Hi Lou,
Was wondering what do you think of SLF. If they do cut their dividend, will it affect their stock price? Also, what are the chances that they will reduce their dividend, given that Manulife paid dearly for doing that.

Thanks
Cedric

Hey Cedric,

Thanks for the assignment. Sun Life Financial Services of Canada Inc. (SLF TSX) is under pressure but they are not alone. The insurance industry as a whole is struggling with the poor returns on invested capital arising from market conditions since the fall of 2008.

In an effort to maintain its dividend the company announced that it will be exiting some businesses in the United States including the sales of variable annuities and individual life insurance. Those steps reported in December of 2011 did not prevent Standard and Poor’s from putting a watch on SLF’s debt rating with negative implications.

You asked what would happen if the company cut it is dividend? Without a doubt it would sell off. Currently the yield is 7.2% which is way ahead of what is being offered by similar companies. If you want to see the comparables go to globleinvestor.com and look at the competitors tab for SLF. In order to get in line with the dividend paid by competitors the stock has to gain over $6.00 a share or the payout has to go down.

Management is always reluctant to cut dividends but in the face of the inevitable the bitter medicine is taken. Basically you can’t keep paying out if you are not bringing it in!

A review of the charts will help identify the trend that is in play and possible outcomes for the stock.

What the three year chart illustrates is a stock with a defined downtrend that started in February of 2011 when it hit a 52 week high of $34.39.

If you look closely at the chart there is a double top that formed signalling that it was time to get out of Dodge. By July of 2o11 a death cross had formed and the shares breached support at $28.00. By the fall of 2011 support at $24.00 broke, evidence of continued weakness.

The six month chart indicates that there has been some buying that came in at $18.00 but the volume has thinned out. Volume has not been greater that the three month average volume for the last 15 trading days. Generally I like to see a move up confirmed by increasing volume.

In addition the MACD and RSI are indicating that the advance is weakening at this time. Overall I would not be chasing this stock. The trend is down, there is a death cross on the chart, volume is thinner than I would like, and the dividend is rich compared to its peers.  These are not reasons to be a buyer.

Make it a profitable day and happy capitalism!

Hi Lou
I am picking up positive vibes on WFC and wondered if I could ask for your opinion.
Thanks
John

Hey John,

 Thanks for the assignment! Warren Buffett owns a nice piece of Wells Fargo & Co. (WFC NYSE) so you are following in the footsteps of a giant. Your vibe on the potential for the shares could be driven by rumours of increasing dividends. There is conjecture that the company has the room to goose the cash distributed to owners over the next few years. Nothing lifts a stock like a boost in its dividend.

The charts will provide further guidance to help you with see if your vibe is supported by technical indicators.

The three year chart depicts a stock that has been range bound since late 2009 with support at $23.00 and resistance at $34.00. The downtrend that started in February, 2011 as the shares hit resistance has been broken and have now caught a bounce off support.

The MACD and RSI on the six month chart both signalled the late November move off of $23.25 to the high of $27.25 December 07, 2011. A 17% return in two weeks is a nice little something to enjoy during the Christmas Season!

Currently the stock has met resistance along the 200 day moving average. In addition the RSI and MACD are not generating clear signals at the moment.

Given that you have a gut feeling that has you interested in WFC and that there is new support forming along the 50 day moving average at $25.50 making an initial investment at these levels would not be reckless. Plus you will earn the 1.8% yield while you wait.

Make it a profitable day and happy capitalism!

Hi Lou,
I always learn something via you answers to reader questions. Now I would appreciate your comments re D+H. Stock is going down, down, down. True, cheques are out, but they seem to be compensating with other investments, contrary to Yellow Pages’ management.
Any thoughts re hold/sell of D+H?
Many thanks
Morton

Hey Morton,

Thanks for your kind words and the assignment. Davis + Henderson Corp. (DH TSX) has reduced its dependence on providing personal and business cheques to the customers of financial institutions. The segment represented 90% of corporate revenue in 2006. By 2010 cheque services were down to 46% of sales and lending technology and servicing solutions made up 48%. The forecast for 2011 is for further improvements in the revenue mix.

An examination of the charts will provide some answers to your question.

The three year chart indicates that investors hit the sell button in early March of 2011 as the shares approached $22.00. When I reviewed the 10 year chart on globeinvestor.com it was evident that $22.00 was the all time high. Knowledgeable investors using the tools available to them would have been taking profits when it failed to advance above the previous peak.

What is also visible is the death cross that formed in July and the firm resistance along the 50 day moving average. Every attempt to move higher has failed.

