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

NVDA's upcoming earnings on Wednesday, after the bell.

The last of the behemoths to report. He's wildly bullish about everything AI, and he's terribly scared. Even during the recent election campaign, you'd see something online and you didn't know if it was real or not. Quantum is coming and it will be a disruptor, just as INTC was for others. Always something new coming along and that concerns him a bit.

NVDA is now the biggest weight in the NASDAQ, recently passed AAPL and MSFT. Let's look at the QQQ and draw trend lines along the lows and the highs. The last time we got to the upper channel was July. But we did the same thing last week. If NVDA doesn't beat and get people still excited about AI, odds are we're going to come back down into the range. Eventually (months or quarters), we'll come back to the bottom of the trend. That's the bigger risk here. 

Options market is saying it'll be a move up or down of $11. It'll either gap up above old highs, and hopefully hold. But if it doesn't, you have a big reversal coming to the downside and it could break the market. We talked about the gap after the election, and it would bring the NASDAQ back into the range that would close the gap in the S&P 500 and create bearish momentum with a failed breakout.

Let's cross our fingers that NVDA doesn't disappoint.

i2i Capital Management was set up three years ago to invest in U.S. stocks. It is a hedge fund, non-Canadian and has accredited investor status. He loves the U.S. market which has massively outperformed the Canadian one. The regular 5i Research has been in business for 13 years helping Do-It-Yourself investors. It is a pay for research company which covers Canadian stocks, has model portfolios and a Q&A section. They have answered 180 000 questions over the 13 years. They need the small cap market to kick in because that's their focus. The largest companies are great and have just kept on climbing and could still do so for a while. But this leads to small cap companies falling behind in valuation and it has always been like that. However small caps do better since they grow faster, can have leverage to contracts and do outperform longer term. No one really cares about this most of the time including now because everything else is going so well. However we might see a switch as the value gap has changed and small caps which are still growing fast become cheaper. He would rather find a small or mid cap right now and enjoy it as it grows into a big company. The giant large cap companies can come in and buy out good Canadian companies at good valuations because they're not rewarded by the Canadian market.

Peter talked more about his reasons for liking small caps. Historically small caps have always been more expensive than large caps because they grow faster. Small caps get more attention as takeover or merger candidates. In the last three years they became cheaper especially in 2022. Small caps have the capacity to meet the market's needs when business is brought back to Canada. M&A will be easier over the next 4 years. Small caps got their house in order during Covid so they are in good financial shape. The stocks are volatile but growing and having no debt and lots of cash.

Company Highlight - Revolve Group (RVLV):

Revolve Group (RVLV) is a next-generation online fashion retailer with a focus on Millennial and Gen Z consumers, primarily catering to female audiences. It mostly operates through two brands: REVOLVE and FWRD. The company has built a large, engaged audience through collaborations with influencers, and its proprietary algorithms analyze consumer behaviour to help manage its inventory. In the past few years, it has seen sluggish growth as e-commerce growth normalized and consumers returned to physical stores, and its margins also came under pressure due to inflation. However, its brand presence among the younger generations remains strong, and with inflationary pressures easing, its margins are expected to improve, helping its stock price. 

RVLV is up significantly on the year, up 107% year-to-date and 161% on a one-year basis. It is a small-cap stock ($2.4 billion market cap) and while it is not cheap (47X forward earnings multiple), its forward earnings growth is expected to average around 27%. It is profitable, but its profit margins have compressed in recent years as higher logistics and fulfillment costs and inflationary pressures have taken hold. Although, these pressures are beginning to ease, and its core Revolve segment is beginning to see a strong rebound in demand, helping future margin expectations. 

RVLV has a strong history of beating earnings estimates, and we can see its profits have begun to rebound in recent quarters. We feel that with inflationary pressures easing and the potential for lower interest rates, that RVLV can continue to benefit from a strong US economy. 
Unlock Premium - Try 5i Free 

Believes markets will push higher in 2025. General market might not be as good as 2024 - but economy continues to hold up. As long as US does not enter recession, will be good for investors. Market sectors in areas like tech (A.I.) seem to reach new highs despite lofty valuations. US Fed Reserve interest rates not expected to fall as quickly - but this is a healthy signal (inflation has not gone away). Would point towards under valued stocks, that have been ignored by markets in order to generate gains. 

Company Highlight - VersaBank (VBNK):

VersaBank (VBNK) is a Canadian-based, digital-only bank focused on specialized lending and deposit services. Established as one of the first fully digital banks in Canada, it operates without physical branches, leveraging technology to keep overhead costs low and streamline services for niche markets, including point-of-sale (POS) financing and commercial real estate lending. It mostly operates in Canada, but has recently expanded some services into the US. 

