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

The word of the last several months has been resilience. Still elevated inflation and relatively higher interest rates, yet global markets are still up 11% YTD. Technology and the S&P 500 have done even better than that.

We have to talk about the strength of the US economy. The consumer continues to be very strong, and corporate earnings continue to be very solid. Unemployment rate is near decade lows. He's very optimistic about the rest of the year. Based on the magnitude and length of this bull market, 20 months or so, we're probably in the 4th-6th inning at this point. 

We're probably going to see 1-2 cuts by the Fed by the end of the year, depending on inflation numbers. Going back a month, predictions were for no rate cuts; now we're looking at potentially 2 cuts based on futures markets. Have to remember that there's still a lot of money sitting in money market assets, about $6T USD.

Once rates start coming down, investors might be encouraged to move money into better-performing areas such as risk assets like equities. 

Pullbacks and corrections are par for the course. It's the price of admission to the stock market. Looking back to 1950 for the S&P 500, there are three 5% pullbacks on average in any given year, and one 10% correction. Look for those to add to good-quality holdings. Always pay attention to total asset mix and allocation in your portfolio.

It's almost a given that choppiness will come, and you want to take advantage of those times.

Not all-in on AI. Go back to 2000, when we knew that the internet would be a big part of the future. But lo and behold, not every internet company survived. Tech market was down 82-83% for 2.5 years. AI is a very important part of our future and of investing today, but be cautious about buying everything in that space and only in that space.

His tilt is still secular, long-term growth companies. Very little competition, duopolies or oligopolies, such as COST or ASML. Really command the market and have pricing power, such as MA or Visa.

Yes. Companies will go through quarters where they'll hold off and not spend on something for now. But when it comes to cybersecurity, it's not something they can hold off on spending for years or even several quarters.

We've all been wondering when it was going to happen, and now it has. The positive is that it's great for stocks. The negative is that it's a reflection that the economy is slowing, and Canada has economic issues right now. As an investor, you want to capture the benefits of lower interest rates but still be cautious of areas where there's weakness in the economy. 

Great for both growth and rate-sensitive stocks. Lower rates are also good for the economic cycle. There's the AI revolution, and some of the best growth rates and most attractive valuations are in Canadian AI stocks.

The best-performing markets globally in the last 5 years have been those with a fairly high concentration in technology. The Canadian market is 60% either financials or resources. There are these small chunks of attractive growth, and that's what he's looking for.

He can't be agnostic to the rate environment, because typically the small- and mid-caps are quite interest-rate sensitive. Interest rate environment that's flat or starting to roll over is one of the pre-conditions for the next upward small- to mid-cap market.

Consistent growth, margins, and reasonable valuations. He's not typically looking for pre-profitable companies. All his Past Top Picks are AI companies trading at 5x PE or less.

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.