When Interest Rates are Hiked, It’s Time to Buy
Hope You Made a Quick Profit
When Two Cabot Analysts Recommend the Same Stock
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When Interest Rates are Hiked, It’s Time to Buy
Today we start with a simple chart that Fidelity published last year, showing what stocks do, on average, after the first interest rate hike.
They go up!
One reason for this is that the business cycle is still in a growth phase when the first rate hike is implemented. It typically takes several rate hikes to put the brakes on an economy significantly enough to end a growth cycle.
Another reason is psychology. Rate hikes typically come when the market is trending up, and investors tend to expect these trends to continue—so they do, for a while.
So whether the Fed hikes rates this month, next month or months later, don’t be afraid. Remember that the first rate hike, on average, comes in an environment that is beneficial to investors, and thus you should make the most of it.
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Hope You Made a Quick Profit
Nearly three weeks ago, on November 17, I showed you this chart, and suggested that the stock was a good buy on technical grounds.
My exact words were, “Technically, it’s a very high-potential chart, and I recommend buying here.”
But I didn’t tell you the stock’s name. Instead, I suggested that you become a regular reader of Cabot Top Ten Trader, which had recently featured the stock, so that you could get full details.
Well, I hope you did, because here’s the chart today.
The stock is Nvidia (NVDA), and it’s up about 10% since my recommendation three weeks ago. Short-term, it’s a little extended, so if you haven’t bought yet, I’d wait for a better setup before buying. But long-term, the stock’s growth story is quite intact.
Here’s the entire recommendation from the original Cabot Top Ten Trader feature on November 9.
“The steep decline in the personal computer market has done serious damage to many of the semiconductor companies that make chips used in PCs. Not Nvidia. The company has managed to stay ahead of the curve by developing chips for industries that aren’t in a downward spiral, including mobile. Its graphics processing units (GPUs) are used to display animated scenes in online games, a growing industry that contributed 44% revenue growth for Nvidia last quarter, accounting for 58% of the company’s total sales. The auto industry is another big customer—the company develops chips that generate images for car dashboards and navigation systems. More than 50 automakers use Nvidia’s technology for its navigation systems, including Tesla Motors, which uses Nvidia processors exclusively. Those two growth industries have helped Nvidia overcome the PC slowdown. Last week, the company beat earnings estimates in its fiscal fourth quarter, reporting 18% EPS growth and 6% sales growth from the same quarter a year ago, marking the seventh straight quarter of top- and bottom-line growth. That kind of growth, along with the gigantic potential from the gaming industry (including virtual reality), is enough to capture Wall Street’s attention.
NVDA started to make a move in late July, jumping from 19 to 23 in a couple of weeks. It didn’t last, as the broad market correction knocked the stock back to 20 by the end of August. Since then, it’s been on a tear, breaking through yearlong resistance at 23 in early October (as soon as the market got going) and motoring ahead to 28 early this month. Last week’s earnings beat extended the rally, pushing the stock to 31 on volume that was four times normal levels. It’s possible NVDA will just keep running, but we think it’s best to buy on dips as the stock is likely to digest its recent rally.”
Bottom line: the uptrend remains intact, and buying on normal corrections is recommended.
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When Two Cabot Analysts Recommend the Same Stock
From time to time, two Cabot advisories will recommend the same stock, purely by coincidence. So it is with Royal Bank of Canada (RY). One analyst is focused mainly on the large and growing dividend, while the other is focused on value. But both recognize that there’s good potential for long-term growth. Putting them together makes a very strong case for the investment.
Here’s what Chloe Lutts Jensen wrote about the stock in Cabot Dividend Investor on November 25.
“Royal Bank of Canada (RY) is one of Canada’s “Big Five” banks. Energy companies make up a big part of the Canadian economy, so the past year of declining oil prices has weighed heavily on all five bank stocks, as investors fret about their impact on Canada’s economy as well as its real estate market, employment situation and appetite for loans.
“The biggest loser has been Bank of Nova Scotia (BNS), which has been aggressively expanding into emerging markets, another weak spot this year. And the most resilient of the five has been Toronto Dominion (TD), the largest of the group, with the highest valuation. In the middle of the pack, high-quality Royal Bank of Canada offers good value, a generous yield, an emphasis on dividends, solid net income growth and the best operating margins of the group.
