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

In a typical small- to mid-cap cycle, you get a 7-year run, and then a year or year and a half correction of multiple contraction. So a stock trading at 13-14x, which seems reasonable for a growth stock, suddenly finds itself trading at 5x. It's not that these companies are growing that fast, but it's the multiple expansion at work.

What you need is the psychology of the market to get to the point where it's going to look at these stocks. When you get a correction, money comes out of small caps, valuations fall, usually interest rates are still rising. So the money can only come back in one direction. Once interest rates start to roll over, people start looking for growth. 

Thinks we're in the first year of the next 6 or 7-year cycle. All his Top Picks are under 10x earnings. 

Not sure if we'll see more IPOs. Canada is not a great place to be entrepreneurial. Housing affordability crisis. Entrepreneurs are seen as the bad guys. There are slivers of entrepreneurship and great companies, but until the economy is strong, it won't be a hotbed of business activity. We have to balance our social programs with a strong economy that creates jobs that create tax wealth to pay for those programs.

A little secret is that the TSX 60 is not growing, and there's no incentive or encouragement to grow. So you have to pick growth in Canada where you can find it, and then look to the US or elsewhere.

She's concerned about the abrupt downturn in copper prices which could have a negative effect on the major indices. Copper prices were steady from 1972-2000, then created a new floor until the 2008 crisis. Now, the floor for copper is a little over $2.00 and its historic trend line is $5.35. Last week, we came close to that, but Garner feels that copper has already peaked. History says that any time copper touches $5.00, it drops down and historically it peaks a little before the market does. It's an historical indicator. In fact, if stocks pull back in a couple months, copper's decline could resume and fall to the floor of $3.00. $3.50 is a key level for copper with prices acting bullishly above that level though bearish below that. The 200-day moving average at $4.00 will act as a magnet for investors. She notes that large speculators are net long 70,000 copper futures contracts; history says that when this happens copper prices are about to peak, so when prices decline, these bullish traders will dump their positions--this creates another leg lower. We need copper though to build data centres and in tech. The good news has been priced in and prices could head seriously lower.

Company Highlight: Coca-Cola Consolidated (COKE)

Coca-Cola Consolidated (COKE) operates as one of the largest bottlers of the Coca-Cola Company (KO), COKE is the manufacturer and distributor of beverages, while KO provides the flavors and syrups. Unlike KO’s popularity as a high-quality dividend grower, COKE is quite under the radar with most investors. That being said, the company has a track record of consistently growing revenue and earnings and has compounded shareholder wealth at attractive rates. COKE has compounded shareholder wealth at around 30% on average in the last ten years, while it is still a $9.1 billion market cap company.

In its recent earnings results, COKE announced the intention to repurchase up to $3.1 billion of its common stock. Given the company’s market cap of around $9.1 billion. In effect, the company will retire around one-third of the total share outstanding in a short period of time. This capital return program was announced shortly after the company announced a special dividend last year. The amount of capital returns (buyback and dividend) has been quite limited in previous years as the company focused on deleveraging and growth through acquisitions and capital investment. However, the capital allocation policy has changed meaningfully in recent years, this could be a catalyst for further outperformance in the share price going forward.

Looking at its financials, we see a slight contraction in its valuation (forward EV/EBITDA multiple) over the past 10 years while the current share price is near an all-time high, and consistency in fundamentals growth. In fact, it has not missed an earnings estimate in the past 10 years. There is some cyclicality to its earnings due to the investment cycle, but it has seen an expansion in earnings, and margins consistently over the years.
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He expects a lot of ups and downs. He's surprised the market is up this much so far this year. The year began with 6-7 rate cuts and not now it's maybe 2 for Canada. Great that shares are up, but we're ahead of their skiis. He expects a pullback though earnings have been good. In recent days, economic data has been weaker than what the market expected. In Canada, sectors like telcos and utilities will respond to a Bank of Canada rate cut and overall a good signal. Buy those on sale now. He sees 1-2 cuts this year in Canada; too many cuts will weaken the Canadian dollar against the USD. Oil: that's driven by OPEC cuts and doesn't effect the CAD as much as interest rates. Oil stocks are on sale here; the transition to renewables will take longer than we expect. Oil and natural gas will enjoy good demand.

On a rate cut, buy residential, not commercial, and maybe industrial.

