Strategy for 2011
Facing a sluggish North American economy for the foreseeable future, an investment strategy for 2011 should emphasize:
• Income Generation
• Turnarounds
• Growth via China
Given the secular changes occurring in the North American economy, this strategy could very well apply to the next few years.
Income Generation
Gone are the days of simply building a portfolio of growth stocks and expecting rising earnings to translate into continuous portfolio gains. In today’s anaemic economic environment where sustained earnings growth prospects are mediocre at best, portfolios have better prospects of increasing value through income generation.
With low interest rates, however, generating income must be pursued on a highly selective basis with an emphasis on high yielding dividend common stocks, preferred shares, real estate investment trusts, MLPs, and high yield corporate bonds. Fortunately, a number of these securities trade at discounted valuations. As a result, astute investors can select securities offering both attractive income yields as well as capital gain upside upon a normalization of economic conditions.
Turnarounds
Coming out of an economic slowdown, turnarounds offer some of the most compelling risk / return prospects for investors today. Through 2009 and 2010, numerous turnaround stocks have already achieved triple digit percentage gains. And while the largest gains have likely been made, the upside potential on turnaround opportunities still remains greater than the upside from owning growth stocks, which for the most part, are struggling to increase revenues while paying little or no dividends.
Growth via China
While there remains a small group of North American growth companies still worthy of investment consideration, a greater selection exists in China – the only country enjoying meaningful economic growth.
To appreciate the investment opportunity in China, investors should first take a lesson from America’s greatest mutual fund manager based on performance, Peter Lynch. $10,000 invested in Fidelity’s Magellan fund when Lynch became manager grew to $190,000 in 10 years. His favourite stocks were fast growing companies trading at low price/earnings ratios. China currently possesses many Peter Lynch type stocks where revenues and earnings are growing over 30% per year, yet trade at P/E multiples at a discount to their growth rates. Many of these promising companies can be bought on US stock exchanges.
Conclusion
An investment strategy for 2011 should focus on building a portfolio that includes significant income generation, compelling turnaround opportunities, and selective growth companies from Canada, the US, and from the world’s fastest growing economy, China.
If you have any questions, or are interested in implementing any of the above strategies in your own portfolio, please call Teal Linde at 604-738-5600.