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

You gotta ride the wave. In his fund, he has about a 45% hedge, which is a bit overweight. But the top 5 stocks in the market are his top 5 stocks, and you just go with it until it doesn't work.

The software stocks are interesting, because they've really taken a back seat to the whole AI thing.

If you look at the possible catalysts going out, perhaps a change in tone on the interest rates? Even when the 10-year got up to 4.5-4.55%, the ones with deep pockets at the front of the parade could weather it.

That's right. If you look at the NASDAQ 100, there are a heck of a lot making new lows, and the majority are certainly sitting below their 50-day MAs. But the big mega-cap guys are holding it up. The top 5 stocks account for about 30% of the NASDAQ 100.

What's really running it is this whole AI revolution. It's the picks and shovels right now, and the rest will join in the parade. But for now it's still the infrastructure guys -- think data centres, infrastructure, server suppliers, semiconductors.

He continues to trim and then goes to the infrastructure (hardware) side of things. Interesting, because from 2011 to 2022 it was all about the software. Once in a while, the pendulum would swing over to the hardware, but it's swung way over there right now. Even guys like DELL and CSCO, the servers to data centres, have done tremendously well.

It will probably happen for the end users, he's not sure about the software guys. Everyone's being forced to be a "first adopter" of AI. It's supposed to help the bottom line and margins. There's a narrative out there that the software companies are going to take a back seat, because people will be able to get their analytics from the AI tools embedded in the hardware. We're seeing this in both education and healthcare.

We've only been talking today about AI. There's the whole technology arena out there. Fintech, e-commerce, EVs. It's a big market. The pendulum will swing, so make sure you get into stocks that aren't just playing in one sandbox, and good examples are his Top Picks today.

Canadian Stock Poised to Benefit From AI Spending:

Spending on AI infrastructure is growing rapidly, and the need for AI workloads is not appearing to slowdown anytime soon. This has led to a boon in AI-related plays, and even industrial companies that traditionally have not been tightly correlated with high-tech, but are now seeing demand for AI infrastructure. When looking for Canadian stocks that are in the AI space, the company set is fairly limited, and often a ‘derivative’ play. Nevertheless, the below list of companies are names that have directly benefited from an increased spending and demand for AI infrastructure.

Celestica (CLS):

CLS can be considered a tech manufacturer. While this is a very simplified explanation of its services, its services range from the design and engineering of electronic components to manufacturing specialized machine tool technology for companies. It can create these components for customers in the semiconductor, healthcare, industrial, aerospace and defense, and smart energy industries. Overall, it is much less involved in the software side of things, and more so on the hardware and manufacturing of electronic components. We like CLS for its exposure to cloud solutions and AI-infrastructure space, and management has done an excellent job of controlling costs and expanding its free cash flow.
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The US indices keep making new highs, but the TSX has been left behind. This comes down to the composition of the TSX which is heavy in sectors such as banks but they have been hit hard lately like the deeper cyclicals. The TSX is great for income investors, but he certainly likes some US tech names. Growth names have been bid up, so if you chase a tech name at a high valuation it will limit your returns.

It's really about concentration. Yes, more stocks are down than up. On the NYSE, more stocks are hitting 52-week lows than 52-week highs, despite the S&P 500 hitting all-time highs. Part of the buoyancy is that the major economic threats of surging inflation and rapidly rising interest rates are behind us.

There still remain challenges. Economy is slowing down, consumers are being squeezed, savings rates are falling to historically low levels, credit card debts are at record highs. We've talked about how the top 10% own about 7% of the wealth, whereas the bottom 50% own only 2% of the wealth. The wealth gap, or the disparity between the haves and the have nots, is starting to cross over into the corporate sector. 

If you look at the top 10 companies in the S&P 500, or 2%, they generate about 1/3 of all the profits. The top 10 companies have more cash on their balance sheets than the bottom 400 combined. Families and companies at the top are doing quite well, but everyone else is struggling. 

That's a potential risk for the market because employment is dispersed broadly across the economy, it's not concentrated the way earnings or net worth or cash are. Employment is what triggers whether or not there's going to be a recession. So when you have so many people working for companies that are just getting by or struggling, there's a risk there.

There is opportunity. The S&P 500 is trading around 21x earnings, but that earnings multiple is skewed because of all the tech stocks in the index. Decades ago, there used to be this index called the NASDAQ off in the corner, and that's where the risky and volatile tech stocks existed. 

But those companies have gotten so large, they now dominate the S&P 500, and so the S&P is actually a riskier index today than before. Comparisons with the 2000 tech bubble aren't fair because, back then, 14% of the index was represented by companies with no revenues. Today it's only around 4%. 

But tech stocks are still inherently more volatile. While the companies aren't as risky on an operating basis, they do trade at higher valuations, so there's valuation risk.

Resource stocks have come off. He doesn't think it's going to have too much impact. His client base is showing very little selling. One place of activity might be moving ahead the winding down of a corporate account.

S&P 500 is being pushed up by a handful of large companies. TSX is the other way around, where small resource companies are doing better than the large caps. Weakness in the prices of copper and oil. Nat gas in Canada is terribly low. Resource stocks are pretty volatile. 

With the smaller resource companies lifting the TSX, and now selling off, that's enough to bring down the overall market in Canada.

Discipline trumps conviction: start trimming 20% up, but buy some bacr or let it run.

It takes time to build consensus in the market, but often that is baked into the price of stock(s). He's a big fan of index funds that track the S&P. It's perfect for retirements funds. It's hard to be an investor in  individual stocks; it's real work. You can gradually contribute with every paycheque over time. If you believe the economy will grow over time, you can park your money in an index fund.