Welcome to The MapleMoney Show, the podcast that helps Canadians improve their personal finances to create lasting financial freedom. I’m your host, Tom Drake, the founder of MapleMoney, where I’ve been writing about all things related to personal finance since 2009.
Are you struggling to make sense of the current state of the economy, not to mention the stock market? If so, you’re not alone. These are uncertain times, and no one seems to have any real answers. My guest this week is Dan Kent, investor and co-founder of stock research and news site, StockTrades.ca. Dan joins me to discuss the recent market volatility related to the COVID-19 crisis, and shares his thoughts on where he thinks we may be headed.
Despite Dan’s knowledge of the markets, he admits that he’s much like the rest of us, in that he doesn’t know how long the COVID-19 crisis will continue, and what it’s lasting effects on the economy will be. That doesn’t mean that he doesn’t have some great advice to share.
According to Dan, we should get a clearer picture of the effects of COVID-19 on the economy during the next earnings cycle, when companies begin filing their most recent quarterly earnings. For many, the news is not expected to be good. Dan and I discuss some of the industries he expects to be hardest hit by COVID-19, a group that includes airlines and movie theatres.
Thankfully for investors, certain industries tend to be recession proof. That is, they continue to make money in just about any market. Good examples would be the utilities and telecom business, with stalwarts like Fortis, Rogers, and Bell, who continue to pay dividends. The financial sector, specifically Canada’s big banks, is another industry well positioned to ride out the current economic crisis.
Dan cautions investors who turn to gold in times like these, and he explains how self directed investors tend to fare so poorly in bear markets such as the one we’re living in now. It’s a can’t miss episode that could not be more timely.
Our sponsor, EQ Bank, has partnered with TransferWise, to give Canadians a better way to send money overseas. The result is fully transparent and remarkably quick international money transfers that are up to 8X cheaper for EQ Bank customers. To find out more, visit EQ Bank.
Are you struggling to make sense of the current state of the economy, not to mention the stock market? If so, you’re not alone. These are uncertain times and no one seems to have any real answers. My guest this week is Dan Kent, investor and co-founder of Stock Research and the news site, stocktrades.ca. Dan joins me to discuss the recent market volatility related to the COVID-19 crisis and shares his thoughts on where he thinks we may be headed.
Welcome to the Maple Money Show, the podcast that helps Canadians improve their personal finances to create lasting financial freedom. Our sponsor, EQ Bank, has partnered with TransferWise to give Canadians a better way to send money overseas. The result is fully transparent and remarkably quick international money transfers that are up to eight times cheaper for EQ Bank customers. To find out more, visit maplemoney.com/eqbank. Now, let’s chat with Dan…
Tom: Hi Dan, welcome to the Maple Money Show.
Dan: Thanks for having me on.
Tom: We’re in an interesting time right now where we’re both locked away in our house and unable to go anywhere. This has really affected people’s investments a lot. I’ve seen it drop. It looks like it’s coming back right now. What are your thoughts on where we are currently? What’s happened over the last couple of weeks? Is this sort of just a one-time drop or is it something longer?
Dan: It’s difficult to say at this point. It all depends on this virus clearing up. As you see right now, we have movie theaters shut down, big events shut down. They’ve even said that they’re pretty close to shutting the Calgary Stampede down, which means you’re taking a show that hasn’t shut down since the mid 1920s and talking about shutting it down. This is truly something we’ve never seen before, this kind of economic collapse. At Stock Trades we like to do research on popular growth stocks, and a stock like Lightspeed that sells (essentially) point of sale services for restaurants are now faced with something that nobody could ever expect because these restaurants are simply shutting their doors. We don’t really know when the recovery will be, especially the Canadian government. Obviously, you’ve seen Trump in the United States. He’s kind of pushing for the economy to be turned back on as soon as it can. But it Canada, it’s kind of murky. They haven’t really said when anything is going to happen which is fair because they don’t want to give people false hope, essentially. They don’t know when we’re going to hit this peak. They have estimates on when they’re going to hit the peak.
