What does it take to beat the market?
According to some, it is a nearly impossible feat that, if possible, requires years of intense study and financial expertise. When you buy and sell stock, you’re competing with Wall Street, and those guys are up to their necks with PhDs, MBAs and other credentials. Therefore, you shouldn’t try and should instead just stick to index funds.
Truthfully, the ideas above are correct 95% of the time. However, there is one edge that regular investors sometimes possess that conventional orthodoxy doesn’t account for: local knowledge.
Local knowledge is a kind of expertise people possess from having intimate experience with something. It isn’t captured well in research reports and Excel Spreadsheets. You’d have “local knowledge” about a given industry if you were employed in it. This is a kind of knowledge that Wall Street does not have at its fingertips, except when analyzing financial stocks.
According to mutual fund Kingpin Peter Lynch, individual investors can employ local knowledge to gain an edge in the markets. By following a “buy what you know” strategy, Lynch says, you can beat the market. In this article, I will explore a company I have some “local knowledge” about that I think should beat the TSX long term.
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Fortis
Fortis (TSX:FTS) is a dividend stock that has beaten the TSX over the last one, three- and 10-year timeframes. It is a bit behind the TSX over the last five years, but nevertheless, over most commonly looked-at timeframes, Fortis has outperformed.
Now, about that local knowledge:
Fortis is a Newfoundland company. I grew up in Newfoundland and knew a good few local business leaders who invested large percentages of their money in Fortis. They did quite well with it. The “word on the street” about the company was that it was run by sensible, mature and non-selfish people. Analysts across the country praise Fortis for its strong balance sheet and sensible dividend policy. The “scuttlebutt” I acquired in Newfoundland explains why FTS is financially strong: the people who run it are competent and are looking out for shareholders’ best interests.
Financial health
Fortis is well known as a best-in-class Canadian utility. It has a dividend payout ratio of about 70%, while payout ratios above 100% are common in the TSX utilities sector. It also has a lower debt-to-equity ratio and a higher interest coverage ratio than its peers. As for why this should continue being the case going forward, it goes back to what I wrote in the last paragraph. Fortis’s managers are largely decent, competent people. This should give Fortis a continuing edge over companies run by corporate raiders who fleece shareholders to maximize their own paycheques.
Utilities, in general, are well-positioned
I do not mean to praise Fortis while disparaging other TSX utilities. On the contrary, I think utilities as a whole are well positioned here. Markets are increasingly volatile these days due to Trump tariffs and the economic uncertainty they create. Utilities are generally not heavily involved in exporting, so they are relatively tariff-proof. Also, the Bank of Canada is lowering rates this year, and lower rates translate to lower interest expenses on utilities’ typically substantial debts. So, Fortis’s sector is well positioned, and Fortis itself is well-run. I think this stock has a real shot at outperforming.
