The successful hack of the Liquor Control Board of Ontario’s data is only the latest in a long series of security breaches that threaten both consumers’ private information and savings. For BofA Securities analyst Tal Liani, it means that corporate executives will continue to spend heavily on network security and related stocks are set to produce outsized profitability.
This past year featured a series of major global data hacks – Uber, the Los Angeles School District and the teen who hacked Rockstar Games to get an early look at Grand Theft Auto VI to name three - just like every year of the past decade.
Yet cybersecurity stocks had a difficult year, caught up in the broader technology sell-off. The TSX-traded Evolve Cyber Security Index Fund ETF (CYBR-T) has fallen 37 per cent from the April 2022 high. Mr. Liani notes, however, that the weaker performance was caused by a stock valuation correction while business conditions in the sector remained robust.
The analyst expects some sector volatility in the first half of the year, particularly in cases where management teams are overly bullish, heightening risks of disappointment (Palo Alto Networks and Fortinet were mentioned here). “Solid underlying fundamentals”, however, should lead to strong performance in the latter half of 2023 for selected stocks.
Cloud-based security provider Zscaler Inc. (ZS-Q) and Check Point Software (CHKP-Q), developers of security software and devices, are BofA’s top picks in the sector. In each case, growth expectations are reasonable. Zscaler management has already reduced billing growth expectations to 31 per cent year over year, down from 2022′s 59 per cent.
Check Point managed to dodge sector weakness in 2022, rising 8.4 per cent. Mr. Lianai expects the company to continue to outperform both the sector and the broader technology space thanks to strong business execution and growth.
Spending on cybersecurity may not be fully immune from a slowing global economy but any pause will be temporary. The threat from hackers is constant and network security will remain vital for all major corporations across the world, supporting strong profit growth for cybersecurity software and hardware stocks.
-- Scott Barlow, Globe and Mail market strategist
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Stocks to ponder
Bed Bath & Beyond Inc. (BBBY-Q) The news flow around BBBY is fast and frenetic, and so is the day-to-day volatility in its stock price. The wild moves are reminiscent of the meme stock boom, with some days seeing a spike and plunge in its shares of more than 30 per cent. The enterprise has warned of a possible bankruptcy, and failed to secure a debt swap with lenders. But some investors are taking the risk in buying shares in hopes of making a quick profit. Philip MacKellar of The Contra Guys explains why he’s not among them - and the lessons every investor should learn from this tale.
Also see: Bed Bath & Beyond brings meme stocks back in vogue to start 2023
Algonquin Power & Utilities Corp. (AQN-T) So much for the company’s investor day presentation restoring confidence in the stock. Shares fell further Thursday and Friday as the company slashed its quarterly dividend by about 40 per cent and provided further guidance on what it has in store. Analysts Friday morning weren’t exactly jumping for joy either as they shared their thoughts on Algonquin’s plans for a turnaround.
The Rundown
Five things to talk about with your adviser after the sad returns of 2022
The year just passed was historically bad in the way that both of the twin pillars of portfolio building, stocks and bonds, were hammered. Portfolios that would have been considered prudently diversified a couple of years ago did not fare well. You and your adviser should discuss all of this. Rob Carrick presents these five points to hit in your discussion.
Will China’s rebound serve a boon to Canadian stocks?
China has been dismantling its framework of harsh COVID-19 restrictions, setting the stage for a revival of the world’s second-largest economy. This prospect has enlivened several major stock markets around the world, most notably in Europe. The Toronto Stock Exchange, on the other hand, appears to be taking its cues from U.S. stocks, which are still under the pall of a bear market. As Tim Shufelt explains, that could be a sign of strong returns ahead for the Canadian stock market.
Softer inflation print stirs hopes of ‘Goldilocks’ scenario for U.S. markets
Some investors believe a slowdown in U.S. inflation last month may be paving the way for a market-friendly “Goldilocks” scenario for asset prices, allowing the Federal Reserve to bring down consumer prices without badly damaging growth.
Also see:
Rebound in U.S. stocks faces earnings test
Debt bomb, biotech bump and a bond rally are among 2023 U.S. money predictions
U.S. credit lures investors but recession risk could mean wild 2023
PIMCO to focus on high-quality bonds ahead of ‘mild’ recession
Bullish investors, don’t be deceived: price-to-earnings is actually a price-to-fantasy
Investors are deceiving themselves by focusing on price-to-earnings ratios for the U.S. stock market that are actually “price-to-fantasy” ratios, according to a pair of noted market researchers. Chris Brightman and Rob Arnott of asset manager Research Affiliates LLC warn in a note that investors should be wary of those who assert the S&P 500 index of large U.S. stocks has blown off its pandemic froth and is now poised for a rebound. As Ian McGugan reports, the benchmark index is considerably more expensive than is usually reported.
Others (for subscribers)
The highest-yielding stocks on the TSX, plus risk data
Number Cruncher: 10 U.S. Materials stocks with attractive fundamentals and earnings growth
Number Cruncher: Seven global equity funds that are set to outperform
Friday’s analyst upgrades and downgrades
Thursday’s analyst upgrades and downgrades
Globe Advisor
Why this money manager is adding to positions in railways, waste management
Is the tech sector ready to drive growth again?
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Ask Globe Investor
Question: I would like your views regarding these ETFs: HHL-T and HHL-U-T. Their yields are about 8 per cent, which is very attractive, and they have low volatility. I don’t have clarity about how much the management fee will reduce the yield. Also, I would like to buy them in my TFSA but I’m not sure that if I buy the HHL.U whether the 15-per-cent withholding tax will be deducted? - Carolina A.
Answer: These are the trading symbols for the Harvest Healthcare Leaders Income ETF. HHL is in Canadian dollars while HHL.U is in U.S. currency. The fund invests in 20 large-cap healthcare companies from around the world, on an equal-weighted basis. Key holdings include Pfizer, Johnson & Johnson, Stryker, Merck, etc.
HHL has posted a five-year average annual compound rate of return of 9.28 per cent and was up 3.30 per cent last year as of Nov. 30. HHL.U has gained an average of 10.18 per cent over five years and 3.83 per cent last year. Based on those results, the U.S. dollar units have done better historically, but that could change any time, depending on the currency exchange rate. (All results are reported net of management fees.)
The Canadian dollar units distribute 5.83 cents a month, or about 70 cents a year. At a recent price of $8.22, they yield 8.52 per cent. The U.S. units pay 5.83 US cents (about 70 US cents a year). HHL.U was recently trading at US$8.53 to yield 8.21 per cent. The Canadian dollar units therefore offer a slightly better yield.
The units in both versions of this fund will be subject to withholding tax in a TFSA or non-registered account because all the stocks are foreign companies. The withholding is the same for both classes of units since they are based on the same portfolio. Note that the 15 per cent is taxed on the underlying dividends of the securities, not on the entire distribution of the fund. Some of the distribution comes from writing covered call options. That portion is generally taxed as capital gains in non-registered accounts but not in TFSAs.
--Gordon Pape (Send questions to gordonpape@hotmail.com and write Globe Question in the subject line.)
What’s up in the days ahead
Canadian bank stocks, energy producers, railways and pipelines look like a fine way to ride out the economic uncertainty ahead, given their mix of reasonable valuations, strong cash generation and rising dividends. So why not grab them all with a fund that simply tracks the S&P/TSX 60 index? David Berman will have some thoughts.
Much to say in Tokyo (and Davos): World market themes for the week ahead
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Compiled by Globe Investor Staff