“Sell in May and go away,” refers to the tendency of stocks to perform worse in May through October than during the rest of the year. I hope that is not the case this year given the decline in the stock markets. The S&P 500 Index and Dow Jones Industrial Average are both in market correction territory (down more than 10% from their respective highs) and the Nasdaq Index is in a full-blown bear market (down more than 20% from its high). The S&P/TSX composite, meanwhile, is down three per cent. I would not be happy if the markets performed worse during the summer. On the flipside, its times like now that are made for good investors. As Warren Buffet said, “Be Fearful When Others Are Greedy and Greedy When Others Are Fearful.”
Selecting Companies
In my ongoing attempt to not pay too much attention to what is happening to the three Portfolios I manage (they have fallen considerably), I am going to go over my process for selecting the companies I invest in.
My process is relatively new (started in 2020) and is still evolving as I learn more about investing, what to look for, and the type of companies in which I am interested. It is a result of plenty of spare time thanks to the pandemic, lots of companies “on sale,” and the need for a consistent way to evaluate and decide which companies to invest in. Currently, I have a 4-stage process that acts like a funnel, eliminating companies as I work my way through the process. These stages are:
- Stage 1 – Radar Check
- Stage 2 – Multibagger Analysis
- Stage 3 – Financial Analysis
- Stage 4 – Scorecard
At the end, I am very familiar with the company, and I am in a much better position to decide if the company is worthy of my money. Today I am going to talk about Stage 1, the Radar Check.
Radar Check
There are many ways companies can get on my radar. The most common is from investing newsletters, but Twitter and word of mouth are also sources of information. No matter how a company comes across my radar, I run it through what I call my Radar Check.
The purpose of the Radar Check is to take a quick, high-level look at companies. Generally, it takes five minutes or less to run a company through the Radar Check and record the information in an Excel file. So, without further ado, here is what is on my Radar Check.
Note: I use Microsoft Excel and its built-in features, as well as custom formulas, to automatically generate information.
The first thing I do is enter the company name. Utilizing a built in Microsoft Excel feature (the Data type – Stocks, which automatically generates specific stock information) I can see the closing share price for the last two days, the 52 week hi, 52 week low and the market capitalization. This provides the range the stock has traded over the last year, and I can see if the current price is closer to the high or low. Knowing the market capitalization provides a sense of the size of the company and sets my expectations accordingly. For example, I do not expect small or mid cap companies to provide a dividend, whereas large cap companies are more likely to provide a dividend.
Next, I make a brief note of what it is about the company that interests me. It could a favourable tailwind, an excellent product or service, multiple opportunities to generate sales, or anything that interests me about the company. A short note helps me remember what originally piqued my interest if I must come back to the company.
Ratings
Next, I look to see what the professionals think about the company. One of the benefits of having a TD Direct Investing (TDDI) account is their research capabilities, and I take advantage of that benefit (for comparison, I’ve yet to find any research capabilities in my Wealthsimple account). During the Radar Check I do not read the reports, I only look at a company’s ratings from 3 reports:
- Morningstar’s Quant Report: to see if Morningstar’s professionals think the share price is overvalued, fair valued or undervalued. They rate the share price on a scale of 1 – 5 (higher indicates undervalued and better) and provide their estimate of the fair market value of a share.
- Thomson Reuters StockReports+ (TR): to see how TR rates the companies technically (various ratios and numbers). TR rates the company in several technical areas and provides an overall score. I am looking for this overall rating which is a scale of 1 – 10 (higher is better).
- TD Direct Investing Analysts section: to see what the pros from different companies think about the company and the overall Analyst Consensus (AC). I award a consensus ‘Strong Buy’ rating a 3, a ‘Buy’ a 2 or 1 (a 2 if more than five analysts follow the company), a ‘Hold’ is 0 and a ‘Sell’ rating is -1. I also note the upside to the estimated target price.
I then add up the TR rating and the AC score to provide a score out of 13. I am interested in anything above 9.