Recent economic data out of Canada shows that our economy is decelerating at a rapid pace. With the bank earnings and potential credit issues, he prefers the US market over Canada's at this point. If the BOC does move ahead with a rate cut in June, as is highly anticipated, that could change his viewpoint. Markets typically will perform pretty well after a rate cut.

But for now, he's more inclined to be in the growth-oriented industries, specifically tech and data centres in the US. Less favourable on the value sectors such as financials and energy that predominate Canada.

He's not sure if it's a lower-volume May to September kind of trading environment, but while we're seeing pretty good results from major companies, the market just hasn't loved some of those results or the forward guidance. See his Top Picks for a company that had good results, but has come down quite a bit.

You have to pick through in this stock picker's market, looking for undervalued opportunities in names that have moved too much on not-so-bad earnings. Volatility is there a fair amount. Keep your eye peeled for opportunities that could appreciate fairly significantly.

It can vary client by client. At certain times, you just don't want an individual to have the risk of owning a stock, where you can see 10-15% moves over the course of a day or week. ETFs are better for broad-market exposure where you're trying to get specific access to an industry or a market. You can then use individual stocks to supplement that exposure, or for companies that you think are going to significantly outperform the market.

Believes interest rate cuts might be on the table from the Bank of Canada (mortgage situation much more fragile). Strong labor markets & sticky inflation not pointing towards US Fed rate cuts. Not until consumers start to weaken will this option be on the table. US Federal Reserve debt load is spiraling out of control - makes rate cuts and/or raises very complex. Currency situation would suggest Canadian Dollar is heading down. 

Nuclear energy is the power source of the future, however Uranium prices are fully valued at this time. Would wait for Uranium prices to fall before buying. Owns Uranium directly and in companies as well. 

Believes Bank of Canada is likely to cut interest rates this week. Canadian housing market is fragile due to 5 year mortgage rates, which would add incentive to cut rates. Canadian consumers much more vulnerable than in the USA. Canadian economic policy poor - reason for economic weakness, and further reason to cut interest rates. Canadian dollar will dip to ~$0.70 before any recovery in Canadian economy. 

Market Update:

Oil prices turn volatile as the members of the Organization of the Petroleum Exporting Countries (OPEC+) plan to extend production cuts voluntarily to stabilize oil prices. On the other hand, Canada’s gross domestic product (GDP) grew at an annualized rate of 1.7% in the first quarter, weaker than expected by most economists at 2.2%, raising the odds for a rate cut in June. The Canadian dollar was 73.14 cents USD. The U.S. S&P500 ended the week down 1.7%, while the TSX was down 0.7%.

Most sectors ended the week in red. Industrials gave up 2.5%, while real estate slid 2.1%. Consumer staples and technology edged lower by 1.2% each, while financials slipped 0.9% and consumer discretionary went down 0.7%. Energy and materials ended the week up 1.2% and 0.7%, respectively. The most heavily traded shares by volume were Lucara Diamond, Suncor Energy, and Canadian Imperial Bank of Commerce.
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Believes there is underlying momentum in commodities at this time. Watching a rebound in the industrial materials & precious metals simultaneously. Strength in energy markets also very positive. Fossil fuels will remain an important part of energy mix for the next 30-40 years. Energy equities presenting a lot of opportunity. High quality junior mining companies will continue to be able to raise capital going forward. Many high quality junior mining companies are over-capitalized. 

Market Update:

Oil prices turn volatile as the members of the Organization of the Petroleum Exporting Countries (OPEC+) plan to extend production cuts voluntarily to stabilize oil prices. On the other hand, Canada’s gross domestic product (GDP) grew at an annualized rate of 1.7% in the first quarter, weaker than expected by most economists at 2.2%, raising the odds for a rate cut in June. The Canadian dollar was 73.14 cents USD. The U.S. S&P500 ended the week down 1.7%, while the TSX was down 0.7%.

Most sectors ended the week in red. Industrials gave up 2.5%, while real estate slid 2.1%. Consumer staples and technology edged lower by 1.2% each, while financials slipped 0.9% and consumer discretionary went down 0.7%. Energy and materials ended the week up 1.2% and 0.7%, respectively. The most heavily traded shares by volume were Lucara Diamond, Suncor Energy, and Canadian Imperial Bank of Commerce.
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