Friday, 31 May 2013

Investing Big Stuff vs Small Stuff

We've all heard the expression "don't sweat the small stuff", a wise admonition to focus on what is important. But what is the big important stuff when it comes to investing? In today's information age, there is a deluge of data and advice that can easily confuse and mask what really makes a difference to our long term lifetime (say 30 or 40 years) investing prosperity. Therefore, today we will take a shot at identifying the key issues and quantifying their impact.

#1 Not Saving Money - Impact = 100%
It's almost embarrassingly obvious but if there is no money set aside out of income for investment, there can be no growth. The more savings, the greater the eventual total. Moreover, the earlier in life that money can be set aside, even small amounts, the more time that the benefits of compound growth can accumulate (earnings reinvested generate more earnings - see the difference compounding makes in Fidelity's growth calculator).

#2 Chasing Performance or Headlines - Impact = 3 to 5% per year
This is another story familiar to, and sadly applicable to, many investors. Buying into funds or stocks that have done really well recently, only to see subsequent stagnation or worse, losses, as performance cools off. The evidence comes from numerous sources, one well-known example being the annual reports by Dalbar Inc, which document (e.g. the 2013 press release which showed 3.96% under-performance of US equity investors) that investors have chronically under-performed the funds in which they have invested through poor timing.

Another way to see the issue is the panel insert "Dangers of Market Timing" within the superb Big Picture inter-active chart of the TSX going back to 1934 at the Get Smarter About Money website of the Investor Education Fund. There was about a two and a half times difference in total growth between being continually invested in the stock market and missing the best year in a ten-year period (which would be akin to waiting till after the good year to decide to invest).

#3 High or Low Fund Fees - Impact = 1.5 to 2% per year
Funds on average under-perform more or less by the amount of their fees and costs (management expense ratios and trading costs) as shown in many sources, for example, David Swensen's book Unconventional Success. A handful of funds do outperform, justifying their high fees, but they are very hard if not impossible to identify beforehand. The easier, effective solution is to search out funds with low fees, which most often are index funds passively tracking broad markets. Since fees are based on assets, not returns, they take a chunk away from the investor every year. It is a very predictable return reduction, year after year. Our estimation of the return difference is based on the spread in fees between high-fee and low-fee funds.

#4 Utilizing RRSP, TFSA Tax-Advantaged Accounts - Impact = 1 to 4% per year
Every Canadian investor should take advantage of RRSPs (in any of their various forms like LIRAs, LIFs, RRIFs etc) and TFSAs. (We previously explained in this post why taxable accounts do not produce as much after-taxes as RRSPs and TFSAs.) Withing such accounts, the capital gains, interest and dividend returns are tax-free so the investor benefits by the amount of his or her tax income tax rate times the return. An Ontario taxpayer in a 35% bracket on a 6% pre-tax annual investment return would gain about 0.35 x 6% = 2% per year. The higher the tax bracket and the greater the investment return inside the RRSP/TFSA the bigger the benefit.

That a TFSA produces tax-free returns is very obvious but for a RRSP how this works can be confusing. For a fine explanation that separates the mechanics from the financial reality, see's Nitty-Gritty of the RRSP Model).

#5 Creating Diversified, Rebalanced Portfolios with Efficient Funds - Impact = 1 to 2% per year
The last 60 years of financial research, beginning with Markowitz's 1952 seminal paper Portfolio Selection, have shown that combining different types of assets, especially stocks and bonds, with proportions that are set according to the investor's risk requirements and then rebalanced regularly to maintain the risk level, perform better. Beyond the basic level, further benefits can be obtained by adding other assets like real estate and commodities or subdividing stock holdings into geographies, such as domestic market, developed country and emerging market, and into types like small cap, value and momentum.

Finally, and still not mainstream, but supported by a growing body of research that this blogger believes, alternative selection and weighting schemes like low volatility, equal weight and fundamental factor offer opportunity for further portfolio performance enhancement. The alternative scheme effects only reliably happen over decades long periods so the investor must be very patient and determined when the odd decade of under-performance relative to traditional standard cap-weighted indices goes by.

Wealthfront's Investment Methodology outlines the case for diversified rebalanced portfolios up to but not including the alternative weighting schemes, which can be found analyzed in Jacques Lussier's recent book Successful Investing and on the EDHEC Risk-Institute.

Translating the Impact into dollars
The graph below shows how much difference each percent makes to the total compound growth of investments over the long term, such as thirty or forty years. Adding up the lower end values for items 2 to 5 gives us a 6.5% difference, the gap between 0.5% and 7% annual growth, which ends up being in excess of a 12x difference after 40 years - $149,700 vs $12,200.