As an example, lets look at Take Two Interactive (NASD:TTWO) which I suddenly own because of its acquisition of Zynga, which was in Portfolio 2. As of May 21, Take Two trades at US$ 125.78. Morningstar gives them 5 out of 5 as being undervalued with a fair value estimate of US$ 181.66. TR gives them a 5 out of 10, while TD’s AC rates the company as a ‘Strong Buy’ so I give them a 3 out of 3. Add up the TR and AC to get an 8 out of 13. If I did not own the company, I generally would stop there. However, if I were still interested, my take away would be Take Two is undervalued but has considerable upside (45%). If I were looking to invest in a gaming company, Take Two would be of interest.
High Level Financials
The last step is to look at some high-level financials which all can be found on Yahoo! Finance. I look for:
- 3+ Years Increasing Revenue: to see if the company is growing sales.
- Net Income Profitable: to see if the company is making money.
- EBITDA Profitable: if the company is profitable, this is irrelevant. If the company is not profitable, is it profitable before it pays Interest, Tax, Depreciation and Amortization.
- Long-term Debt Free: how much, if any, long term debt does the company have. The less long-term debt, the less cash required to service that debt. With interest rates going up in 2022, more money will be required to make the interest payments, money that could be better used to grow the company.
- Free Cash Flow Positive: does the company have cash left over after it has paid all the bills to keep operating.
- Beat the S&P 500 over 5 Years: I want a company that has proven itself by outperforming the S&P 500 Index over 5 years and looks capable of continuing to beat the S&P 500 Index.
Ideally, I want to see six ‘Yes’ for this section, however, I have found that to be rare. If I do get six ‘Yes,’ the company has my interest. Using Take Two as an example again, I had five ‘Yes’ with a ‘No’ for Long Term Debt Free. Pretty good.
There you have it, the Radar Check is complete. At this point I decide whether to move on from the company or to dig deeper into it. If I did not own Take Two, I would move on because of its 8 out of 13 score in the Ratings sections, although the High-Level Financials section was good. However, I suddenly find myself an owner of Take Two, so I want to know more about the company before I decide whether to remain an owner or if I want to sell my stake in the company.
For any company that makes it through the Radar Check, the next step would be my Multibagger Analysis but that will be another time. For now, lets look at the past week ……
Weekly Market Review
Monday: The Toronto Stock Exchange Composite Index (TSX) was closed for Victoria Day in Canada. In the USA, it was business as usual for the S&P 500 Index (S&P), the Dow Jones Industrial Average (DJIA), and the Nasdaq Composite Index (Nasdaq). Maybe not so usual for 2022 as all three Indexes end higher thanks to gains in the banks (Financial sector), and a rebound in the beaten down mega cap technology companies. However, it was a broad-based rally with all 11 S&P sectors ending in positive territory.
Tuesday: A mixed day for the markets with the TSX and DJIA rising, and the S&P and Nasdaq both lost ground. The TSX was buoyed by the Energy, Basic Materials (natural resources) and Financial sectors. Despite a late afternoon rally, only the DJIA was able to make into positive territory. The S&P and Nasdaq were weighed down by the interest rate sensitive Technology and Consumer Cyclicals sectors as investors continue to fear the unknown of how aggressive the US Federal Reserve (the Fed) will be with upcoming interest rate hikes.
Wednesday: All four major North American Indexes gained ground today. The TSX was propelled higher by the Energy sector (thanks to higher oil prices) and the Financial sector (better than expected earnings by the Bank of Nova Scotia (TSX:BNS) and the Bank of Montreal (TSX:BMO).
The US based Indexes rose after the release of the Fed’s notes from their last meeting in early May were released, indicating a good chance of additional .5% rate increases later this year. The notes also showed there was a unanimous agreement among the Fed members that the US economy was strong. The stock markets like certainty and these notes provided as much certainty as could be expected.
Thursday: Thanks to strong earnings reports from Canada’s big five banks, the TSX notched its fifth straight day of gains. The Canadian Technology and Consumer Discretionary sectors helped boost the TSX higher.
In the US, all three Indexes finished higher thanks to the strong earnings season recently completed, and optimistic guidance by retailers. For the DJIA, it was the fifth straight day in the black. The US Indexes were buoyed by the S&P’s Technology and Consumer Discretionary (home of many retailers) sectors.
