Good times, scary times

The theme of this year's Investor 500: proceed with caution.

Wow. What a 12 months it's been for Canadian investors. If you had taken the companies listed in this, the seventh annual Canadian Business Investor 500, and bought them as an index a year ago, you'd be up more than 50% today. (The TSX composite returned something like 35% during the same period.) And it wasn't just a few big players driving the market: four in five companies on the Investor 500 have had positive 12-month returns. You don't need to be a CFA to figure out what's going on. High commodity prices driven by a growing world economy, along with demand- and fear-driven surges in oil prices, have conspired to boost our resource-heavy market big-time. Going forward, it doesn't look like China's slowing down or that Iran is going to give up its nuclear ambitions anytime soon. So, let the good times roll, right?

Not so fast. If there's a consistent message in this issue, it's this: proceed with caution. Now, you might not be surprised to find a forensic accountant sounding the alarm (over the “time bomb” of pension deficits) for investors. But meanwhile, economist David Wolf, investing columnist Ian McGugan and senior writer Thomas Watson all work variations on a theme in their market analyses: what goes up must come down.

More evidence of the need for caution can be found in the Investor 500 numbers themselves. For a couple years now, we've screened the Investor 500 — Canada's largest publicly traded companies — for various investment criteria: growth, income, turnaround plays, and so on. Among the best-returning screens in years past was value, derived from a relatively conservative compilation of common value indicators. But this year, when we applied the screen, just one met our value criteria. You read that right — just one. (In the end, we settled on compiling stocks that are underpriced relative to peers; see page 135.)

Could it be that the Canadian market has finally reached such a state of wisdom that it has fairly valued 499 of its 500 largest companies? It's possible, I guess. But if you think that's unlikely, then the smart play might be to go where the herd ain't. (For several market-watchers quoted in this issue, that land of opportunity is, well, the land of opportunity — the United States.)

A further word of caution: the rankings, stories and strategies in this issue are intended only to provide ideas for further research — in other words, to help you make your own decisions.

Good luck beating the herd.