 Finally if you draw a set of parallel lines to bracket the decline from upper left to lower right you can see that a trading channel has formed. If you want to see higher prices for the shares of DH it has to breakout above the upper rail.

The MACD and RSI on the six month chart both generated a series of buy and sell signals which would interest investors who were inclined to trade in the down channel.

 Given that you are deciding between a hold and a sell I would say sell before the end of the year. Take the tax loss and if you really like the story buy it back in 2012. Please consult your accountant for how best to proceed with the loss and buy back.

Make it a profitable day and happy capitalism.

I understand the impact of low interest rates on the Lifecos but at a safe 6.3% current yield does Great West Life look good?

Gary

Hey Gary,

Great West Lifeco Inc. (GWO TSX) and all the life insurance companies have had to deal with a less than robust return on their investments. Equity markets have been a challenge and interest rates have been paltry at best. I want to caution you on your use of the word safe when it comes to dividends. Dividends are issued at the discretion of the board of directors based on profitability and other factors. They are not guaranteed.

 When conditions demand boards have been known to cut and even eliminated dividends. Let’s make sure we don’t get lulled into a false sense of security by framing dividends as sacrosanct. Having said that let’s run the charts and see where GWO stands.

The three year chart illustrates a stock that broke support in June of 2011 and had a death cross surface in July. Currently the shares are trying to hold onto support at $19.50.

The six month chart provides a better look at the most recent trading action in GWO. The MACD and RSI both signalled the move off of $19.50 in mid September. The shares then advanced to $22.50 for a 15.38% gain. The momentum indicators then signalled a shift to the sell side as the stock met resistance and then retested $19.50. 

Currently the MACD and RSI are generating another buy signal. At this point it looks like you can catch a run off of these levels. But keep in mind that the overall trend is down and the next significant event will be the Q4 release in February.  Trade this one for income and don’t look for a return to a buy and hold strategy. That may have worked in the past but those days are gone for now.

Make it a profitable day and happy capitalism!

Hi Lou,
I have to say I love your column and read it religiously.

I was hoping you could have a look at Western Alliance Bank for me. I bought in to this bank at about 7.50 on a bit of a flyer after reading an article in the Globe about possible takeover candidates in the banking industry. Between the exchange rate and the stock’s performance it hasn’t been particularly good to me. However I think I am seeing some strength in the stock again. I am wondering whether to hold it longer or move on at this point. I would love to hear your opinion.
Thanks
Eric

Hi Eric,

Thanks for the assignment. Western Alliance Bancorp. (WAL NYSE)  with a market capitalization of $517 million is a small player in the U.S. banking sector. Their operations are centered in Arizona, Nevada, California, and Colorado which have been hard hit since the subprime mortgage debacle hit in 2007.

The first thing that comes to mind is your interest in the stock based on one outcome. There are three things you can do with your money as an investor. You can invest, which means researching companies with a history of earnings and dividend growth. The second opportunity to put your money at risk is to speculate. Speculations is the process of watching as a company develops its prospects over time with no guarantee that they will build a mine, hit a gusher, or bring their new technology to market.

Finally there is gambling. Gambling is putting your money into a company based on one outcome.  In your case it is a potential takeover. There is absolutely no way to evaluate or measure how or if a takeover will happen which adds to the risk.

Let’s see what opportunities exist to get you money out from under this loss.

The three year chart tells the sorry tale of a stock that had traded over $35.00 back in 2006. Unfortunately WAL  hasn’t seen the sunny side of that peak in five years. The shares had been range bound since May of 2010 with resistance at $8.25 and support at $6.75.

WAL broke support in the panic selling that came into the market in August and hit a 52 week low of  $4.44 before it caught a bounce.

The six month chart depicts the lift off  the 52 week low and the advance to resistance at $7.00 along the 200 day moving average. The bounce provided a 48% gain from the lows but still has you nursing a loss.

Given the advance is still intact and that we are now in a period of seasonal strength for banks you should hold on to WAL until January 2012 and see if you can get back to your breakeven point. From there you can decide if you want to continue to hold a small cap bank stock that doesn’t pay a dividend in the hopes of a premium offer in a takeover.

Make it a profitable day and happy capitalism!

Question for you Lou.

I am considering buying some Canadian bank stock. I am interested in the dividend income and, hopefully, reasonable steady growth. Is this the route to go and if so, which banks in particular interest you.

Thank you.
Bill

Hi Bill,

Thanks for the assignment. Investing in the Canadian banking sector has historically been the basis of wealth generation and there is nothing on the radar that would suggest otherwise. After looking at the charts for the major banks the one that stood out was the National Bank of Canada ( NA TSX).