Its stock price has recently seen strong momentum, up 58% year-to-date, and 125% on a one-year basis. It pays a small yield (0.4%), but both sales and earnings growth are expected to be strong in FY2025 and FY2026. Its historical growth rates have been robust, with a five-year sales and earnings CAGR of 16% and 19%, respectively. Net profit margins are expanding and with a market cap of $595.7 million and a reasonable valuation of 11.4X forward earnings, we think VBNK looks interesting here. 

We can see that its net profits have really taken off over the past couple of years, and its outlook is increasingly positive. It has ongoing plans to expand its POS financing offerings in North America, and its cybersecurity segment, DRT cyber, is also expected to see growth in the coming years. 
Unlock Premium - Try 5i Free 

Yes. Looking at that index, equity markets outside the US have been down 8% since September. Compare that to the S&P 500, which is up 5% since election day and about 25% YTD. Significantly different performance. Why the difference? We just had Q3 reporting season in the US, and about 50% beat on revenue expectations, and about 75% beat earnings expectations. Fundamentally, things are still going quite well for US equity markets.

Still, listening to the conference calls, there is some concern about the US consumer. Specifically, the lower-income consumer. People have been spending Covid savings, so savings rates now may not be what they used to be. 

Also concerns about whether US equity markets are getting ahead of themselves since the election. The new administration has talked about lower taxes and deregulation, but tariffs keep coming up. Those will hurt imports into the US and will impact a subset of US companies.

He cautions investors against trying to time the markets as a whole. A good time to focus on quality companies, ones you know will be there through a full economic cycle. These things come and go. Few things are inevitable in investing, but you know that at some point we're going to have a recession. You want to own companies that, going into that, are going to be strong with conservative balance sheets.

By trying to time things, you can miss some of the best days. For example, the day right after the election was one of the best days we've had all year. If you were sitting out because of uncertainty going into that election, that would have significantly impacted your returns.

He has a fairly negative view on it. The USD, for example, has a value that the Federal Reserve can defend. The USD is accepted anywhere in the world, anchored to a basket of goods, and will maintain its value +/- a couple of percentage points. 

Bitcoin has none of that. Huge volatility. Doesn't know how you can pin a value on it. And if you can't do that, how can you use it to trade as a currency?

We can get too fussed. There's a lot of time between now and January 20, and there will be positive and negative headlines in that time. You have to look at the overall economy. The US, in particular, is in a pretty good spot. Inflation data today was in line with expectations, employment data is still fairly strong, and interest rates are on their way down (though not quite as fast as the plan was earlier this year). 

When you see the news and have a knee-jerk reaction, it's important to not necessarily trade on that. Read the news, digest it, but don't react right away.

Yes. Ultimately, all of these headlines are going to move prices over the short term. But long term, you want to find companies that can growth their free cashflow and produce shareholder yield. Shareholder yield is a combination of dividends, share buybacks, and debt reduction. As an investor for the long term, ask yourself what's good about this company, and why is it going to be worth more in the future?

Those who went into Covid with assets have done exceptionally well. Houses and stocks have increased in value. Your wealth has been tied to prices going higher as a result of inflation. If you went into Covid without assets, and the source of your wealth is your paycheque, you've seen inflation obliterate your purchasing power. 

The wealthy 1/3 now accounts for about 2/3 of consumer spending. Consumer spending isn't represented equally within the population. The rich are really driving the economy, the poor folks are barely getting by. That's why we're seeing outcomes in elections that we wouldn't normally expect.

Put your Canadian stocks here, as the dividends are free from withholding tax. If you have US or international dividend payers in a TFSA, they could be subject to withholding tax.

The most clear and present danger, still a cold war right now. US and China are inextricably linked, and Covid highlighted the reliance of NA and Europe on China for everything. If something happened, we'd need to act on supply chains and would probably see a fair bit of inflation. 

No party wins from trade escalations. Sounds as though US tariffs are coming, but hopefully they can start off slowly and build over time. Presidents Xi and Trump had a mildly warm relationship, so hopefully this will help discussions. Both countries want to broker a deal, showing that they can work within this "frenemy"-type relationship.

They look around the world for diversity in revenues, company size, and industry. Professional services, for example, is an area you don't hear a lot about. Lots of talk about the large caps, but a small-cap with a good growth trajectory can generate significant returns for your portfolio over 5, 10, 15 years. 

Believe it or not, there was a time that a name like NVDA was a small cap, and then a mid-cap. Holding a name through the cycles as the business grows can generate significant returns.