Posted on 21 December, 2011 | 70 Comments
It’s that time of the year again when we look back at how our Dec 31, 2010 BNN predictions fared. BNN December 31, 2010
2011 was a year marked by uncertainty and volatility, to say the least. With only a few more days to go, 2011 thus far has given investors a rough ride with many feeling bruised and battered. The swings were sharp while the down days dominated the headlines.
2011 YEAR IN REVIEW
Investors began the year with high hopes. The recovery was on firm footing and the worst of the great recession was supposedly behind us. More than 70% of the corporations continued to beat analyst earnings expectations and CEOs revived investor optimism boosting guidance numbers and forecasted profitability.
With greater confidence, both the US Fed and the Bank of Canada started to embark on tighter fiscal policy; ending stimulus programs such as QE2 and raising interest rates from historical lows. With an ever increasing positive outlook for the global economy, the Canadian dollar appreciated to a high of 1.0607 against the US greenback on July 26, 2011.
Then August 3rd hit and what a difference a week makes. Who knew back then that the year would eventually be defined by economic turmoil, the topple of three European governments and a grassroots protest against Wall Street that spread worldwide.
Investor misery began with an unprecedented US debt downgrade – the result of a dysfunctional US government and a political unwillingness to resolve key issues such as debt reduction and tax planning in spite of an eleventh hour agreement. This was then sharply followed by fears of a Greek default and the eventual realization that the whole Euro zone was dangerously at risk.
A fiscal disaster a decade in the making for “too big to fail” countries such as Italy and Spain conjured up memories of Lehman Bros and its swift descent into oblivion. At about the same time, economic forecasters started to slash their forecasts for worldwide growth, down from 3% to the 1-2% range.
In the four business days leading up to August 11th, the US stock market was down 600 points for two consecutive days (equivalent to a daily loss near 5.5%), which was then followed by two consecutive days of 400 points up. Never before had the Dow Jones had four consecutive days of 400 price movements, irrespective of direction.
By October 4th, the Toronto Stock Exchange and S&P 500 were down 21% and 16% respectively from their 52 week highs. Since those October lows, the markets have crept back. The S&P 500 is now flat on the year while the TSX is down 11%.
DEC 31, 2010 BNN TOP PICKS BNN December 31, 2010
Our top picks for 2011 established on the Business News Network (BNN) with Frances Horodelski were:
Share Price Dec 31/10 |
Share Price Dec 20/11 |
Dividend Yield | Total Return | |
|
|
|||
McDonalds (MCD) | $ 76.64 | $ 98.82 | 3.7% | 32% |
Pepsi (PEP) | $ 65.33 | $ 65.33 | 3.2% | 3% |
National Oilwell Varco (NOV) | $ 67.25 | $ 67.36 |
1.1% |
1% |
Caterpillar (CAT) | $ 93.66 | $ 91.73 |
2.0% |
0% |
Deere Co. (DE) | $ 83.05 | $ 76.64 |
2.0% |
-6% |
Finning (FTT) | $ 27.09 | $ 22.06 | 1.9% | -17% |
Average |
2.3% |
2.4% |
The stocks were chosen for their dominant brand and competitive position, emerging market potential, history of dividend increases, proven management expertise, and strong fundamentals.
If the group was purchased in equal weight the total return would have been 2.4% excluding the impact from currency.
By comparison the TSX is down 11.0% and the S&P 500 is up 1.0%.
Share Price Dec 31/10 |
Share Price Dec 20/11 |
Dividend Yield | Total Return | |
|
|
|||
TSX | $ 125.75 | $ 123.93 | 2.1% | 1% |
S&P 500 | $ 19.29 | $ 16.76 | 2.1% | -11% |
HOW GOOD WAS OUR 2011 FORECAST
In our Dec 31, 2010 interview, we mentioned that we were modestly bullish. We expected a year of slow growth and modest gains for the market. Furthermore, we felt that investors needed to approach the upcoming year with caution.
We specifically liked McDonalds for its conservatism and its potential for upside surprise. In the interview, we felt the company had a high probability of achieving an overall total return of 8% between dividends and capital gains, We also liked the company for its emerging market business, a common theme amongst all our stock picks.
As Frances alluded to in the interview, McDonalds did not seem to be an exciting stock pick. We agreed and let it be known that it was unlikely to produce the type of ‘home run’ that many investors look for on a show like BNN. That being said, McDonalds turned out to be one of the top performing stocks in the Dow Jones Industrial Average returning well over 22% in 2011.
Our worst performer turned out to be Finning which was down 17%. The company’s problems had less to do with the economic shift and more to do with poor implementation of an enterprise wide supply chain system. We continue to recommend Finning as a good long term buy as its business metrics and fundamentals remain sound. (Note: We continue to own stock in Finning)
INTEREST RATES SPIKE PREDICTION
Our prediction in the interview that interest rates could suddenly spike 400 basis points at any time, interesting enough, did prove true for many on the globe – as Italy, Spain and Greece found out. While Greece is a basket case, Italy and Spain are highly A rated countries. Even France, which is rated AAA, the highest credit rating possible, saw a 120 basis points jump in November (equivalent to a 50% rise) — something that would have been unheard of only a few months ago.
FEARS ABOUT INFLATION
Inflation was a concern highlighted as a key risk in 2011. Admittedly, neither Canada nor the US had to deal with runaway inflation in 2011. As a result, fixed income type investments maintained their values for the most part. Preferred shares, REITs, and 10 year investment grade bonds continued their returns of 3-5% on average with little fanfare.
However, we continue to believe the risk of inflation remains. Canadians are now starting to see inflation rear its ugly head. Both national newspapers (National Post and Globe and Mail) in Canada reported on December 20th that food inflation in Canada is now running at a 20 year high and the “era of cheap food” is coming to an end. Inflation should definitely remain a key risk for investors with medium to long term horizons.
Next week we look at our 2012 Market Forecast.
Jeff Kaminker
www.frontwater.ca
www.fwcapital.ca
July 1st, 2012 at 5:50 am
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