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

He's lightened up a lot on software. The place to make $$ these days within the AI revolution is the hardware (picks and shovels). Software will come, but it's too early, maybe in a year. The whole idea of AI is that the embedded AI in the hardware is going to do a lot of the analytics itself. It will be eating the lunch of a lot of the SaaS providers.

Silicon carbide has been around for a while, and is much more efficient. Problem was it was more expensive. AI revolution just took off like a rocket, and they're still trying to bring down the price.

That's right, don't buy a full position today. For the kind of events like today, it takes people time to digest information. The people bailing out today are the "weak longs". There are other people out there who, instead of looking to sell, are trying to put hedges around their portfolios. 

Problem right now is that volatility is up, with the VIX around 16.5-17. A week ago it was 13.5-14. It's expensive to do the hedges.

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.