The longer the time period and the more Big Stuff items the investor takes advantage of, the greater the ultimate difference. Readers can test other combinations of contributions, time period and return differences in Fidelity's online calculator linked above.

(click to enlarge image)

Disclaimer: this post is my opinion only and should not be construed as investment advice. Readers should be aware that the above comparisons are not an investment recommendation. They rest on other sources, whose accuracy is not guaranteed and the article may not interpret such results correctly. Do your homework before making any decisions and consider consulting a professional advisor.

Friday, 24 May 2013

Portfolio Volatility of Swensen Seven, Smart Beta vs Simple Recipe - Which is best?

Last week when we examined how to reduce portfolio volatility, we found that we could reduce volatility by about half, a very good result. The Simple Recipe portfolio that we used to illustrate had to undergo a drastic shift in allocation away from equities to the bond ETF to attain that stability at some loss of long term return. Let's now see how two other portfolios we proposed back in March - the Swensen Seven and the Smart Beta - fare compared to the Simple Recipe. We have compiled the following comparison table using the calculator.
(click image to enlarge)

Does we see the same pattern of portfolio volatility reduction when we equalize the volatility / risk contribution of the holdings?
The answer is an unequivocal YES. In each portfolio, when we adjusted the asset allocation percentages to get closer to an equal share of risk from each ETF holding, there was a marked reduction in both the annualized portfolio volatility and the daily Value at Risk (VaR - a measure of how much the portfolio could lose in any given day taking into account its past volatility over the specified time period of 1-, 2-, 5-years). For instance, the Swensen Seven portfolio's annualized volatility for the past year goes down from 5.2% to 4.4% after adjustment and its VaR declines from 0.8% to 0.6%. Risk is not decreased by half but it it's still an appreciable difference.

The volatility reduction applies for any and all time periods we tested - the past year, two years, five years, maximum data available. Equalizing volatility contributions of holdings is a consistent and reliable way to reduce volatility of a portfolio.

It's encouraging that the reduction improvement was least for the Smart Beta portfolio, which we had built by guesstimating equalized volatility contributions. Our guesstimate helped a lot but we did not have the benefit of the calculator when writing that post so we can see the usefulness of the tool.

Which portfolio got the biggest volatility reduction?

The Simple Recipe gained the most - it had the largest reduction in both risk measures, e.g. its trailing one-year annualized volatility went down from 4.5 to 2.9% and VaR from 0.7 to 0.4%. Not only was its reduction the largest, it had the lowest absolute volatility after the adjustment e.g. the 2.9% volatility is against 4.4% for the Swensen and 3.6% for the Smart Beta.

Does that mean the adjusted Simple Recipe is the best?
It's certainly a strong plus in its favour but we notice that the method to achieve the reduction was to boost the allocation to fixed income (the bond ETF with symbol XBB) at the expense of equity. The Swensen Seven also improved by increasing fixed income, though by not nearly as much, while the Smart Beta did not touch the fixed income allocation. Instead it moved money from volatile ETFs RSP, EFAV and PXH to more stable ZLB and ZRE. A higher bond allocation is not the only way to reduce portfolio risk.

After adjustment both the Swensen Seven (45% allocation) and Smart Beta (40% allocation) have an allocation to fixed income significantly less than Simple Recipe's 75%. That leaves more in higher returning (on an expected basis at least) equities. Yet Smart Beta's one- and two-year volatility is not that much higher than Simple Recipe's. Our point in the original post linked above about the Smart Beta portfolio was that it could well offer an improvement over traditional portfolios through a more balanced structure and more efficient ETFs. The balance for different economic growth, market, crisis,  inflation and currency environments of the Swensen Seven and the Smart Beta is retained while the Simple Recipe is decidedly unbalanced towards fixed income. Volatility risk reduction has come at a cost. If future bond returns are weak because of rising interest rates, the unbalanced Simple Recipe could lag considerably.

We believe the trade-off looks favourable to Smart Beta but every investor must decide for him or her self.

