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

If you're looking for stable dividend stocks, it's a good place to put capital to work. You can feel safe with those dividends, but don't expect to generate outsized returns over the investment cycle. 

You need to sort stock candidates into categories: true long-term compounders, trading stocks, or somewhere in between. Canadian telcos are somewhere in between. Buy them, but slowly, if you're happy to only get the dividend. He wouldn't accumulate aggressively. If competition pops up in Canada, that would not be good.

He likes technology companies, as they're capital-light businesses. Agile business models. Revenues are usually sticky. High recurring revenue. With a great management team, you're often looking at margin expansion as well. 

Be careful not to overpay for this type of business. That's been hard over the last few years, but the current environment brings good opportunities.

We're finally waking up as a country. It's amazing to see everybody coming together and talking about working together. Dropping barriers, like crazy taxes, to move products from one province to another. Those make no economic sense. Dropping them will unleash a lot of GDP right there. 

Great to hear the talk. He would like to see some action, which will probably come after the election. When it comes to Canadian infrastructure investment, there are some good companies out there and already trading at attractive multiples. And that's before accounting for any additional investments.

You really have to pick your spots. Have to make sure companies don't take on any fixed-price contract risk. Many have smartened up over the years and now structure contracts differently. Take a look at ARE. And ATRL, in consulting, is probably an even safer way to play in the space.

The publicly traded real estate space absolutely is a beneficiary of this. When you look across equities today, real estate stocks have been largely underweight ever since interest rates went higher. As the uncertainty continues, people will be looking for more defensive equities to invest in.

In contrast, when you look at the private markets, fundamentals in the commercial real estate space have been quite strong. Seeing internal growth of 3-4%, balance sheets in check. Given the interest rate backdrop, transactions should pick up at quite a pace in the back half of this year. That will shed light on the valuation disconnect in the public market.

So he's actually quite bullish on the outlook of the sector for the rest of this year.

He's foreseeing a pickup in both, but definitely a difference between the two. People seem to be translating slowdown in the US into a recession, but he doesn't think this is necessarily the case because there's a stronger economic backdrop there. 

The backdrop in Canada is tougher, and tariffs do not help. Recession could be a reality. What that means is that the central bank here in Canada is going to be cutting at the fastest rate of any country globally. That type of backdrop in interest rates can be quite positive for the valuation of real estate. It's particularly positive for those that have a better cost of capital. 

This is an environment where people can take advantage, not necessarily of broken assets but of broken owners, and buy great assets. If assets continue to trade at such a wide discount in the public market, we could definitely see M&A pick up and REIT privatizations across Canada.

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.