We could be in this shutdown until mid-May. Small businesses, as it is, are having trouble paying leases in April. If it goes until May, June, July, who knows the kind of economic impact we’re going to see.
Tom: I remember seeing a stat that was roughly half of restaurants won’t make it past one year or something like that. When you mention restaurants, I’m thinking a lot of these probably won’t even exist, these non-franchised restaurants despite any help they get from the government. There won’t be a full recovery. You mentioned theaters too. What if people don’t want to go to the theater anymore even though they’re open? I could see things changing quite a bit.
Dan: It’s actually and that’s the issue. Even after these distancing measures get eased is how scared will people be to go do these things? I’m not a medical expert, obviously, but they’ve said we could not see a vaccine for 18 months. So after this eases out, are people going to travel? Are people going to go to the movies? Are people going to do anything really? Obviously, they’re going to go out and buy groceries and go to pharmacies to get their medication. But in terms of a lot of the stocks we do invest in economically (and consumer products) we don’t know what is going to happen in the future.
Tom: One thing that surprised me is how quickly stocks have been rebounding. I do have some inside information that a lot of brokers have seen increase in sign ups. Is some of this rebound? Are these people that are just deciding they’re going to start investing? Again, I’m asking you to use your crystal ball here, but do you think it’ll continue to come back? Or is this a lot of people just kind of getting in for the first time? When we have these huge unemployment numbers and the market goes up, it seems kind of backwards to me.
Dan: Yeah, there are a lot of situations it could be. One thing would be short sellers being forced to close their positions on crazy volatility rates which will spike certain stocks and new investors. Definitely, we’re seeing a surge of people who have been sitting here waiting for this for a long time. I personally know one guy who’s been waiting for this for about five years. You think you’re smart. But really, if you missed out on the past five years worth of gains are you really smart? To buy in now, you may as well have bought in five years ago. It’s kind of like timing the market. It’s impossible. It’s impossible to say if this is a bull trap or if that was really the bottom. You’re going to get a clearer picture when these companies start filing the next quarter or two worth of earnings. You’re going to see how drastic it will be. US airline travel, I think they figured we’ll drop 96 percent. So, until you see those reports—and airlines, obviously, (in our opinion) are going to be in favor of a government bailout probably here and in the United States. But still, you just don’t know the impact economically until you get to that point where this virus is no longer causing this havoc. It’s impossible to tell and it’s impossible to time the market ever. And timing the market during something like this is even harder.
Tom: Even to use the word recession, isn’t that something that’s sort of backward looking? Don’t you have to get over a certain amount of quarters before you can even count it a recession?
Dan: Yeah, exactly. There are some clear pictures, especially here in Alberta. There is definitely going to be severe economic fallout here. It is inevitable now with the price of oil. The analysts have downgraded their price of WTI to under $30 a barrel. And a lot of people were saying that oil has historically never traded at these levels for very long but nothing like this has ever happened. The demand for oil has never plummeted like it has. Oil was in the mid $60 range halfway through January. And now there is a 70 percent collapse. Who knows when this is going to end and when it’s going to pick up again because Canada relies a lot on oil and gas. They are our second biggest export. We rely a lot on the United States as a trading partner as well so how is that going to be affected with the borders closing? They say trade won’t be affected but, ultimately, there will be some effects of the borders being closed. In Canada, we are doing a better job but even in our resolution of that, how long can you keep the borders closed to the United States?
Tom: You mentioned oil. That’s something I was thinking about. It seems like that’s a story that’s kind of been buried a little bit because everything’s Coronavirus right now. If there were no virus, oil and the Alberta economy would be the top story over the past month pretty much.
Dan: Yeah, exactly.
