and where there are bargains to be found, writes Norman Rothery. He focuses on price-to-earnings ratios (P/Es) and one-year total returns as his measures to evaluate stocks, and comes up with two stock names to consider.

How mergers and acquisitions could crimp Canadian energy share prices

Investors betting on Canadian energy stocks have more to worry about than the price of crude oil: The oil patch is saturated with new shares, thanks to surging deal activity, at a time when stock prices are hardly cheap. According to Ian de Verteuil, head of portfolio strategy, quantitative and technical analysis at CIBC World Markets, this combination “means there could be high downside risk in these stocks if oil prices weaken.” David Berman explains.

How Equitable Bank’s CEO invests his own money

Equitable Bank chief executive officer Andrew Moor’s first foray into investing was in his native Britain in the mid-1980s, when then-prime minister Margaret Thatcher pushed the privatization of public assets. He bought some telecom and utility stocks that turned out to be good bets, writes Brenda Bouw. He’s since invested in the mid-sized companies he has worked for and he explains his strategy.

Why bond ETFs are proving more and more enticing

The fees on bond ETFs are finally falling into line with the low interest rate world we’re stuck in, writes Rob Carrick. Exchange-traded funds holding bonds are less costly to own than bond mutual funds. But with bond yields as low as they’ve been in recent years, bond ETFs still seemed a bit pricey. Price competition in the ETF business is taking care of this, at least for core bond funds.


Ten companies with recent insider buying and selling activity

Gordon Pape: My TFSA income portfolio has gained 13.3% annually

Rob Carrick’s ETF Buyer’s Guide: The complete series

Insiders buying as Inter Pipeline slides

The Globe’s stars and dogs for last week

Number Crunchers

Fifteen stocks in IT sector offering value and sustainable growth

Ask Globe Investor

Question: If one wants to invest in the S&P 500, is one better off to do it on the New York exchange instead of the TSX and, if so, what would be your recommendation?

Answer: The TSX will work just fine. You can choose between an ETF that is hedged back to Canadian dollars or one that is unhedged.

The iShares Core S&P 500 Index ETF (CAD-Hedged) trades under the symbol XSP. The average annual return for the three years to April 30 was 9.81 per cent. The unhedged version of the same fund trades as XUS. It had a three-year annual return of 18.37 per cent, the difference being the gain in the value of the U.S. dollar against the loonie.

If you expect our dollar will continue to decline against the greenback, choose XUS

— Gordon Pape

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What’s up in the days ahead

Utility operator Fortis Inc. is one of the original members of John Heinzl’s Strategy Lab model dividend portfolio, and he’s been pleased with its performance. So pleased, in fact, that he’s buying more shares. He’ll explain why in Wednesday’s Globe Investor.

Click here to see the Globe Investor earnings and economic news calendar.

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Compiled by Gillian Livingston

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