Lets examine the charts and see where we have come from and where we might be going.

The three year chart illustrates the uptrend that started in September of 2010 which has taken the stock from $55.00 to the May 31, 2011 close of $80.95. What I like about the advance is that stock has been hugging the 50 day moving average taking a steady rise to the penthouse of profit.

In researching the sector  I found that NA has produced industry leading annual average dividend growth of 11% over the last ten years. Their dividend payout ration was the lowest in the sector as well. The analysis was conducted by Rob Carrick for the Globe and Mail, in an article published on March 11, 2011. http://www.theglobeandmail.com/globe-investor/investment-ideas/portfolio-strategy/doing-some-dividend-detective-work/article1939102/

The six month chart isn’t indicating that the uptrend is at risk. Now that doesn’t mean that the shares have gone straight up. There have been pull backs that tested support on the trend line but buyers were willing to step up and buy on the dips.

NA has beaten the street in seven of the last eight quarters on an earnings basis. The next report is scheduled for release on August 25,2011 and the forecast is for earnings of $1.74 per share.

Another factor that I like about NA is that they are focused on growing their business in Canada. Some of their competitors have hit rough patches trying to grow in the United States which is great when it works but not so when it doesn’t. The dividend yield on the stock is 3.5%.

The sector is solid and this one looks like the pick of the litter.

MAKE IT A MASSIVE JUNE AND HAPPY CAPITALISM!

Hello Lou,

I wonder whether LFC-NYSE, supposedly one of the largest insurance
companies worldwide, is ever going to recover from its mediocre
standing. Regarding the supposedly falling US $ and China owning so
much of it, what are the affects on LFC or are insurance and
financial companies just not in the picture compared to commodities.

Thank you

Jay

Hi Jay,

China Life Insurance Co. Ltd. (LFC TSX) is one of largest insurance companies with a market capitalization of $116.56B. Insurance companies, regardless of where they operate earn income from the premiums that they charge and the investments that they make with the capital not used to pay out benefits. The insurance industry as a whole has had a rough go of it since 2008 given market volatility, low yields on fixed income, destruction of asset values in the U.S. real estate market, and a host of other factors.

Your concern regarding the U.S. dollar is a valid one given that it is the reserve and vehicle currency of the  international financial system. Governments hold the greenback as part of their reserves and its used extensively for international trade. The issue isn’t that the U.S. has gone down as much as the pace at which it may continue to fall.  The value of the U.S. affects all assets from commodities to stocks and bonds. Given that insurance companies hold financial and real estate assets they are exposed to movements in the U.S. dollar.

The charts will provide some guidance as to the potential opportunities with LFC.

The three year chart illustrates the uptrend that took the stock from the March 2009 lows to the high in November of 2009. Since then the stock has been somewhat range bound with support at $60.00 and resistance at $70.00. With this sort of pattern you have to trade the stock in the range to generate a return or be happy with the 2.49% dividend yield until a new uptrend is established.

The six month chart depicts the buy signal generated by the MACD and RSI in September of 2010 which saw LFC run from $57.00 to almost $72.00. By late October the MACD and RSI both indicated a shift in momentum to the downside. A double top also formed by mid November which is a clear reversal pattern. From there the stock pulled back to $61.00.

If you are interested in LFC you have to be comfortable trading it in the range until it either breaks above resistance at $70.00 of breaches support at $60.00.

Happy Capitalism!

What is your assessment Royal bank stock re common shares. It has dropped pretty heavy since the first week of Dec. Is it a hold, sell or buy opportunity right now in your view?

Rob

Hi Rob,

On September of 2010 I filed a  post on The Royal Bank of Canada ( RY TSX) for Amir. At the time the stock was selling off  but put in a nice advance to a high of $57.00 in October. It has recently reversed itself back to $51.00 where it has found some support. The charts will provide a better look at the prospects going forward.

The three year chart illustrates the peak at $62.50 in May of 2010 and the retreat to $48.00 in late August. The stock moved higher into October but is now trading below its 50 and 200 day moving averages. On December 13, 2010 Moody’s cut their rating on the debt at RY because of their capital markets exposure. Bottom line the stock is in a range bound pattern with resistance to an uptrend.

The six month chart depicts the move off the late August lows and the peak in mid October.  Both the RSI and MACD signalled the shift in momentum in October. The sell off in December was triggered by the release of Q4 results that came in below forecast.

The MACD and RSI are both currently indicating that the oversold condition is reversing. The current dividend yield on RY is 3.9% which is attractive enough in today’s environment.

