Invest In Biotech Stocks For The Long-Term?

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I wrote an article titled “Eight Points To Remember About Biotech Stocks” earlier this month. The following is an update to that post.

Biotech stocks have been in the news lately. The sector is inherently volatile as I explained in the above post.The dramatic decline and fall of Valeant Pharmaceuticals International, Inc. (VRX) is a classic example of the roller-roaster ride that biotech investors can expect at any time.

The following chart shows the return of the NASDAQ Biotech Index from 2008 thru October 16th:

Click to enlarge

Nasdaq Biotech Chart

Source: Chart of the week: biotech spawns a monster, MoneyWeek

According to a portfolio folio manager at Fidelity, investors can hold biotech stocks for the long-term. However Rajiv Kaul, the manager of Fidelity® Select Biotechnology Portfolio correctly advises investors to consider investing only a small portion of their assets in biotechs. From the article:

Biotech stocks have hit a rough patch in recent weeks. The S&P 500 Biotech Index has fallen around 20% since its high point July, as investors have grown worried about the impact China could have on global growth, and the potential for regulatory policy changes that could affect drug pricing.

Rajiv Kaul, the manager of Fidelity® Select Biotechnology Portfolio, thinks that the market may be misreading the potential impact these risks could have on biotech stocks. He has been using the recent pullback as an opportunity to upgrade the quality of the names in his fund, and still believes that biotech’s five-to-10-year investment story remains compelling and may warrant a small place in a diversified portfolio, but only for investors who can live with the potential ups and downs.

Biotech Stocks Chart Volatility

 

The above chart shows the gut-wrenching volatility of biotechs in the past.

Source: Biotech: Bubble or opportunity?, Fidelity

The entire article at Fidelity is worth a read as it makes many interesting points some of which I noted in my article linked above.

Disclosure: No Positions

Long-Term Investors Should Ignore Volatility And Buy The Sharp Market Dips

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Equity markets worldwide have stabilized in the past few weeks.Before that markets went on a roller-coaster ride due to a multitude of worries including the great Chinese slowdown, crash in commodity markets, the Federal Reserve interest rate hike, emerging markets’ currency crashes, plunge in oil prices, etc. However all of these issues should not be a great concern to long-term investors. Before the recent volatility, markets were hurt by the multi-year Greek crisis and possible disintegration of the EU. Markets eventually recovered from those scares only to be hit with the communist China’s stock market collapse and its impacts. Issues like oil price declines are not a major concern because fundamentally oil is a highly volatile commodity. The price of oil went from around $50 a barrel few years ago to over $140 and then gave up all the again only to tread higher and then fall again. Though oil is the most traded commodity in the world, it is the most volatile commodity also compared to copper, aluminum, iron ore, wheat, cola, etc. The key point is that oil prices going up and down is not a surprise and that alone should not cause a major decline in equity prices.

Long-term investors should ignore all these noises and use sharp market pullbacks to add high-quality stocks to their portfolios. The recent market dip due to China provided an excellent opportunity for such investors. From an article at Fidelity Investments:

To the surprise of some, global markets were rattled in 2015’s late-summer heat. The MSCI All-Country World Index fell 6% in Augustas a variety of factors unsettled investors. But remember, while market dips can trigger emotions of fear and concern—particularly if they occur suddenly and over a very short period of time—they are not uncommon (see the chart below). The U.S. stock market, which is just 7% from the all-time high set earlier this year, has a proven track record of recovering from market dips over a long enough period of time.

Click to enlarge

SP500 Pullback and Rise Chart

One key to successfully navigating turbulent markets is understanding what kind of investor you are, having a plan, and sticking to it.

“During this period of market volatility, we’ve seen three basic types of investors—the scared, the confident, and the insightful,” says John Sweeney, EVP of retirement and investing strategies. “The confident are generally those with a plan. The scared seem to be those without one. And the insightful are those, like most of our fund managers, who see pullbacks as an opportunity to potentially upgrade their holdings at lower prices.”

If you are scared, take a breath and think about formulating a plan to weather market volatility. Once you are confident in your plan, here are a few things to keep in mind when considering buying the dips.

Source: Buying the market pullbacks, Fidelity Investments

Stocks in general are volatile than other asset classes. However they can provide better returns for investors willing to ignore the short-term volatility. Even blue-chip stocks can be volatile as shown in the chart below:

However, when the market takes a tumble, these retirees often find their retirement plans are far more exposed than they realized. That’s because, even though dividend-paying stocks may seem more stable, they’re still stocks, not bonds. While they may offer higher potential returns, that potential has a cost. Even a diverse portfolio of stocks, represented by the S&P 500®Dividends Aristocrats Index in the chart below, has been far more volatile than bonds.

Stocks—even blue-chip dividend payers—are more volatile than bonds

SP500 Dividend Aristocrats Volaitility

 

Source: Help Keep Volatility From Derailing Your Retirement Plan, Charles Schwab

In summary, it is wise for investors to take advantage of sharp market declines and avoid all the noises.