Every portfolio is more stable than any of its components, even compared to the ultra stable bond ETFs
It's not much of a surprise to most investors to see in our comparison table that equities on their own, such as ETFs SPY, VTI, XIU and XIC are much more volatile than portfolios that include them along with more stable fixed income ETFs. But some may not realize that even that most stable holding, the broad Canadian bond market ETF XBB is more, not less, volatile than the Simple Recipe portfolio which includes equities along with it. That's right, the portfolio is less volatile than any of its parts. It's not magic or illusion. Why? This occurs through the operation of negatively correlated holdings that move in opposite directions (one zigs while the other zags as the popular expression goes, though both go up in the long term). The overall average ride is smoother. The slide below from this presentation based on the Booth & Cleary Corporate Finance textbook shows how this works.
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This screenshot of the InvestSpy results for the trailing one-year performance of the adjusted Smart Beta shows the desirable negative correlations amongst the various ETFs.
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Bottom Line
Adding ETFs to a portfolio that produce positive returns and are un- or negatively-correlated with other holdings, such as the bond funds and ZLB in the Smart Beta portfolio, adds greatly to return reward vs volatility risk performance. 

Disclaimer: this post is my opinion only and should not be construed as investment advice. Readers should be aware that the above comparisons are not an investment recommendation. They rest on other sources, whose accuracy is not guaranteed and the article may not interpret such results correctly. Do your homework before making any decisions and consider consulting a professional advisor.

Tuesday, 21 May 2013

How to Minimize Portfolio Volatility and Sleep (a lot) Better

That an investor is able to sleep well at night matters. It matters first for peace of mind, since the sickening feeling of a threatened retirement resulting from plunging markets is not what life is all about. It matters also to prevent the rash reaction of selling out at precisely the wrong time, after a plunge and before recovery has come about.

Many portfolio structures that are described as conservative or balanced are actually quite volatile. Let's explore how to adjust a portfolio to reduce volatility. We'll use two free online tools - the Stingy Investor Asset Mixer, which provides long term return data of the main asset classes, and the recently launched InvestSpy Calculator, which provides market price volatility data. Both allow the user to enter various combinations and percentage allocations over different time periods, a very useful feature for "what if" testing.

Test Portfolio - The Simple Recipe Portfolio
We'll examine a classic simple portfolio, one of a bunch of such portfolios we compared here. The Simple Recipe has only four ETF holdings, three equity (Canadian TSX Composite ETF: trading symbol XIC, USA S&P 500: symbol SPY and international developed country MSCI EAFE: symbol EFA) and the Canadian bond universe (both government and corporate): symbol XBB. Assuming a 50 year old investor, the Simple Recipe allocates 50% to XBB, 25% to XIC, 8% to SPY and 17% to EFA. Those are the numbers we entered into the two tools to get the results of the Pre-Adjustment version of the portfolio.

Reduce volatility by equalizing the Risk Contribution of each holding
Beginning with the InvestSpy tool we enter the initial Pre-Adj allocations and find that almost all the volatility in the portfolio, as seen in the Risk Contribution result column, comes from XIC and EFA. XBB provides a powerful offsetting negative volatility reduction (see screen shot of results below).
(click image to enlarge) 

The source of this effect is revealed in XBB's negative numbers in the correlation matrix.

Next we reduce the overall portfolio volatility by changing the allocation to each ETF to try equalizing the Risk Contribution. That means boosting XBB's percentage and reducing both XIC and EFA. Remember that playing with the numbers is not a matter of trying to find the exact perfect minimum volatility. There really isn't such a thing as an optimal solution, since what works best for the past one year goes out of kilter for the past two years, five years or the entire price history. Volatility and correlation has changed over time and will continue to do so in future. In addition, SPY and EFA are traded in US dollars so that currency shifts with the Canadian dollar will alter the results. We are merely looking for something more stable than the initial portfolio, knowing that it also won't be perfectly adapted to the future. The before and after-adjustment results are summarized in the table below.
(click image to enlarge)

Our Volatility-adjusted allocation reduced volatility by about half compared to the initial portfolio allocation! That includes the period of the financial crisis in 2008-2009. One big takeaway is therefore - increasing the bond allocation brings much stability to the portfolio.

What happens to the returns, do we lose half the returns too?
To find out we entered both pre- and volatility-adjusted allocations in Stingy Investor for various time periods. The Stingy tool has the merit of taking account of currency shifts by converting returns to Canadian dollars, i.e. we assume that the investor does not hold a CAD-hedged ETF. The negative numbers in the Alpha input column approximate ETF expense ratios (we entered current MERs for our ETFs), which reduce returns. This is necessary to get a reasonable estimate of what would have happened since Stingy does not use actual ETF data. ETFs did not even exist in 1970. Looking at the longer historic time data helps us see how our portfolio allocation would have fared through more economic and market environments like the high inflation 1970s oil crisis and the 2000 Tech bubble. Unfortunately, all the data is only year-end annual so we cannot see what happened day-to-day during any year. However, it's better than nothing. We online investors must make do with what we can get, knowing in any case that we are always approximating, since the future is never exactly like the past.

