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

Loves it when grandparents can do this for their kids and grandkids. They don't need any more toys, just give $$ so they can buy stocks. An amazing savings vehicle in Canada, especially when it's withdrawn at the low tax rate of the student.

Hard to buy stocks with the annual contribution amount allowed. Better to focus on mutual funds or ETFs. Hard in Canada, as we don't have a great, diversified index. He'd suggest buying the S&P 500 through an ETF on the TSX, there are a few of these to choose from. You can buy the full S&P, or limit it by using an "equal-weighted" S&P index; or use a bit of each. 

Looking at a graphic that's constructed like a dartboard, the bullseye is comprised of all the manufacturers. The likes of Japanese automakers such as Toyota and Hyundai, and TSLA is in there. They build and use the automation robotics.

The circle just outside the bullseye contains the hardware companies. All the way from HON to NVDA. It's the hardware that assists and supports the manufacturers in what they put into the robotics and automation. Then the outer circle contains the software guys. 

He mentions all this on the back of the TSLA Robotaxi event. It was a historical moment, as it was the first time they had robots. Some were dancing, some serving drinks, others conversing with the audience. First time we've had a venue like that, it's a big deal.

It's early days, but if you listen to the likes of Gartner Research, the compound annual growth rate (CAGR) of those robotics and automation companies is running about 25% per year. And it will continue that way. You can see it with the manufacturers, such as with all the robots that TSLA and GM use.

He'd pick 1 or 2 of the manufacturers, 2 out of the hardware players, and 1 or 2 out of the software area. The application of AI is key in this, as it's really accelerating all the automation and robotics. It's a young area, but it's applicable.

Everyone's wondering when they're going to be able to actually monetize the AI side. Well, here it is, this is real.

Bar is set very low on TSLA, should do pretty well. AAPL should also do pretty well because it has some momentum behind it, even though it's behind on the AI side. AMZN is firing on all cylinders. Have to wait until the end of November for NVDA.

The one with uncertainty will be GOOG, because of DOJ litigation as well as competition on Search (especially from the new one, Perplexity). He still really likes it though, because it has so many horses in the race.

Company Highlight: Lightspeed Commerce Inc. (LSPD)

The top performer of September was Lightspeed Commerce (LSPD) whose stock price was up 28% on the month, down 20% year-to-date, and up 17% from the year prior. Things have been improving over the last year but LSPD remains volatile with a 52-week range of $16.04-$28.73.

LSPD provides cloud-based software subscriptions and payment solutions, empowering small and midsize businesses, retailers, restaurants, and golf course operators. The company operates globally, serving diverse industries, and it continually enhances its offerings to remain competitive in the e-commerce space. Roughly 62% are transaction-based, 34% of its sales are subscription-based, and the remaining 4% are hardware and other.

LSPD jumped at the end of the month when news broke that it was working with a financial adviser to explore a potential sale and other options. LSPD has confirmed the report and issued a press release that it had entered a strategic business review to discuss being taken over. Many analysts raised their target prices as a result on anticipation that LSPD could receive a significant premium. Going private seems like a potential option. While the premium is unlikely to be anywhere near LSPD’s all-time highs, a significant premium from current levels is enticing investors.
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As prices rise, value drops. Earning must keep up. Valuations are getting stretch, around the low-20s. Reasons are that the Fed is cutting interest rates while corporate profits have been buoyant. Early earnings this quarter are promising. But we must keep our feet on the ground. Multiples no longer are expanding, so earnings must support strong stock prices. The double-digit returns of recent years were unusual. Now, he is overweight financials--there will be loan and therefore economic growth, and the banks are cheap, trading around 12-14x PE.

No doubt that's better to have a split House with neither party dominating. As for Trump's expected tariffs, remember that in his first term, he saw stiff pushback from members of his own party who had a direct interest in those products facing tariffs.

A welcome sign, especially in the US. The S&P 500 had been narrowly lead by the Mag 7. The past quarter that ended in September actually saw NASDAQ lag the broader market. And the TSX has outperformed the S&P. 

Encouraging, as it means there are more stocks and sectors going up in price. Investors are perceiving that the growth outlook is improving as well.

Overall, longer term, it would be a positive for investors if the Chinese economy improves. The government has targeted a 5% GDP growth rate, looks as though it will fall short this year. Many economists think it will continue to be sub-par next year.

Late September, the central bank cut interest rates, and will provide funds for loans so companies can buy back their own stock. Also making it easier for consumers to buy a second home. Initially, there was a very strong upside response. But we need more fiscal stimulus by the government, and they've hinted they'll provide it but without a lot of detail. That's why there's been a pullback. Some of the companies with exposure in China, such as luxury stocks, see continued softness in China.

It's a step in the right direction to have stimulus, but we need monetary and fiscal stimulus. If the Chinese economy does improve from current levels, a positive for companies that do business there.

US banks reported very strong results, and they hinted that the economy is on pretty solid footing. Sort of a "no landing", with growth continuing. Right now, bottom-up consensus estimates are that Q3 earnings will grow 4% YOY, with growth rates being higher in subsequent quarters.

We'll still get growth, but guidance from companies for next year will be very important. Given strength in the stock market and price appreciation, we need to have growth expectations met. Right now, earnings are supposed to grow 15% next year. We need that growth to materialize.

Q3 GDP is expected to grow 3.4%, so growth is continuing. But market is very sensitive to any negative news that may disrupt that growth profile.

A bit of revenue on the miss side, a bit better on EPS though mixed among sectors. The next 2 weeks are pretty key. The US election is 15 days away, and the bulk of the S&P reports in the next 2 weeks. For more, see today's Educational Segment.