Tom: It’s kind of swept under because it’s just not as nationally important to a lot of people. But it does seem that that’s something that would be a huge, huge story; that oil dropped so far. I remember hearing about it about two days before the Coronavirus became a bigger thing. So it doesn’t seem like it’s been addressed, really. And people aren’t paying attention to that. They might not realize just how big of a deal that could be.
Dan: Yeah, it’s huge on a global scale. It started with the price war with OPEC failing to come to a deal with Russia. They flooded the market and as we said in one of our newsletter releases, it was a perfect concoction for oil to just outright collapse. OPEC came to a deal a few days ago. They’re going to cut 10 million barrels a day. But when there’s an oversupply of 25 million barrels a day, you’re still pumping 15 million barrels a day into reserves. It’s not enough. And as we saw, as soon as a deal was announced, Saudi Arabia cut their prices by $8 a barrel and we saw oil collapse, 10 or 12 percent in a single day. I don’t know what it’s trading at right now. I know yesterday it closed just above $20, but we could see it below $20 a barrel. And at these prices, there’s not too many oil and gas companies going to see bar profitable. Major companies might be able to withstand this for a little bit. Most junior oil and gas companies you’ve already seen have slashed their dividends or suspended their dividends. They’re closing up rigs at the major companies. They have enough cash on hand, especially companies like Suncor, Canadian Natural Imperial Oil, to withstand this for a bit. But there will come a time where these companies may run out of cash, and at that point may be forced to suspend the dividend.
Tom: Let’s get into that a bit. If someone’s looking to invest now, what’s a good recession-proof investment? Obviously, it is not theaters. Well, actually, I would have thought that some time ago. I remember in 2008, 2009, I’m pretty sure I recall there was actually an increase in people going to the theater because it was cheap entertainment compared to going to some concert or traveling or something like that. Sometimes I could see a case where something like a theater actually does pick up just because it’s cheap, but certainly not in this case. If you could run us through some of them, what kind of industries might be recession-proof? Not just for today, but just in general, if they don’t want a lot of volatility or to see half their investments disappear in a day?
Dan: Well, the movie theater business is a prime example of what you need to be looking for in recession-proof and stable stocks. You want something where you are fairly confident the business model will still be relevant 10 or 20 years from now. It was really hard to tell with the emergence of Amazon Prime, Netflix and all that but that has been the downfall of the industry. It was hard to predict that but it was it wasn’t impossible to predict. Those companies were around back then. I remember when I first got Netflix, there was absolutely nothing on it. I wasn’t sure who would pay $8 a month for this. But now, especially during this time, that’s all people are watching. But the top two industries we would recommend looking at right now are definitely utilities and telecom companies for a variety of reasons. In terms of utilities, both utility and telecom companies are very capital intensive which means they have to borrow a ton of money to expand and build infrastructure. And obviously, we’ve seen interest rates drop—plummet. That would be the correct term, they plummeted percent and half. They’re sitting at a quarter percent. So these companies are going to be able to borrow money cheaper and severely reduce their borrowing costs. Then if you look at utilities in terms of dividend growth, of the top five dividend growers in Canada right now, three of them are utilities. You have Canadian Utilities, which for 48 years they’ve increased the dividend. Fortis for 46 years and I think Atco was 26 years. When stocks are going bad, when the market is falling, pure growth space like Shopify or Lightspeed are often the first second sold off because they don’t pay a dividend. There’s no benefit to owning them during a market crash. But a company like Ford is a utility company which 99 percent of their revenues are from regulated utilities. This is essentially a legal monopoly. Ford owns everything from the pole down to your meter and as long as they comply with government prices, there’s zero competition. So that is almost 100 percent of Fortis’ revenue. One of the last things you’re going to