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

The market is fed up with the megacap Magnificent 7, which it sees as overvalued, and is rotating into small-caps and other sectors that are catching up. This trend has been happening for a few weeks but was pronounced in today's sweeping sell-off. 

Order Types:

• Market Order- The most well-known and easiest type of trade to execute. Investors can buy or sell stock immediately at the next available price.
• Limit Order- Allows investors to pick their buy or sell price. The order is not filled immediately as it is typically set above/below the market price. If the limit order price never reaches the desired level, then it will not be filled.
• Stop-Loss Order- Similar to a limit order but with more of a risk management focus. If one purchased shares for $100 and they wanted to limit their downside to $90, they could place a stop-loss sell order. If the market price drops to $90, the stop-loss will automatically be executed as a market order. A stop-buy order is a tool used by short-sellers, so we will not discuss it.
• Stop-Limit Order- The one downside to a stop-loss order is that it turns into a market order, so if there is significant sell action on a stock, the order could be executed below the initial downside point of $90. A stop-limit order adds even more protection and requires two prices to be entered; a stop price and a limit sell price. In the previous scenario the stop price could be $92, and the limit-sell price could be $90 to fully protect against the desired loss. 
• Cancelling Order- These include fill-or-kill (FOK), good-till-canceled (GTC), and day orders. These are all pretty similar and have a feature where the conditions are met and the order is filled, or it is cancelled. The difference is mainly the time frame - FOK’s are typically a very short time, maybe just a few seconds; GTC’s are active until the investor cancels it, but brokerages normally only keep these open for 90 days; Day orders are only kept open for the day.

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Yes. He manages money for families, and they use their investments to generate a return to live life. He thinks that we continue to be in a world where the cost of living is going up. Maybe inflation is cooling, but that's going to come in fits and starts.

The playbook for the last 30-40 years has been that when rates drop, you buy fixed income and high-dividend-paying stocks. That's really not where we're going. He prefers dividend growers, so he'd take a lower dividend but one that's growing at a good rate. He thinks that will be a very attractive attribute for other investors over the next number of years.

We're heading into the next economic cycle, markets are looking ahead into rate cuts. So, what can benefit?
 
There are some dividend growers that are a little more economically sensitive, with really great cashflow and dividend growth, that can offer some great capital appreciation and a rising stream of dividends. Look at GS, CNQ, FCX and AEM.

What it means is that, over time, the EPS goes up. If they're buying back their shares, the earnings are spread over fewer shares. And dividend increases in the future will be spread over fewer people.

He's being very careful of companies that use a fair bit of debt in their business model to engineer a return to their stakeholders. If we think that we saw a generational low in interest rates in 2020, we may see a cyclical decline near-term in rates. But he thinks that, longer term, rates are going higher. The cost of capital is going to go up.

So he wants to own companies that don't have debt, and generate very strong cashflow without it. Many of the infrastructure companies carry debt to finance the building of their projects. 

There is a demand for infrastructure, and there's spending to be done. But he prefers the engineering companies that provide the services to build the infrastructure. A company like STN. Unless a company has significant growth, such as energy infrastructure, he's cautious and wants to be sure to see growth that can offset the rising cost of capital.

Tricky, because this industry is in the political crosshairs of both camps. So he's been cautious. However, there are some real winners.

The GLP-1 weight loss companies are really in the sweet spot. For example for LLY, a very large holding for him, the opportunity for them is a very large marketplace. Getting approval for a broader range of uses. He's very happy to continue to own.

He also owns ISRG, which will help with the cost of healthcare, a very big growth opportunity. He owns MCK too.

Those 3 names together make up a 5% weight for him, which is underweight the market.

Some people are value investors, buying low-price and out-of-favour stocks and waiting for them to get better. The gestation period on a value stock can be 3-5 years. A lot of his clients don't have the patience for this, especially if you're in a good market.

The street is focused on the next rate cut--the bank decides tomorrow--which he thinks will happen in September. US election: either outcome looks positive for markets. Though Canadian June retail sales were not great, overall the economy is strong with a low unemployment rate. He doesn't see doom and gloom. Markets have run up so fast, that there may be a pullback in the second half of this year. The banks are leading the market to a soft landing. He's adding to rate-sensitive names in utilities and real estate (after slashing his exposure).

ZZZ, CWB, STLC, IDG, NVEI, and NBLY all this year. On Sleep Country, Prem Watsa seems to buy these mediocre retail companies, and clearly he sees value long term. 

What's going on is there's no interest, lackluster support in Canada. Everybody's putting money into either GICs or the big techs. And that's what's really going on across the globe. Small caps in the US have underperformed for a very long time. As a result, you're seeing undervaluation, no support, a very illiquid market in Canada making it difficult for managers like himself to take stakes in these companies.

Lots of money in private equity is just chomping at the bit to put money to work, with billions and billions of cash on the sidelines. You're going to see a lot more of these small-cap deals in Canada in so many sectors.

He manages about $2.4B for his clients. So he likes to buy healthy stakes in companies, somewhere between $75-100M of a stock. If he's looking at a small-cap company with a $1B market cap, he doesn't want to take a 10% stake in a company and be stuck in it forever. Look at the performance of ZZZ and CWB for many, many years -- they did nothing, you just got the dividend. That's terrible. 

There aren't too many great small caps in Canada that he wants to own and be stuck. But for a retail investor, if you're patient, and you see the undervaluation, you have the opportunity to acquire a nice stake and make a lot of money.

A done deal, for sure. There's just so much money in private equity. FFH and BRK are both swimming with cash. There are great opportunities and great undervaluation out there. 

He doesn't have a list of names, but you can investigate yourself. Any Canadian tech company that isn't CSU, GIB.A, or SHOP is going to get taken over at some point in time.

Believes US President Joe Biden stepping down is good for the overall prospects of US politics. It appears Republicans have the advantage at this time, but regardless, high quality, bottom up approach to investing is best for investor portfolios. Generally speaking, politics are hard to predict. S&P 500 at all times highs, and TSX index also performing well. Sees an investment case for TSX catch up(lower PE ratio) to the S&P 500. Overall, it is an excellent environment for active stock picking investors - lots of under valued equities in the markets. However, sectors like Canadian Telecom sector will be difficult (very price competitive and hard to make a profit). 

Trump would benefit small business, a sector crushed by de-industrialization, a world he wants to bring back along with better wages for workers. Kamala Harris would be way better than Biden--and even Trump--for big business, because she believes in globalization like American world leaders before 2016. In contrast, Biden was adversarial to big business, because he admittedly didn't know much about business. Harris is an elected rep in California, and knows the people who run Silicon Valley. Her secret weapon is her brother-in-law who's general counsel at Uber. She will be friendlier to business than Biden was.

Company Highlight: CAE Inc (CAE):

CAE is a technology company which digitalizes the physical world by deploying simulation training and critical operations support solutions. It is managed through three segments: Civil Aviation, which provides comprehensive training solutions for flight and other personnel; Defense and Security, which provides global training to ensure mission readiness; Healthcare, which provides virtual education and training solutions.

For the third quarter of fiscal 2024 Revenue of $1094.5 million was up 12.8%; Operating income at $121.6 million was down 14% and net income at $56.5 million ($0.18 per share)was down 28% ($0.24). Adjusted order intake at $1273.9 million was up 7% leading to adjusted backlog of $11,746.3 million, up 9%. Civil service segment margins were a bit light with product mix being a factor;  defense revenue margins were low in part due to legacy contracts. Management remains confident in the future.
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