The results vary slightly amongst sub-periods and the total time period for which data is available, 1970 to 2012, but a pattern is clear.

The screenshot below shows detailed results for the volatility-adjusted portfolio:
(click to enlarge)
We've taken the results and created the following summary table comparing the pre- and volatility-adjusted portfolio allocation results for the total time period 1970-2012 and the high inflation years of the 1970s, when bonds might have been thought to severely drag down the portfolio performance:
(click to enlarge) 

  • Returns for the volatility-adjusted portfolio are still highly positive but reduced by about a half-percent a year BUT
  • Downside risk is hugely reduced - fewer downside years, a lot less volatility and especially, worst drop years have very small decreases
Bottom line: It is quite possible to drastically reduce sleep-depriving portfolio volatility without much loss in returns. Is that a worthwhile trade-off? It's up to you the investor to decide.

Disclaimer: this post is my opinion only and should not be construed as investment advice. Readers should be aware that the above comparisons are not an investment recommendation. They rest on other sources, whose accuracy is not guaranteed and the article may not interpret such results correctly. Do your homework before making any decisions and consider consulting a professional advisor.

Monday, 13 May 2013

Comparing the Canadian High-Yielding Mortgage Companies

A few weeks back, we introduced the various alternatives for investors to obtain steady dependable income from mortgages. Today let's go a little deeper and compare the seven mortgage-focused companies available through online brokers and traded on the TSX. In particular, we want to see what the chances are that these companies will be able to maintain their current attractive distribution yield rates of 6 to 7%. Many of these companies state outright that they aim to provide a return of 4 to 4.5% over the federal Treasury Bill rate while safely preserving capital. We'll use the excellent guidelines PIC-A-MIC from Fisgard as our checklist of factors to consider.

The Seven Contenders
As our first comparison table details, the seven use various combinations of two legal structures - corporation or closed end fund - and two tax structures - ordinary taxable entity and tax-exempt Mortgage Investment Corporation (MIC).
(click image to enlarge)

Tax treatment matters and it differs a lot
A MIC's tax-exemption only means the income is passed along to the investor to be taxed in his/her hands, which in turn could be in a tax-exempt TFSA or a tax-deferred RRSP, LIF, LRIF, LIRA or a tax-advantaged RESP. Since the five MICs in our list all distribute interest income which is subject to the highest tax rate, these stocks should preferably go into a TFSA, RRSP (or the like) or a RESP, or simply in a taxable account.

The other two funds, FN and FNM.UN, are taxable. FN distributes primarily eligible dividends and sporadic small capital gains so it can go well in an investor's taxable account. FNM.UN uses a forward agreement to transform interest income into primarily return of capital distributions. Unfortunately, as mentioned in our previous post, the recent federal budget said it would prevent these arrangements but the company believes the existing FNM.UN will be able to continue till the forward agreement expires in December 2017. Since return of capital is effectively deferred capital gains, investors can continue to benefit for up to almost five years of tax advantaged income. As such, FNM.UN fits nicely into a taxable account.

Trading below or above Net Asset Value (NAV)
Perhaps the uncertainty about FNM.UN explains the fact it is trading at 1.8% below the net asset value of its holdings. In contrast, TMC is trading a fairly significant 7% over NAV and MTG is at 1.6% above NAV. Some investors may be chasing the yield without noticing what each fund is really worth.

Cash yield is often supplemented at year end
The MICs all must distribute all their income to retain their tax-exempt status so they typically set a conservative monthly amount to distribute. Then at year end there is an extra top-up amount to parcel out the remainder, which means the indicated cash yield in our table most probably under-estimates what the investor will eventually get by year end.

Distributions have trended in different directions
Disappointing - TMC and AI have seen their distributions fall appreciably over the past several years.
Pleasing - MKP, FN  and FC have been increasing their regular monthly distributions.
The other two don't have a long enough track record to detect any trend.

Dividend reinvestment plans at discounted price
Five funds offer the opportunity to reinvest distributions at no brokerage cost and at a 2% - MKP, FC and AI - or a 5% discount - TMC and MTG - to current market price of the shares.