shut off is the power. You’re going to use electricity, hydro and water all the time. Right now they’re not allowed to shut it off, but you would never shut it off anyway because it’s one thing you need. Back to the dividend point of it all; when these companies’ prices fall, their dividend yield goes up. For people looking to buy on the dip while the market is crashing utility stocks are becoming extremely attractive. And that’s why you see in a company like Fortis—I think before the crash they were trading in the $57 range. And as of today, they’re at $55 (I think). They’ve barely been touched. And it’s more because people know that their top and bottom lines are not going to be affected as much. They still will be affected because commercial and industrial business—some people will be closing up shop so their revenues will be affected but not as much as you would think. A theater company, for example, they’re losing 100 percent of their business right now. They’re just struggling to hang on. And another one is the telecoms. Obviously, the telecoms are the same thing, very capital intensive. We spend a lot of money to expand and as a result, borrowing costs are going to be way lower because of the interest rates. So during all of this, we obviously realized why phone companies are important to us. Telecom, TV, internet, cell phones—people realize they need this stuff to communicate with their families. Businesses realize people need this too because how many people do we see working from home right now? They need the internet. They need these services. And the top three are Rogers, Telus and Bell. They probably have the biggest economic moat in the country. Maybe rail lines like CNR and CPR would trump this, but I would say Telecom is a close number two. There is nobody who’s even come close to touching these companies’ revenues. Shaw has come close but they’re still a long ways from getting there yet. And we as Canadians pay the highest or one of the highest telephone bills in the developed world. Revenues during all of this are going to be stable. They pay excellent dividends. Like I said, during a crash like this, this is going to be stocks that people are looking to buy because as they fall, their yield gets higher and the dividend is safer in the fact that revenues’ top and bottom lines are not going to fall as much. And another thing with telecoms right now, there’s a lot of talk about the rollout of 5G. There’s a little bit of negativity towards Telus with their deal with Huawei. And Rogers has Ericsson, I believe. So right now, Telus has taken more of a hit because of that. And Rogers is actually up during all of this. Right before the crash they maybe gained half a percent. That might’ve fallen a bit. But there’s been crazy confidence in telecom companies right now for a variety of reasons. This is one thing I wanted to bring to people’s attention; there is a lot of negativity on the telecom companies because of the Liberals saying that they have to slash their plans by 25 percent. I’m not sure when this came out, but they said that the telecom companies have to slash prices by 25 percent and they have a two year window to do so. But the thing they don’t really say (in the headlines at least) is that these are data plans that are in the two gigabyte to six gigabyte range. I’m not sure about you but my data plan is 15 gigabytes. When you go on a telecom website right now, you don’t see a data plan under 10 gigabytes. That seems like the norm. And I think in two years from now there’s going to be even less people on those types of plans. I don’t think it’s going to affect top and bottom lines as much as a lot of people say. I think it’s kind of just an election promise that was filled. But they promised to cut telecom companies for a long time now. I think they did it but I don’t think it’s going to have the effect people think it will on these companies.
Tom: Yeah, I didn’t realize it was a certain range like that. I guess as good in that someone that needs an affordable plan can get that. But I was hoping it was going to be across the board as a user but not as an investor.
Dan: That’s what a lot of people think. They look at and they say they’ve got to cut their plans by 25 percent. Do get me wrong. There are some people who still have those low data plans, but it’s not the vast majority. The vast majority have these unlimited data plans. They gave me 15 gigabytes of data and I pay under $70 a month. I could go to two gigabytes of data and after the cuts I think it will still only be $50. I’m just not quite sure. I don’t think it will have as big an effect as people think it will.
