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You Win Some, You Lose Some
Toronto: December 30, 2013
By John Stephenson

For most investors, 2013 was a pretty good year.  The S&P 500 finished last week with a gain of 29.1 percent, blowing away the returns on resource-heavy indices such as the Toronto Stock Exchange (S&P/TSX), which was up a paltry 9.3 percent.  With U.S. companies sitting on nearly $1.25 trillion in cash, investors have been treated to share buybacks and dividend hikes to help round out a year of stellar capital gains.  Dividend payouts reached a record $310 billion in 2013, up from $286 billion in 2012, and with companies sitting on a mountain of cash, look for even more dividend increases in 2014.

This past year was punctuated by some ups and some downs.  Facebook started the year off as a stock that looked to be overhyped and overpriced, but then it shocked investors by doing something that few people expected—it made money in mobile.  Today, the stock is up more than 40 percent since its IPO and double its levels of just six months ago.  The success of the Facebook IPO helped pave the way for Twitter (another social media darling) to go public in the dying months of 2013.  So far at least, an early investment in Twitter has been a slam dunk.

The biggest gainer on the S&P 500 in 2013 was Netflix, up an outstanding 411 percent.  At $7.99 per month for all the movies and TV you can watch, including original programming such as Orange is the New Black and House of Cards it’s a steal for couch potatoes.  But for investors, Netflix’s stock at more than 200 times earnings is looking a little rich.  The stock has been propelled this past year by momentum traders as well as by its solid fundamentals.  While it may well soar in 2014, this is one stock that is unlikely to repeat its heady gains of 2014.

One of the big losers this year was gold and gold miners, which slumped along with the price of the metal.  A year ago, it looked as if gold would be the next coming, with prices around the $1,800 per ounce level and some of the biggest names in the investment world piling in.  But fast forward a year and gold has fallen to around $1,200 per ounce dragging down the share price of Barrick Gold (down -46.4% in 2013), the biggest gold miner in the world. 

Outside of the U.S. and Canada it’s been a mixed bag for international investing.  Venezuela was up 295% in U.S. dollar terms for 2013, while national exchanges in Ghana, Kenya, Nigeria and Pakistan all soared more than 35%.  On the minus side of the equation were some past favorites of international investors, namely Brazil (down -27%) and Peru, which slumped -31% in 2013.

For the last five years stock markets have to varying degrees been driven by large macro calls, or top-down waves of “risk-on” and “risk-off” that have frustrated stock pickers.  While the markets have risen solidly in 2013, with the S&P 500 never sustaining a correction as much as five percent, correlations between stocks fell noticeably in 2013. Falling correlations means that at any given time some stocks will zig while others zag—a potential boon for stock pickers.  Some are wondering if 2014 could be the year when stock pickers finally recoup the ground they’ve lost to passive index-trackers?

Research from S&P suggests that correlation is not the only concept that matters for stock pickers.  The other concepts that matter for successful stock selection are volatility and dispersion. It turns out that what matters most for investment success is dispersion—the gap between the best and worst performing stocks.  The greater the dispersion the better those who make the right calls will look at the end of the year.  But volatility and dispersion tend to go hand-in-hand, and with the VIX Index at near historic lows, it may be another year of tough sledding for stock pickers.

But with the Fed starting to taper, volatility is likely to begin creeping higher and for my money, stock pickers are about to have their due.  I continue to like Tech, Financials, Industrials and the Discretionary sectors for the start of 2014, with a gradual rotation toward the Materials and Energy sectors as the year progresses.  It should be another good year for investors, so buckle up and enjoy the ride.

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