The Dividend
“Royal Bank of Canada has paid dividends for 20 years. Management has increased the dividend nine times in the past five years, averaging an annual dividend growth rate of nearly 10%. The current payout ratio of 46% is in line with the bank’s historical average and typical payout ratios in the financial industry.
“RY’s dividends are declared in Canadian dollars, so U.S. investors will see some variation in dividends because of exchange rate changes. This inconsistency affects RY’s Dividend Safety Rating, but the company’s overall commitment to rewarding investors still earns RY a solid 7.6 from IRIS. And RY’s stable earnings expectations and track record of dividend boosts earn the stock a Dividend Growth Rating of 7.6 as well.
Note: IRIS stands for Individualized Retirement Investment System, Chloe’s proprietary rating system; 10 is the highest rating.)
“In recent years, Royal Bank of Canada has pursued growth primarily by expanding its offerings beyond retail banking. The bank now has operations in wealth management, insurance, capital markets and treasury services for institutional investors, as well as personal and commercial banking. Today, personal and commercial banking accounts for 52% of earnings, followed by capital markets at 23% and wealth management at 11%.
“In January, Royal Bank bought U.S.-based City National Corp. (CYN), a private and commercial bank, to expand its wealth management and capital markets presence south of the border. Approximately 19% of revenues now come from the U.S., 18% from other international markets and 63% from Canada.
“Over the past 12 months, Royal Bank of Canada has delivered the second-best return on equity and best operating margins among the Big Five banks. Since 2009, net income has grown by 18% per year on average.
“Going forward, analysts expect EPS growth to reach 7% this year (in U.S. dollars) and average over 8% over the next five years. RY will report fourth-quarter and full-year 2015 results on December 2 before the market opens.
The Stock
“You can buy RY on either the Toronto or New York Stock Exchange. Both securities trade under the symbol RY. If you’re a U.S.-based investor, buying the Canadian listing will give you exposure to the Canadian dollar, and vice-versa for Canadian investors (although the U.S. listing’s performance is still affected by Canadian dollar weakness). To keep things simple, we’ll be adding the NYSE listing to our portfolio.
“After declining 18% over the past 12 months, NYSE-listed RY now trades at a P/E of 11.5 and a forward P/E of only 10.9. The stock’s current yield of 4.2% is also about half a percent above its five-year average yield of 3.7%, another indication that the stock is undervalued.
“There is some risk that the downtrend in Canadian banks isn’t quite over. However, RY shares have been quite stable over the past month, despite a renewed slide in oil prices to their lowest level since August.
“For long-term income investors, RY presents a good opportunity to buy a high-quality dividend-prioritizing stock at a good value. We’ll be adding the NYSE listing of RY to the Safe Income tier of our portfolio at the average price on the first trading day of December.”
Note: Cabot Dividend Investor recommends three different portfolios, yielding 7.2%, 3.7% and 2.6%, or you can mix and match to build your own custom portfolio using the Individual Retirement Investing System (IRIS).
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Meanwhile, over at Cabot Benjamin Graham Value Investor, ace value analyst Roy Ward has been holding on to Royal Bank of Canada for more than two years! In that time, his readers have not only raked in dividends exceeding 4% per year, they’ve also enjoyed capital appreciation of more than 18%.
When the stock eventually becomes overvalued (and thus risk is high), Roy will tell his readers to sell and move on to a new, low-risk investment, but for now, holding strong remains his advice. Here’s what Roy wrote in his latest update on December 4.
“Royal Bank of Canada (Toronto Stock Exchange: RY.TO: CAD 76.36; NY Stock Exchange: RY: USD 57.20) reported excellent results for the quarter ended October 31. Loans outstanding advanced 8% and EPS surged 11% after increasing 8% and 4% in the prior quarter. Deposits jumped 14% from a year ago. The bank’s board of directors increased the quarterly dividend to $0.79 from $0.77 (Canadian dollars). The dividend yield is now 4.1%.”
Note: Roy provided a much more thorough picture of the stock when he initially recommended it. By his system, the stock is too high to buy now but holding is simple. And profitable! Since inception on 12/31/95, the Cabot Value Model has provided an impressive return of 1,089.1% compared to a return of 527.3% for Warren Buffett’s Berkshire Hathaway. During the same 19-year period, the Dow has gained just 246.3%.
For more information, click here.
Yours in pursuit of wisdom and wealth,
Timothy Lutts
Chief Analyst, Cabot Stock of the Month
Publisher, Cabot Wealth Advisory