Tom: A lot of these make sense looking back at them. Anyone without a whole lot of investing knowledge can kind of get the idea of what things they will pay for. Say if my money was cut in half, what are the things I still have to pay for as a homeowner and everything? I think Warren Buffett kind of talks like that, too, right? Invest in things you know. This all makes sense looking at it together. It’s basically your bills; things like utilities, your phones, the internet and stuff. It’s all the stuff you’re going to keep no matter what. Yeah, you might not be going out to restaurants and not traveling even in a normal recession but when it comes to your bare minimum, these are the things that you still make purchase for. I could see things like the groceries being there, too, right? Maybe that can be handled poorly or something as a company but you still need to eat just like you still need your phone and everything. I always hear things like gold do well in a recession. Is that a thing? I’ve never touched it. I don’t understand it all. But when people say they invest in gold for days like this—
Dan: Yeah, that’s exactly what I was going to talk about next. Especially with new investors gold it’s kind of a tricky issue. Most people know that during something like this, people flock to gold. The price of gold tends to go up. But the thing new people get in trouble with is they’re looking to buy gold now when it’s gone from $1,400 an ounce to over $1,800. People are selling out of their stocks. First off, they’re selling out of their stocks for a 30 percent loss. Then they’re going and buying gold for a 30 percent premium. They end up in this cycle where they buy gold when the times are bad and when the market starts to recover and gold starts to go down, they sell their gold for a loss, buying into the market as it’s going up. Gold producers are good investments right now. But the problem is, there are a lot of people looking for the easy money. They want to buy these gold producers that are going to return, 100 to 200 percent in a couple of months. And it’s just not the case. For use, we tend to stick to streamers; companies that don’t rely on actual production. Franco Nevada is a perfect example. Those kinds of companies are less volatile towards the price of gold and they tend to do a little better. If you want to buy actual physical gold, it’s kind of difficult to do. We posted a gold ETF article a while back. I have to go look at the ticker but there is an actual ETF that tracks the price of gold, physical gold. So you can buy that but a lot of people end up losing money on gold. The last couple of times gold has gone over $2,000 an ounce. I think it’s pretty close to that right now. It’s cratered, essentially. People who were buying on these highs have lost a ton of money. So it’s something you really need to have exposure to at all times. There should always be gold exposure in your portfolio. You shouldn’t just be looking to buy gold just because the market has crashed. The Fed in the States is printing so much money right now, the price of gold is skyrocketing and people are looking to get into it now. It still may be a good investment but like I said, we have no idea how high the gold will go. Just know that there are a lot of people who get caught up in the cycle.
Tom: You mentioned the market timing idea where people are getting out of stocks at the wrong time and buying into gold at the wrong time. My fair analogy for that; anyone who has ever driven has done this where you see one lane that looks better and you move into it. Then it slows down and everybody passes you. It’s the same “changing lanes in traffic” feeling when you’re constantly trying to find the best thing. Then again, it’s sort of over by then. Just stay in your lane and go with it.
Dan: In the end you’re probably going to get there later. Especially when it was really bad like it was with the TSX. I think the TSX was down in the mid 30s—maybe the high 30 percent. A lot of people were emailing us asking if they should sell. I always say, if you’re trying to time the market, you are either wrong or you got lucky. That is essentially what happens. If you sold in February before the dip, that’s great. You sold that, honestly, after that 10 or 11 year bull run, you did great. But to sell them after the market has tanked 30 percent? But their mentality is that they’re going to sell, the market is going to tank more and they’re going to buy in. Not all people end up this way. Some people do get lucky. They recover a bit. But a lot of people get stuck in a cycle where they’re selling at the lows. The market starts to go up. They get really scared. They buy at the peaks because they’re afraid the market’s not going back down. Then it goes down and they sell at those lows again. They just end up in a cycle. And that is why a lot of self-directed investors lose money.