Five high-quality European stocks to consider for the long-term are listed below:

1.Company: BASF SE (BASFY)
Current Dividend Yield: 3.85%
Sector:Chemicals
Country: Germany

2.Company: Akzo Nobel (AKZOY)
Current Dividend Yield: 2.42%
Sector:Chemicals
Country: Holland

3.Company: Nestle SA (NSRGY)
Current Dividend Yield: 2.94%
Sector: Food Products
Country: Switzerland

4.Company: Continental AG (CTTAY)
Current Dividend Yield: 1.58%
Sector:Auto Components
Country: Germany

5.Company: Swedbank AB (SWDBY)
Current Dividend Yield: 5.57%
Sector: Banking
Country: Sweden

Note: Dividend yields noted above are as of Oct 16, 2015. Data is known to be accurate from sources used.Please use your own due diligence before making any investment decisions.

Disclosure: Long SWDBY

An Important Update On Canadian Reduced Tax Withholding Rate For US Investors

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Canada-US-FlagUS investors holding Canadian stocks can get a favorable dividend withholding tax rate due to the treaty between the two countries. The actual withholding rate for stocks held in taxable accounts is 25%. Due to the treaty, this tax rate is reduced to 15%. However in order to receive this lower US investors have to file the NR301 form – Declaration of Eligibility for Benefits under a Tax Treaty for a Non-resident Taxpayer with the Canada Revenue Agency (CRA). I wrote about this new requirement back in 2012.

One more thing to note about this requirement. In order to continue to receive the reduced tax rate this form must be filed with the CRA every three years. Otherwise the investor will be charged the regular rate. So if you filed this form in 2012, it is due this year. Check with your broker on exactly when you last filed this form.

Canada does not deduct dividend withholding taxes on stocks held in retirement accounts such as Roth IRA, Traditional IRA, 401K, etc. So this form requirement does not apply to those situations.

For the complete details on the “NR301 Declaration of eligibility for benefits (reduced tax) under a tax treaty for a non-resident person” form and the requirements go to the CRA website. The form in fillable pdf format can be downloaded for submission to your broker.

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Australia’s Westpac Banking Stock In Trading Halt

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The stock of Westpac Banking Corp(WBK) of Australia is currently on a trading halt. Hence the ADR did not trade yesterday (Wednesday) on the NYSE. The halt is in place due to the rights offering the bank announced on Tuesday. So the stock will open for trading on Monday (10/19/15) on the Australian and other exchanges including the NYSE where Westpac is listed.

A few key points on this rights offering and related impacts are listed below:

  • Westpac is raising A$ 3.5 billion to raise its capital reserves to meet new regulatory requirements. Competitors such as National Australia Bank (NABZY) and Australia & New Zealand Banking Group Limited (ANZBY) have already raised such additional capital.
  • The trading halt is in effect to allow for institutions to bid on the rights offer over the next few days.
  • Westpac also increased its standard variable rate for mortgages by 0.20%.
  • The bank also announced its full year financial results. The results were mostly good with cash earnings per share were up by 2% compared to 2014.
  • A final dividend of A 0.944$ will be paid to current shareholders. This is higher than the dividend paid out last year.

Details on the Rights Offer:

Westpac’s stock on the domestic market (WBC.AX) closed at $30.44 on Tuesday. The rights will be offered at A$ 25.50 for a discount of 13.1%.

Existing shareholders are entitled to receive one ordinary share for every 23 they hold.  So if you hold 1,000 shares you will be entitled to 44 new shares. Current shareholders will be able to buy the new shares at A$ 25.50 per share.

Retail shareholders of Ordinary Shares have three options according to a news report:

Firstly, you can sell your entitlement – which will trade on the ASX from next Monday until Wednesday 4 November under stock code WBCR.

Secondly, you can take up your entitlement by paying $25.50 for each new share. For example, if you had 1,000 Westpac shares, you would be entitled to buy 44 new shares at $25.50 – a total cost of $1,122.00. You will need to front up with the cash by Wednesday 11 November.

Or thirdly, do nothing. In this case, your entitlements will be auctioned to the institutions on 16 November. If Westpac shares are trading above $25.50, then you should receive a payment from Westpac which represents the difference between the auction price and $25.50. These payments (if any) will be made on 19 November.

Source: Westpac shocks market with interest rate hike by Paul Richard, Switzer Daily

Things to remember for Westpac ADR shareholders:

  • WBK trading is halted till Monday according to the depository BN Mellon.
  • The ratio of ADR to Ordinary is 1:1. So the final dividend of A0.944$ will be converted to US $ at the then exchange rate and paid out after any deductions for ADR fees. However no dividend withholding taxes will be held since all the dividend is 100% franked.
  • Similar to ordinary shareholders, ADR shareholders should also be entitled to receive one ordinary share for every 23 ADR they hold. However the three options mentioned above for domestic retail investors may not be available for ADR holders. Further details on the rights offering will be published by the depository and investors will also be notified by your broker.
  • WBK last closed at $21.97. So with a 13.1% discount the rights for ADRs holders may be around $19.0 per share.

ADR investors with a long-term horizon may be better off buying the rights shares rather than selling the rights. However cash is needed in order to acquire the new shares.

Currently WBK has a dividend yield of 6.72%.

Note: Dividend yields noted above are as of Oct 14, 2015. Data is known to be accurate from sources used.Please use your own due diligence before making any investment decisions.

Disclosure: Long WBK