If you look at what's priced into the swaps market, virtual certainty on a 50 bps cut. The way the CAD is trading, you'd argue that there's a bit more weakness to go. Not great for the snowbirds looking to buy USD to go south, as the CAD doesn't go a long way in buying US dollars.

A 75 bps cut is a discussion point. But how fast do they need to cut, and is inflation under control? In the US, that economy has proven to be a lot more resilient and robust than here in Canada. On a relative basis, you could argue for more easing in Canada. But if the Fed is going to slow down, and the BOC is going to accelerate, then the CAD has a date with $1.40-1.45, as the currency is where the interest rate differential really manifests. So he'd be surprised by 75.

It's never "completely different this time", history rhymes. We will mean-revert at some point, some crisis. The last one was Covid, which was a shock; we mean-reverted, and it lasted a few weeks until they threw money at it. To think that that's always going to happen is probably a truth to count on, except that every time fiscal/debt/deficit all get a little bit worse.

So it's not different this time, but fixing things by throwing $$ at the problem has always seemed to work. When does a mean-reversion happen, and how long does it stay? Will we go through a period of really undervalued markets? For that to happen, we'd need inflation to be sticky. That puts the cost of money higher and takes all the leverage out of the system. Not unlike what we started to see in 2022, when the Fed was raising rates. We found out that the Fed had to pivot and cut rates, and inflation didn't come back under control.

If we were to see persistent inflation, that's when valuations would have to get cut and cut on a more permanent basis. That's more the debate, rather than all these financial ratios. For example, you could argue that, because technology is so much a bigger part of the market, it deserves a higher multiple than we've seen historically.

Difference between today and the dot.com bubble is that the vast majority of companies back then didn't have the revenues or growth that the leaders today have to drive markets with real earnings. There are things that are very different today from past cycles. Doesn't mean we shouldn't look at any of those metrics, but they're almost impossible to time as a way to think about your portfolio.

Last week, Stan Druckenmiller said that markets have started to price in a Trump victory. Let's unpack that.

A bunch of smart people created an (untradeable) index that lists the companies that would benefit the most or least from a Trump win. Since July 21, when Biden dropped out of the election and Harris got a big bump in the polls, the companies based on a Trump win initially came down.

Since July 21, the total US market has gone up. But the stocks that would benefit most from a Trump victory are still down. Originally, Trump was going to win against Biden; whereas now it's a lot closer against Harris. But recently, a Trump victory is heading up.

On a long/short chart, you're long the companies if Trump wins, and short the companies if he loses. Since July, the chart was initially down, but recently stronger. So the charts have turned. 

Look to polling and predictive markets, where people can make a bet on who's going to win the election. If Trump wins you get paid, and if he loses you get $0. A chart on the predictive market initially showed higher probability of a Harris win, but recently things have gone the other way. Markets are thinking now that Trump is going to win. If you look at polling from a company like Five ThirtyEight, for example, they're now saying that Trump's ahead. 

So lots of indications that Trump's going to win. But it's a Trump sweep of both the House and Senate, and the Presidency, that would be the worst outcome for the market. Right now, Senate's looking like 51 seats for Republicans. The House race is going to be very close, but best guess right now is that both House and Senate go GOP.

Best outcome for the market would be Harris in the White House, split Congress with gridlock and not a lot of spending. The bond market, such as TLT, is trading as though it'll be a Trump sweep. He's all about cutting taxes, which means more debt financing, and that's inflationary.

Larry's all for putting $$ back in people's pockets, but that will limit the Fed's ability to cut rates, and the market's not priced for this right now. If we get a sweep, initially markets will rally. He'd recommend selling, not buying, into that rally. The cost of money would go up, the Fed would be less accommodative, and that will eventually hit equity multiples. Now, he can't tell you exactly when.

Bond yields are backing up. Someone came out today with a 5% US 10-year bond. If Trump loses, he's probably going to jail. If he loses, the Trump Media stock, DJT, will be worth nothing. If he wins, the stock will keep going. If it breaks below $25, bearish on Trump until election. If it keeps going higher, Trump's going to win.

Company Highlight: Intuitive Surgical (ISRG)

Intuitive Surgical (ISRG) is an industry leader in the robotic-assisted surgery industry, well-regarded for its da Vinci surgical system. Its technology allows surgeons to perform complex procedures with enhanced precision, control, and visualization, which greatly helps with the recovery time for patients. Its da Vinci system is the most widely used robotic-assisted surgical platform in the world. Its sales are from a mix of da Vinci systems, ongoing sales of instruments and parts, and maintenance fees of the systems. 

ISRG has a strong track record of performance, with a 10-year total return CAGR of 25.0%. In terms of its financials, it is a large-cap healthcare name ($170.0 billion market cap), and it has grown its sales and earnings at a five-year CAGR of 13.4% and 11.6%, respectively. Forward analyst estimates call for a 13.7% next year sales growth rate and 16.6% earnings growth rate. Analyst estimates have been rising over the past few months, as optimism around its industry-leading healthcare robotics position continues, and it makes progress on the AI front. 

While its share price has risen dramatically since the peak of 20221, its valuation has stayed roughly the same or declined slightly. This suggests its fundamentals are improving and that we could see its valuation compress more in the future if earnings continue to grow and its share price grows at a slightly lower rate. It is not cheap at a 68X forward earnings multiple, but we feel this is the price for a high-growth, industry-leading name in the robotics-assisted surgery industry.
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