My thoughts on trading this quarter (Q1 2018)

I have purposefully set a quarterly trading date for my buying and selling of securities to prevent over-trading and to provide time for reflection between trades.

Mid-March 2018 is my next trading window. What am I thinking?

I have accumulated a fair bit of cash/short-term bonds in our portfolio (almost 21% compared to our 9% target) that needs to be deployed. We are currently underweight bonds in our bond ladder (22% vs. 36% target), slightly overweight in stocks (48% vs. 46%) and about even in bullion at 9%.

I intend to purchase 1/4 of our underweight amount in bonds and will continue along the same path for the remaining three quarters. Yield to maturity in the retail, investment grade bond market, available via my discount brokers is now sitting at about 3.4% on five to six year maturities. So I will seek out positions of that nature. I also need to top up a bit in the three-year and four-year timeframes. So, as March 15 approaches, I will start filling those gaps.

The only other trade I am contemplating is to take advantage of the market’s current lack of interest in dividend paying stocks like utilities. I have been wanting to purchase Algonquin Power (TSX: AQN) for some time, and it now sits at a forward P/E of 16.47 and a growing dividend of 4.67%, rising steadily since 2009, which is pretty good for this “growthy” dividend payer.

FASTGraphs shows a total annual rate of return since January 2010 of 18.5%. YCharts shows it at a cumulative return of 370% in that same time period  and StockRover shows a 102% cumulative five-year total return.

According to YCharts, it is 8.5% under value, and according to FASTGraphs it is 7.9% under value on a P/E basis. FASTGraphs has it at a 16% discount using historical price/operating cash flow measures. It is nearly 10% off its 52 week high.

So, even though this stock will push our equity allocation even a bit more over target, I believe it is a good addition to our portfolio, especially as we get a little closer to retirement. I may look to trim technology stocks again later this year to re-balance down a bit, since they seem to be making the fastest gains again so far this year (buy low, sell high is my thinking). As our savings, dividends and interest payments accumulate over the course of the year, the equity allocation will trend down slightly in relative terms (all things being equal).

I don’t really want to add another position (going to 34 equity holdings from 33), but I can’t see anything else to sell outright at the present time. And I do like AQN.TO, as does 5i Research (“one of our favourites”) who I follow. The latest commentary from 5i on the March 2 quarterly report suggests fundamentals are good (especially earnings). AQN’s recent acquisition seems to be working out fine as well.

Author: Michael

5 thoughts on “My thoughts on trading this quarter (Q1 2018)”

  1. Any thoughts on AQN replacing BEP or Fortis? That would keep your number of positions down.

    Or go the other way: add a bit of money to either Fortis or BEP (or both) instead of AQN.

    BEP and Fortis show as your smallest positions on the 31 Dec 2017 holding chart. I would be tempted to reinforce or toss one (or both) of them. That transition set of trades, whichever way you run it, would offer a way to commit a bit more money to this dividend space without growing the number of holdings.

    Just brainstorming…

    1. Hi FL,

      You raise some good points. Tough call – punt one or two, add to existing and not buy AQN, or add AQN anyway?

      I guess the best decision would come from looking at BEP, FTS, VNR and ED (all the utilities held) vis-a-vis AQN.

      So, how to compare them?

      There are so many considerations: market cap, credit rating, P/E, forward P/E, P/CF, debt level, dividend, dividend growth, estimated EPS growth, total annualized rate of return, risk, management, beta, broker/analyst recommendations, Morningstar valuation, currency, etc., etc., etc.

      1. So, since I am a subscriber, I asked 5i Research to rank AQN, FTS, BEP and VNR for total return potential with a five-year-plus hold in mind.

        The response I thought was good:

        “We would rank: FTS, AQN, BEP.UN, VNR. Such rankings are difficult, of course, as many factors (i.e safety) also come into play. We have no particular concerns on any in terms of company fundamentals.”

        So I am now thinking I will stick with my policy of replacing existing holdings with “better” holdings. That means selling VNR and buying AQN. I may also top up FTS and BEP at the same time since they are, as pointed out, smaller holdings and currently represent relatively good value.

        1. Good thoughts from you (and 5i). Thanks for sharing. It is nice to know that 5i thinks these stocks have no particular concerns. Of the 4, I only personally hold BEP.UN, but I also have a position in EMA and TRP common stock.

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