Risks - Things that could go wrong
Look at any prospectus for these companies on Sedar and there is a long list of factors that can knock down the distributions and the capital value of the shares:
  • credit risk assessment poorly organized or controlled resulting in higher defaults on loans and losses
  • liquidity risk or cash flow control that does not match up incoming with outgoing cash or put adequate just-in-case sources of funds in place
  • changes in real estate values
  • concentration and composition of the portfolio
  • economic conditions and cyclicality of residential and commercial real estate causing slowdowns in loan growth and rises in bad loans
  • actions by higher-ranking debt holders
  • leverage magnifies the downward as well as upward returns
  • mortgage holdings may not be very liquid / easily saleable
  • increasing price competition from other lenders that reduces profitability
  • interest rate decreases reduce possible returns and increases can hurt the value of existing holdings, especially as term to maturity of holdings increase
  • availability of investments
  • mortgage extensions that go bad
  • foreclosure costs
  • litigation costs
  • reliance on key personnel
  • failure of internal computer systems
  • changes in legislation or taxation
  • environmental liabilities on repossessed properties
  • natural disasters, wars, terrorism
It is impossible to precisely assess the exposure, probability and potential impact of any or all these factors. The PIC-A-MIC list and our table below gives an idea of the current state of affairs for the most likely and most influential factors.
(click to enlarge)

Mortgage portfolio holdings average yield mostly above payout rates
FC, TMC, MTG and AI all sport portfolios whose yields exceed the rate they pay out, which leaves a better chance that after costs are deducted there will be enough to sustain payouts.

In MKP's case, the portfolio yield at end of 2012 was only 5.81%, a lot less than the 7.74% paid out to shareowners. The difference can only come from leverage. But in MKP's case that doesn't necessarily mean huge extra risk. As a deposit taking financial institution, it can, unlike the others in our list, get cheap funding by issuing plenty of low interest term deposits just like the mainstream banks to lend out for higher rate mortgages. The interest rate spread of many such transactions can create a big sum for the many fewer shareholders of MKP shares. The fact that it has been in existence since 1991 and is regulated by the OSFI adds to the comfort that it knows what it is doing and can sustain the business model and the distribution.

Mortgage assets and concentration of loans
A bigger asset base gives more scope for spreading things out and being less exposed to any one borrower or geographic area. Another row in the comparison table shows how concentrated are the portfolios of the various companies. FN and MKP come out looking safest on this dimension.

Investment focus, term duration, loan-to-value ratio and 1st vs 2nd proportions exhibit trade-offs of one factor vs another
What they may lack in strength from concentration or smaller size, the other companies make up for with more protection in the form of shorter lending term, lower loan-to-property value and greater proportions of higher ranking first mortgages.

Portfolio impairment and loan losses across the board look to be acceptably low
The proof of lending quality, or deficiencies therein, ultimately comes out as repossessions, foreclosures and losses on loans. None of the companies seems to be facing any serious losses at the moment.

Expense ratios high for two companies
TMC, at 2.6%, and FNM.UN, at 2.5%, appear to be on the too-high end of expenses compared to the others.

Management skin in the game varies from none to dominance
When there is significant share ownership by the executives and directors who run the company, outside investors get more reassurance that attention will be paid to keeping the company profitable and the cash flowing. MKP, FN and AI look especially good on manager ownership stakes. It is interesting also that the three companies with the higher expense ratios - FNM.UN, TMC and MTG - seem to have no shares owned by the managers/executives.

Amount of leverage employed varies from zero to several multiples
TMC is the one company that so far refuses to use any leverage to boost returns. Its only borrowing is strictly to facilitate timing differences in cash flows. The others run the gamut from modest 5.8% liabilities vs assets at AI to 83% at MKP. However, as noted above, the borrowing base of term deposits is very cheap and stable at MKP so it isn't clear the risk is much more, if any.

Bottom Line
It's hard to say that any company stands out as especially weak-looking overall. MKP noses ahead to grab best choice in our opinion for its combination of pluses - starting with a high base cash yield, that has grown steadily over the years, a long track record of profitability, a dividend reinvestment program, low loan losses, a very diversified loan portfolio and a significant management stake.

Disclaimer: this post is my opinion only and should not be construed as investment advice. Readers should be aware that the above comparisons are not an investment recommendation. They rest on other sources, whose accuracy is not guaranteed and the article may not interpret such results correctly. Do your homework before making any decisions and consider consulting a professional advisor.

Friday, 3 May 2013

Time to Fill 'er Up on Oil & Gas Stocks?