Friday: Peaking inflation and optimism about the strength of the economy caused investors to jump into the market on the last day before the American Memorial Day holiday. It was a good way to end the week with all four Indexes ending higher for the day. For the TSX it was the sixth consecutive day in the black, and its second straight week of gains. In the US, the S&P and Nasdaq snapped their seven-week skid, and the DJIA broke an eight-week decline. For the S&P, it was the best week since November 2020
The TSX rose on strength in the Canadian Technology, Energy and Financials sectors, while the S&P Technology, Consumer Cyclical and Basic Materials sectors led the way for the S&P and Nasdaq.
For the week, the TSX was up 2.7%, the S&P rose 6.59%, the DJIA gained 6.24%, and the Nasdaq gained 6.84%.
Weekly Portfolio Review
After almost two months of constant beat downs in the stock markets, all four Indexes are solidly in the black this past week. I do not know if this signifies a bottom or another false start but its good to finally post four wins.
As for the Portfolios, I do not know if I am simply happy to finally see all three portfolios in the black or relieved that the crushing constant weekly declines has ended, at least for a week. Its no coincidence that the Nasdaq was the best performing Index this past week and all the Portfolios are up. I am not going to look any deeper than that, rather, I am going to just enjoy the win. Hopefully the first of many in 2022.
Note: Cash was transferred out of Portfolio 1 to pay a few bills. No shares were sold to generate the cash for withdrawal purposes. The value of Portfolio 1 was adjusted by deducting the amount of the withdrawal to the start of the week/end of last week value so the withdrawal would have no impact on Portfolio 1’s performance this past week.
Companies on the Radar
Plenty of stocks “on sale.” Unfortunately, I am still short on cash, so I remain on the sidelines. However, there is one new Energy company I have added to my radar – Alvopetro Energy Ltd. (TSXV:ALV). Alvopetro is a Canadian based natural gas company that is looking to develop natural gas in Brazil. It provides a 7% dividend and has favourable energy tailwind for growth potential. I need to perform due diligence to get a better feel for the company.
Other growth companies on my radar include:
Or for less volatile companies with reasonable growth:
- Microsoft (NASD:MSFT)
- Apple (NASD:AAPL)
- Home Depot (NYSE:HD)
- American Tower (NYSE:AMT)
- Berkshire Hathaway (NYSE:BRK.B)
Portfolio Update
Portfolio 1
Portfolio 1 for the week ended May 27, 2022: UP 
An early week earning miss (there revenues and earnings were lower than analysts expected) side swiped other social media companies such as Alphabet (NASD:GOOGL) and Pinterest (NYSE:PINS). Its one thing when companies you own miss their anticipated numbers and get punished, but its very frustrating when the companies you own get knocked down by other companies’ earnings miss. ☹
Electric vehicle maker Rivian (NASD:RIVN) restructured its operations team with one executive vice-president leaving and a new Chief Operation Officer moving in. Rivian plans to double the production, assuming no supply chain issues, specifically access to semiconductors.
Activity
No significant activity to report this week.
Dividends
Dividends Received this week for the following companies:
Companies followed by DRIP (Dividend Re-Investment Plan) indicate additional shares were purchased with the dividend. Any cash leftover was added to the cash balance.
Canadian $
Pulse Seismic Inc (TSX:PSD)
US $
No US$ dividends this past week.
Quarterly Reports
Bank of Nova Scotia
All currency listed in CAD dollars
Selected highlights from their second quarter 2022 financial results on May 25, 2022
- Net income of $2,747 million, compared to $2,456 million compared to the same period in 2021.
- Earnings per share (diluted) of $2.16, compared to $1.88, a 15% growth.
- Return on equity of 16.2%, compared to 14.8%.
Nvidia Corp.
All currency listed in millions of US dollars
Selected highlights from their first quarter 2023 financial results on May 25, 2022
- Record quarterly revenue of $8.29 billion, up 46% from a year ago.
- Record revenues in both its data center and gaming segments.
- Net income of $1,618, down 15% from $1,912 in the same quarter in 2022.
- Returned to shareholders $2.10 billion in share repurchases and cash dividends.
- Increased and extended the company’s share repurchase program to repurchase additional common stock up to a total of $15 billion through December 2023.
