During the holiday season, you have enough stresses. So our gift to you this year is to give you five things you do not have to worry about, at least as far as the markets go. This will allow you to focus your stress elsewhere, other than on your portfolio. You’re welcome. Merry Christmas.
Secondary issues do not impact company fundamentals in any way
Investors freaked out last week with news that BRP Inc. (DOO on TSX) insiders were selling $306 million in shares. The stock dropped six per cent on the news, while the rest of the market was seeing good gains. But, the insiders did the exact same thing last year, but at that time sold $400 million in stock. The stock dropped eight per cent on the news last year, as investors panicked that insiders were getting out before the business potentially deteriorated. How did that turn out? Well, the stock is up 71 per cent this year, even after the recent drop. Point to note: While insider selling is never a great sign, a secondary issue has no real impact on fundamentals of a company. Business is either good, or it isn’t. This year turned out to be stellar for investors in the company, and the insiders who sold last year left $280 million on the table.
Insider selling in January
Similar to the above, investors always worry when they see executives selling. But we think you can at least relax a bit when you see selling in January. Often, there are a few underlying reasons for early-year insider selling. These include tax planning (selling shares to pay 2019 taxes) and options exercises, tax deferral (sales in January of course are taxable in 2020), in addition to simple portfolio management and risk reduction (especially after a strong year in the markets like 2019). So, let others panic when they see lots of insider selling next month — you, you can relax.
Short-term price action on stocks
Not to be flippant, but if shares of your company drop five per cent, who cares? Really, stocks can decline for thousands of reasons, and in many, many cases it means absolutely nothing. Our customers are constantly asking why some company’s shares have dropped, or risen, in price, and in lots of cases we simply have no idea. There is no press release. Insiders do not have to tell you why they are selling. Fund managers don’t, either. Too much focus on the short term takes away from long-term strategizing. It does not matter what your stock does this hour, this day, this week or this month. How has it done in the past year? Two years? Five years? That’s the important question. Relax about daily volatility.
Analyst target prices
We’ve said this before, but we still don’t know why investors get all worked up over analyst price targets. They are (a) all over the map, and (b) not very accurate anyway. Case in point, the range on Roku Inc. (ROKU on Nasdaq) target prices is now $60 to $200 (the stock is at $135). Some analysts clearly love it, some clearly don’t. All of them, though, do not really have any extra insight nor ability to predict where the price will be in a year. While we are on the topic, some investors like to stress when stocks hit new highs, or exceed price targets. Don’t. A new high on a stock means that there are lots of investors — and probably some of them are pretty smart too — that also like the stock you own. Take this sign of strength for exactly what it is: a sign of strength. Enjoy the new highs, and get back to your last-minute Christmas shopping.
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It is hard to not get political here, but the bottom line is, the market simply does not care about the impeachment of Donald Trump. A trial will now be held in January, which will take up a lot of press, but likely will be completely ignored by the stock market. Whether this is delusional or not doesn’t matter. Investors don’t care and just keep on buying. Again, if one looks at the very long term, there is always going to be a change in presidents every eight years. For someone with a 40-year time horizon, politics just don’t matter as much as you might think. Relax, let Trump do the worrying here.
Peter Hodson, CFA, is Founder and Head of Research of 5i Research Inc., an independent research network providing conflict-free advice to individual investors (http://www.5iresearch.ca).