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

Long-term base of support, and seems stuck there. It's only a trend if there are higher highs and higher lows (or lower highs and lower lows). Until it starts one of those 2 patterns, it's in consolidation. Not showing any signs of a real trend.

The only thing you can do with a stock that's in a consolidation is to swing-trade it.

Macros are really important to his team. His business partner does the fundamentals, but the macros they do are largely technical. It's the way he looks at risk. He tries to quantitatively measure how much risk the market has by looking at market sentiment, market breadth, and other big picture stuff.

When he sees that the market has a higher risk profile, he'll raise some cash and really start paying attention to the trend, expecting it to break down. Once he sees that, he starts moving out very aggressively.

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. 
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Know that markets always overshoot, whether to the upside or downside. The Trump Bump was such a huge move. So many unknown variables coming in the next year:  tariffs, inflation, and how many interest rate cuts. Today, the futures market is pricing in 1.5 rate cuts next year.

When you have valuations that robust, priced for 4 rate cuts, it's actually quite a rational response for the market to take a really serious breather. Thinks the markets will end up being OK, but it's an adjustment that they have to get used to. We were going from quite restrictive, to getting way less restrictive, to maybe pausing, to the possibility of an interest rate increase next year. 

Perhaps the market should have seen it coming, because there has been this inflation and an incredible wealth effect, as well as a very robust US economy.

There really is so much uncertainty. How much are interest rates going to go down next year? What will Trump tariffs do to the economy? What will US immigration policy do to the economy?

So, yes, uncertainty. But also an incredible amount of innovation. The Biden administration put in 3 very powerful pieces of legislation that are bringing jobs back to NA, and Trump will probably approve that. We have AI. A close parallel would be the post-war years after WW2, which was an incredible period for innovation, buildout, and infrastructure. We also have all these ESG initiatives. Lots of positive factors.

The upshot is that we'll still be in a bull market, but yesterday was a needed adjustment.

About 8%. A lot of that would be names in the utilities space and names like ALA. Pure oils would be 3-4%.

He just wrote some on BCE. Writing puts is a bullish strategy where you oblige yourself to own something at a lower strike price. It's skimming along the bottom and getting paid a really nice premium to wait.

Predicting currency in the short run is complicated. In Canada, people think it's about the price of oil but it's not. The biggest predictor is the 2-year rate in the US versus Canada. Right now, the differential here in Canada is about 120 bps from the US; extreme, huge.

If our central bank continues to ease, and the Fed continues to be a bit more restrictive, he's not sure the differential will change much in the short run. If the Trump tariffs resolve themselves OK, we could get a pop. But he's not playing for that.

What he's not doing is buying US dollars. Even though there could potentially be another 3-4 cents more downside on the CAD. There's way more upside over the next 3-10 years. So don't convert now. Keep your CAD. At some point there's going to be a buying opportunity for USD, but it's not now.

In the investment markets, there's never a shortage of uncertainty. But a lot of it's coming to a tipping point right now, prefaced by where we are on the valuation side. Not to say that things couldn't keep going, but it's more of an orange flag to be a bit more cautious.

Yes, and that reflects the interest-rate sensitive nature of the economy in NA. As central banks increased interest rates to cool things off, there's a lag as to when all that has an impact. All that filtering through is what we're seeing now. That's why the cuts have been so aggressive.

The view now is that it's going to be sharper and shallower, but we'll hear a bit more later this afternoon with the Fed.

Yes. A continuation of the theme for quite a while, as growth has been bid up and has become expensive. In a market like today, companies that don't grow as quickly but pay a really good dividend tend to be more defensive. There's still some good value there.

When he looks across his coverage universe, a high percentage of names in the income bucket are buys for him compared to names in the growth bucket.

For growth stocks like SHOP, he looks at free cashflow yield instead of PE. You get to that point where you're burning so much cash, even though earnings look good. In lots of tech, the multiples will always look high. But if you look at price relative to cashflow from operations, or price to free cashflow, you get a better sense of how they're doing.

Biggest thing right now is the tariffs. Canada exports about 4M barrels a day to the US. The decoupling from the price of oil has to do with the risk of tariffs, not tax-loss selling, as that will affect the demand for Canadian crude oil. Another overhang is ESG; some people don't want any part of energy. Oil price has been weak recently.

A lot of people have to use them as they build up their savings, but he's not a big user of ETFs. They do have a massive advantage, and have attracted massive fund flows, when you compare their value proposition versus a mutual fund. Mutual funds charge significantly more as a management fee than an ETF.

With an ETF, you get a whole lot of everything. Some very expensive, some very cheap; some with good balance sheets, some with bad. His preference has always been to use ETFs, or the market in general, to frame your opportunity set. Then you narrow down the opportunities from 500 to the 10-20 you want on your dream team.

You want great business economics, good balance sheets, strong free cashflow. Those are the companies that can control their own destiny. When you buy individual stocks, you're a lot more conscious of what you're buying at what price and what return you're expecting. As you build up your savings, you may want to transition from ETFs to individual stocks that meet your risk parameters.

It's not only about individual stock-picking as a way to outperform the index. For clients who are retired, let's say, the goal may not be outperformance of the market. It's more risk management and certainty of cashflow.