Toronto-Dominion Bank
All currency listed in CAD dollars
Selected highlights from their second quarter 2022 financial results on May 26, 2022
- Net income of $3.8 billion, compared with net income of $3.69 billion for the prior year period.
- Diluted Earnings per Share of $2.07, compared with $1.99 per share for the prior year period.
- Return on Equity of 16.4%, compared to 15.3% in the same period in 2021.
Enwave Corporation
All currency listed in thousands of CAD dollars
Selected highlights from their second quarter 2022 financial results on May 26, 2022
- Revenue of $6,881, compared to $4,686 in second quarter of 2021, an increase of $2,195 or 47%.
- Net loss of $2,386, compared to a net loss of $2,285 in the same period in 2021. A net loss increase of 4%.
Portfolio 2
Portfolio 2 for the week ended May 27, 2022: UP
Zynga completed its merger with Take Two Interactive Interactive on May 23, 2022. The combined company will be Take two Interactive Software, Inc, trading under the ticker TTWO on the Nasdaq Exchange. For us Zynga investors, we received $3.50 in cash and 0.0406 shares of Take-Two common stock per share of Zynga common stock. The acquisition of Zynga will help grow Take Two’s footprint in the rapidly growing and very lucrative mobile gaming industry.
Activity
No significant activity to report this week.
Dividends
Dividends Received this week for the following companies:
Companies followed by DRIP (Dividend Re-Investment Plan) indicate additional shares were purchased with the dividend. Any cash leftover was added to the cash balance.
No dividends this past week.
Quarterly Reports
Bank of Nova Scotia
All currency listed in CAD dollars
Selected highlights from their second quarter 2022 financial results on May 25, 2022
- Net income of $2,747 million, compared to $2,456 million compared to the same period in 2021.
- Earnings per share (diluted) of $2.16, compared to $1.88, a 15% growth.
- Return on equity of 16.2%, compared to 14.8%.
Portfolio 3
Portfolio 3 for the week ended May 27, 2022: UP
Glass Lewis, a shareholder advisory firm, recommended shareholders oppose Shopify’s (TSX:SHOP) proposal for the creation of a “Founder Share” for Chief Executive Officer Tobi Lutke. Currently Mr. Lutke and one other Board member control 51% of the voting rights. However, the conditions on which they maintain this control is expected to change in the next few years. Shopify is proposing Mr. Lutke be granted 1 Founder Share which will allow him to maintain 40% of the voting rights, no matter how the share structure and number of shares evolves over time. Joining with Glass Lewis, Institutional Shareholder Services Inc. has also advised shareholders reject Shopify’s “founder share” proposal.
I had already voted “For” this proposal by the time I read these notices. My reasoning was Shopify’s leadership had done a great job so far. In addition, the vision and the execution of management was one of the reasons I invested in Shopify. The other reason I voted “For” was this would protect the management I believe in from shareholder activism.
Activity
No significant activity to report this week.
Dividends
Dividends Received this week for the following companies:
Companies followed by DRIP (Dividend Re-Investment Plan) indicate additional shares were purchased with the dividend. Any cash leftover was added to the cash balance.
Canadian $
Royal Bank of Canada (TSX:RY)
US $
No US$ dividends this past week.
Quarterly Reports
Toronto-Dominion Bank
All currency listed in CAD dollars
Selected highlights from their second quarter 2022 financial results on May 26, 2022
- Net income of $3.8 billion, compared with net income of $3.69 billion for the prior year period.
- Diluted Earnings per Share of $2.07, compared with $1.99 per share for the prior year period.
- Return on Equity of 16.4%, compared to 15.3% in the same period in 2021.
Royal Bank of Canada
All currency listed in CAD dollars
Selected highlights from their second quarter 2022 financial results on May 26, 2022
- Net income of $4.3 billion for the quarter ended April 30, 2022, up $238 million or 6% from the prior year.
- Diluted Earnings per Share of $2.96, up 7% compared to the same period in 2021.
- Return on Equity of 18.4%, down 1% or 100 basis points, compared to the same period in 2021.
- Declared an increase to the quarterly common share dividend of $0.08, to $1.28 per share, an increase of 7%.