Tom: I don’t watch things too closely. And I’m mostly an ETF investor and I don’t really sell. I make my regular investments so I’ve got that going for me already. I’m buying a little bit of highs and lows. I am willing to put more money in when markets are down but I don’t over think it too much. I bought some bank dividend stocks on the first drop and then it kind of went back up again that day. I thought, “Oh, I hope I didn’t it wrong,” but then it dropped a whole lot more. But I couldn’t pick the bottom. “At least I bought it on the way down.” I think they’re already up again. As someone buying ETFs, I do like the analogy of buying a sale. If everybody loves their toilet paper right now, if you bought toilet paper one week and the next week it’s on sale, you’re still going to buy it because it’s even cheaper to get a little more of it. I look at it that way because I haven’t really sold much of anything ever. I haven’t had to make the decision where you wonder whether it’s time to sell. If I buy stocks, they’re all dividend stocks— Canadian dividend stocks at that. I know I’m buying them for the dividends if they’ve got 4 or 5 percent yield. In a way I don’t even care what the stock price is. That’s still better than a savings account, right? That’s how I look at that. I know it’s a very simplistic way to invest but I just I don’t get into the selling half. I’ve just been buying at this point.
Dan: It happens to everybody. It happened to me just recently. Shopify had run down to about $450. I bought the stock in December of 2018 for around $165 to $170. Before the crash is was at $700. Obviously, Shopify doesn’t pay dividends. It’s just pure growth. It fell to $450 and then it rallied up to $600. I was sitting around thinking, “I’m going to sell this right now because I think it’s going to go back down,” pure growth, right? “It’s probably going to fall back into that range and I’ll buy it back again.” Shopify is hitting record highs right now. It never went back down. Still, a 300 percent return in just over a year, you can’t complain. But everybody makes that mistake. You just can’t be making it all the time and at the worst possible situations. Selling to take profits on a 300 percent gain, are you really going to lose sleep over that? A stock like TD Bank, you bought at $75 and it plummets to $50, you sell it. Now, you’re going to be upset when it recovers because Canadian banks, those financial institutions, are one of the safest industries to invest in, in the world. They’re a financial institution and they never cut dividends during the financial crisis. They didn’t raise them, but they didn’t cut either. And a company like Bank of Montreal, they’ve paid uninterrupted dividends for be close to 190 years now. So why are you selling stocks like that? That’s the main thing. When you buy a stock— a lot of people don’t do this which is why a lot of people lose money. But, when you buy a stock there has to be a reason why you bought that stock. When you’re going to sell a stock, why are you not looking at the reason why you bought it to see if it’s changed? The stock price is not reflective of the underlying company over the short-term so why do people make those drastic decisions? It’s pure emotion. I’ve watched money in my accounts evaporate in 22 days when the United States entered bear market, which is under 20 percent—and that’s the quickest in history. I think the last time was 23 days but that was during the Great Depression.
Tom: Yeah, I went quite a ways during that drop not looking at my actual total investments because I didn’t want to see it cut like that. I did do that buying but I just didn’t really look into seeing what dropped. I just kind of ignored that for now. And again, I’m either in ETFs which are super wide or I’m in Canadian dividend stocks which I’m investing for a whole different reason. I barely care what the price is as long as it’s just the price I paid. And the dividend they give is all I’m concerned about. This has been great because I think we’ve given people a good view of what they can do and definitely what not to do. This isn’t a time to sell your investments and get out of the market. That was, unfortunately, a month and a half ago.
Dan: Yeah, exactly.
Tom: Can you tell people where they can find you online?
Dan: Our website is stocktrading.ca. We have a YouTube channel as well. If you go onto YouTube, search for, stocktrades.ca. We just launched the YouTube channel in December and we’ve had a lot of success with it. People like our videos.
Tom: Yeah, I’ve been watching them. People should check that out. We’ll link to it in the show notes for sure. Thanks for being on the show.
Dan: Yeah. Thank you.
Thank you, Dan, for your tips on navigating the current bear market. While no one can predict the future, you shared some great advice we can take with us. You can get the show notes for this episode at maplemoney.com/dankent. Are you a member of the Maple Money Facebook Community? If not, I’d love to connect with you there. It’s a great place to ask a question or share a recent money win to encourage others. To join, head over to maplemoney.com/community to share with the group. Thank you, as always, for listening and I look forward to seeing you back here next week.
Originally posted at https://maplemoney.com/podcast/making-sense-stock-market/