The RY story is currently on of a range bound stock with support at $51 and resistance at $57.00. Long term the stock is well positioned for growth given the relative weakness of the banking sector in the United States and Europe. The company has recently announced acquisitions in London and Asia as it seeks growth outside of North America.

At this point you want to trade the stock in the range for income and watch for breaks above resistance or below support.

MAKE IT A MASSIVE CHRISTMAS AND HAPPY CAPITALISM!

Greetings,

I was wondering what would be your input on Bank Of Montreal. I bought the stock few days ago and it’s down by 6%.
Is it a hold or sell.

My Best,

Vica

Hi Vica,

I posted on the Bank of Montreal ( BMO TSX) on June 3rd of 2009 for Glenn. At the time the stock was on an uptrend and provided good returns into 2010. My post of September 03 , 2010 indicated that the stock had its highs in April and was struggling to get back on track to an upside. 

The hit you took on your purchase came after BMO announced their US$4.1 billion acquisition of Marshall and Ilsley to expand their footprint in the U.S. Marshall and Ilsley is the largest bank in the state of Wisconsin with branches in seven other states and $53.9 billion in assets. The rub on the deal is that analyst surmised that BMO overpaid for the company and then Moody’s jumped in to review the rating on BMO’s debt.

The charts will provide a better sense of  trend, support and resistance.

The three year chart illustrates the range bound trading that BMO has been in since May of 2010 with resistance at $62.50 and support at $58.00. The big advance from the March 2009 lows is behind us and now what  the stock needs to break above resistance is improved results, higher dividends, or both!

The six month chart depicts the range with support at $58.00 and resistance at $62.50. The fact that the stock is trading below its 50 and 200 day moving averages doesn’t suggest a quick return to a sustain uptrend. The stock has oscillated through the range three times in the last six months suggesting that BMO offers opportunities to trade for income.

The MACD has proven a valuable signal generator for opportunities to buy and sell BMO through the range.

Another factor that you can not ignore is the 4.80% dividend yield that the stock offers. In an environment where Government of Canada bonds, the risk free investment, are offering substantially lower returns,  a 4.80% yield looks pretty attractive.

It was easier to consider BMO in June of 2009 when it was in a sustained uptrend. Currently the stock is more of a trade than a hold so make sure your investor profile can profit from the opportunity.

MAKE IT A MASSIVE CHRISTMAS AND HAPPY CAPITALISM!

Hey Lou,

Merry Xmas. I’m looking at the MACD turning up on the signal line on WES-TSX ( a good small co that was bashed by the last downturn) To make a long story short, they have been working away to improve the outlook…they are profitable and Western Financials books are in order with the bottom line perking up.

Can you comment on WES for me? Am I looking at the company the wrong way?

Thanks Lou….all the best in ’11.

Wayne

Hi Wayne,

All the best to you and your’s for the Christmas Season and a healthy and prosperous 2011!

I last posted on Western Financial Group Inc. (WES TSX) on December 23, 2009 for Neil. At the time the stock was in an uptrend and meeting light resistance at $2.60. It made its way all the way to $3.50 a share by March of 2010 but that was as good as it got. Having said that a 35% return in a ninety day run is still okay in my book. The charts will help illustrate a number of good lessons and perhaps provide a sense of direction for 2011.

The three year chart depicts the run to $3.50 from the March 2009 lows but the uptrend was broken in late March of 2010. The sell off took WES to a low of $2.20 in September of 2010 where it caught  a bounce to resistance at $2.60.

One lesson from this chart is to capture profits when available. Once WES broke the uptrend line in March of 2010 its was a call to action. There is also a double top visible at $3.50 which is a reversal pattern indicating that the good times were over. Finally the breach of the 50 day and 200 day moving averages also signalled that the sellers were in control. Capturing profits and preserving capital are central to asset management or as the song says know when to fold em!

The six month chart illustrates the the support at $2.20 where WES caught a bounce and the resistance at $2.60. Over the last three months the stock has been trading in a tight range with support at $2.40 and resistance at $2.60. Volume has been a bit thin. In only twelve days out of the last thirty has daily volume exceeded the average volume  over the last three months.

If you like the WES story you could find an opportunity in the January through April period when financial stocks enjoy a period of seasonal strength. You are right the MACD does appear to be turning higher which would signal the beginning of a shift in momentum to the buy side.

What you must remember when investing in a small cap stock is to take your profits when available and to set realistic expectation. Trees don’t grow to the sky and stocks don’t go up forever.

Happy Capitalism!