Many investors will have noticed that the shares of oil and gas companies have been taking a beating in the last few years. It's one of the main reasons the TSX Composite has been lagging the S&P 500 in the USA. From a peak in mid-2008, oil & gas shares first suffered a big decline and then have got stuck in a doldrum. The chart below (using BMO InvestorLine's internal ETF comparison tool) shows this pattern using the benchmark ETF of the TSX, iShares' S&P/TSX 60 Index Fund (TSX: XIU) and the iShares S&P/TSX Capped Energy Index Fund (XEG), which tracks the oil & gas sector.
(click on image to enlarge)
We note that the oil & gas stocks, despite the woes of the past five years, have returned slightly better than the overall TSX over the ten year period. A 150% total return for XEG versus 139% for XIU isn't shabby for either. Maybe we shouldn't be too despondent. Nevertheless, where there is a downtrodden industry, perhaps there is an opportunity to pick up good stocks that have been dragged down with the negative sector trend, so we decided to have a look.
Finding the oil & gas stocks
Using the TMX Money stock screener, we extracted a list of candidate stocks by setting the Sector to Energy and imposing a minimum $2 billion market cap to eliminate the multitude of smaller companies and to thereby focus on established successful companies that have a longer track record. With the 34 companies thus located, we eliminated pipelines like Enbridge, TransCanada, Pembina and Inter Pipeline and utilities like AltaGas. The remainder is a mix of integrated companies that do everything from exploration to production, refining, marketing and distribution, to others that exist in one part of the energy chain or who provide services to the industry. Our first table shows the companies and their type. The table also shows which companies are in the ETFs XIU and XEG. All but two are in XEG, shown by the orange cells, and 11 are part of XIU, the light purple cells. Many of these stocks pay a very attractive dividend, much above that of XIU and XEG's average, as we can also see from the first table. A key question is thus whether the payouts are sustainable.
(click on image to enlarge)

Past market performance and profitability
It is no surprise that most of the stocks have had significantly negative returns over the past 1 and 5 years and many have suffered declining profits and have cut dividends, as we can see in our second table below. But, encouragingly, there are some notable exceptions that have increased profits and boosted dividends. Most companies are still making profits, as shown by the positive Return on Equity. Using the profitability factors, we have rated each company with an A (best), B (indifferent) or C (poor) grade. Ten companies out of the 26 get an A.
(click on image to enlarge)

Riskiness and volatility
Most investors want to avoid future nasty surprises, so we want to assess how stable and reliable are these companies. Are they paying out too much in dividends as a proportion of earnings, as tested by the dividend payout ratio?  One - Keyera Corp - actually paid out more in dividends than it earned in 2012, which may be sustainable in the short term with enough incoming cash flow but cannot be in the long term. Too low a payout ratio can also be bad if management uses profits for empire building on unproductive investments (which we noted in our recent post on Canadian dividend ETFs). Other risk indicators include the actual daily volatility of the stock relative to the market average (measured by beta, with 1.0 being the market average, i.e. the same as XIU, under 1.0 being less volatile and over 1.0 more so); the dispersion of future earnings per share estimates by analysts (the less the better as we noted in this post); insider trading, i.e. what executives and directors of these companies are actually doing with their own money (buying is obviously a good sign, while selling may be bad as we discussed previously here; and several debt burden indicators since too much debt with the fixed interest obligations makes the company more susceptible to downturns. Only seven companies got A on these factors.
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Price Attractiveness
The final set of measures aims to see whether the stock price reflects a good buy relative to earnings, cash flow, sales and book value. In several cases, the ratios don't all tell the same story. Along with that, we have included (and taken the grain of salt we suggested in this post) the average recommendation of stock analysts on each stock, as well as the often differing results of the value assessment tool provided by BMO InvestorLine to its clients. We are looking for patterns and consistency of results. But there seems to be even less consistency in this set of factors, as only six stocks garnered an A.
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The "A List" of overall best looking stocks to buy
Consolidating the ratings across all the above categories leads us to the following five stocks which we think merit an overall A rating:

(click on image to enlarge) 
Of course, if you aren't sure which are good and which bad, it is always possible to buy XEG (or other energy sector ETFs listed at TMX Money), which holds almost all of these stocks. If you aren't sure whether the sector is worth buying as against any other sector, XIU holds some of everything.

Disclosure: This blogger owns shares in Imperial Oil.

Disclaimer: this post is my opinion only and should not be construed as investment advice. Readers should be aware that the above comparisons are not an investment recommendation. They rest on other sources, whose accuracy is not guaranteed and the article may not interpret such results correctly. Do your homework before making any decisions and consider consulting a professional advisor.