Northland Power: This Former Investor Favourite is Down 50%+

Now's the time to buy, at least according to one simple strategy

Let’s talk a little bit about the Beat The TSX strategy (BTSX).

For those of you unfamiliar, here’s the strategy. Once a year an investor simply buys equal weights of the ten top yielding stocks on the TSX 60. The next year they boot the companies that don’t qualify and do the whole thing again.

That’s it. That’s the whole strategy. It’s really simple.

Don’t let the simplicity fool you. It’s a really powerful strategy that has crushed the TSX 60 index over the last 30 years. As of the end of 2022 it has posted a 12.27% annual return, handily beating the TSX 60 return of 9.53%.

A 2.75% annual beat doesn’t seem like much, but it can translate into very impressive gains over the long-term. A $10,000 initial investment in the TSX 60 in 1987 would be worth $172,000 these days. The same investment put into the BTSX strategy, meanwhile, would be worth more than $380,000 — although that doesn’t factor in taxes or transaction costs, which would be higher with such a strategy.

Still, the outperformance is impressive.

Credit: dividendstrategy.ca

If you’re interested in the BTSX strategy, I recommend dividendstrategy.ca. He’s the expert.

It’s a powerful and simple strategy, and I think it continues to perform well over time. That’s because buying the highest yield is a pretty good signaling mechanism for value. Generally, high yields reflect poor investor sentiment, which is usually a pretty good time to buy.

However, I don’t participate in the strategy for a couple of reasons. Firstly, I don’t want to sell stocks after holding them for a year or two. That generates a tax bill (at least in a taxable account), and that’s something I want to avoid. I also think the TSX 60 is too small of a universe to choose from. I’d rather expand my investing universe to include small and mid-cap stocks as well. Consider me a modified BTSX lover.

I bring up BTSX because I think Northland Power (TSX:NPI) is the kind of stock the BTSX folks will absolutely love. It is temporarily beaten up, with shares falling some 50% compared to all-time highs. This has pushed the dividend yield up to the 5% range, much higher than average. It just isn’t part of the TSX 60.

Bears, meanwhile, argue that Northland’s fall from grace has been well deserved, and the stock could be heading much lower based on a highly unpredictable European power market and doubts about its highly ambitious growth program.

Which side is right? Let’s take a closer look.

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