A Comment -- General Comments From an Expert (A Commentary)

As a stock picker, it's really important to get the top-down correct, and then do your bottom-up research. Looking across the sectors, if you're thinking bullish and recession, you want to think defensive. Grocery-anchored shopping centres across Canada are very defensive. Seniors housing is enjoying secular tailwinds, where demand is far going to outpace any new supply. 

Shy away from office space, which has a secular headwind with high vacancies. Doesn't expect any rent uplifts in that space anytime soon.

Everything about this economy is good, except one thing: the president who is angry at everything except Putin (maybe him too) and his wrath has made investors so negative that they want nothing to do with stocks, sure that Trump will keep issuing tariffs that wipe out our wealth. April 2 could be liberation day when US investors are liberated if Trump gets his tariffs out of the way. Maybe.

Debt Can Kill a Company

Endo International PLC filed for bankruptcy protection this week. This is the company that took over Canada’s Paladin Labs Inc. about a decade ago. Endo shares are down 91 per cent this year. The problem? Very high debt. Endo has US$8 billion in debt after a large acquisition spree. Cash flow in the past 12 months? Just US$80 million. It paid US$560 million in interest charges in the past 12 months. 

Cineworld Group PLC this week said it was “considering” bankruptcy. The stock is down 95 per cent in the past year. This company tried to take over Cineplex Inc. in 2020, with about the worst timing a company could have (just prior to the COVID-19 shutdown). It had about US$8.9 billion in debt at the end of fiscal 2021 including lease liabilities, more than 27x its 12-month cash flow. Bausch Health Cos. Inc., once Canada’s largest company, this week retained advisers to help “map out its future.” Its stock is down 81 per cent this year. It has US$22 billion in debt, and cash flow of less than US$700 million.

The lesson here: Debt can kill a company, sometimes quickly. Make sure the companies you own can service their debt. Times are not always great, and a company must be able to survive before it can prosper.
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After that phone call, the Dow did rally a bit. The call may be enough to arrest the development of a steeper dive in the stock market. Stock market participants are getting tired. There are protest votes going on against US equities; there's so much opaqueness, people are scared of Trump, and we're seeing them pull back.

Today we saw US data for PCE and consumer sentiment. Inflation is sticky, and consumer sentiment is weakening. Most of this has to do with the tariff uncertainty. If the market starts to see better behaviour towards Canada, that is a positive.

Notice the words and language of President Trump, who said that he and Mark Carney would talk more after the Canadian election. That's implying a lot right there. 

A lot is going to happen April 2. He suspects that, at the end of the day, we're going to see very big carveouts for Canada. When all is said and done, most of this too shall pass, because that's in the United States' best interests. Look at their overarching plan of 3-3-3. They're never going to hit 3% GDP growth with tariff wars. 

Tariffs appropriately and in targeted places, yes. But across the board, with 25% applied to Canada, is something we're probably not going to be dealing with in a month or two.

Deliberate that he's being toughest on us. He's showing the world what he can do with family and friends, so imagine what he can do with countries that don't have as close a relationship. There's some sort of method to the madness. 

Maybe it's being too optimistic to think that 3 months from now we won't be dealing with big, hard, sustained tariffs. But he doesn't think so. If all that happens, we're probably going to have a recession. Then stock markets will come down more, and Trump's base is not going to be happy. Recessions take a while, and the US mid-term elections are 1.5 years away. So it doesn't add up, but then again lots of people are questioning whether it's been adding up thus far. There's just a lot of confusion.

At these levels, this whole area is a buy. There are now 4 telcos instead of 3. CRTC has imposed headwinds. They've all been plagued by balance sheet issues. Divestiture of assets is going to happen. Catalysts will happen, and most of the bad news is in.

One of the good things about having negative positions in your portfolio is that they tend to not be the ones that get sold when things get worse. They're already washed out.

Markets always overdo everything, both to the upside and to the downside. The Mag 7 trade has been very crowded. We're in a time now, all around the world, where people are not happy with the United States and may be picking on this sector. If the administration doesn't pivot, this will get overdone.

You really have to respect a chart like this. When you see a chart like this, you know there's another side. You might see a head-and-shoulders pattern, and it's probably going to fall. His guess is that in the next month or so, Trump's going to roll back a lot of stuff and the economy will be better. So areas like gold are going to sell off.

But both the Chinese and central banks are buying it long term. Always a good theme if interest rates are heading down, though inflation prints are bringing that into question today.

Can be a remarkably frustrating area. Cost inflation, operational problems, jurisdictional issues. He's a stock guy, but sometimes it's OK to just be in the index. Think GDX or GDXJ for US $$. XGD in Canada.

He's looking for bond proxies. Things that can work if we have a growth scare or worse. You can make $$ from bear markets. For example, some names actually buy assets that have come way down in a recessionary environment,  making money from those acquisitions.

Losing money in the stock market: Underestimating how much it costs to be public

Many investors seem enthralled by tiny micro-cap companies, those with market capitalization of $10M or less. We guess these investors are looking for “lottery tickets.” Yes, we know one way to get rich is to buy a million shares of a 10-cent stock and watch it go to $5. But seriously, how often does this happen? Answer: not very. Speculative investors seem to forget how expensive it is to be a public company. Suppose you are looking at an $8 million market cap company. Being public, with listing fees, regulatory fees, accounting fees, lawyer fees, shareholder costs and a PR firm might cost upwards of $400,000 annually. That is a five per cent expense drag on the entire company, every single year. If your broker tried to sell you a fund with a five per cent expense ratio, you would laugh at them. Of course, this discussion doesn’t even address the fact that small companies constantly need money and dilute shareholders with continued stock issuance. And guess what? If your stock is 10 cents, and you need $1 million in capital, you are going to have to sell a lot more shares to meet your capital budget than if your stock is $5. Our thoughts: Just forget about micro caps. Let others take these risks.
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One of the worst things for an investor or business owner is uncertainty. The latter has no idea what will happen this week, no idea over input costs, whether they should hire more employees now. The former are paralyzed and do nothing. Business will grind to a halt, which is not good for the stock market. He doesn't see an ending soon. There's a small window--inflation takes a little time to kick in, like 3-4 months, but impact on demand is immediate. People won't spend if they expect a  recession. He's waiting for the VIX to spike to 40-50 before buying.  What will Q1 earnings be and the full-year outlook? Business isn't bad for companies, but they are uncertain, which will dampen their outlooks. Don't panic or react to headlines. Quality companies will get through this. Most dividends will be okay. Buy a little gold, which is good in a crisis.

Before Jan. 20, the strategy was to buy on dips. But since then, the plan is now to sell on strength. The tariffs have a lot do with that. 80-85% of the time, the market rallies, so eventually we will return to buying dips. That said, the last few weeks have provided an excellent time to buy cheap, quality stocks. Earnings season is just three weeks away and it will be interesting to see what companies can offer guidance. In tech, look at the new trend of Agentic AI, different from existing AI, because it can pro-actively solve complex problems independently; it's not robotic process automation.

Wait. But his style is to buy or sell in 3 parts. So, he advises buy a third to be safe. The tariffs will continue past April 2 but should extend beyond end-June. Also, Trump needs to distance himself from this tariff nonsense by the mid-terms elections next year.