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

Not surprising. Lots of high-quality, public assets trading at significantly depressed valuations. It's encouraging. Likely to see more, and the premiums have been pretty nice.

It really comes down to the credit markets in this environment being quite robust. Credit spreads are quite tight. And now you have the benefit of more interest rate certainty. A survey would likely show a belief that interest rates are going to be lower a year from now, not higher. This creates a catalyst for companies to make a move.

A second big theme is that we know that private equity is a massive asset class, with more and more money going there. So a lot of capital is sitting on the sidelines, ready to be deployed. That's why we're seeing private equity come in and buy these assets, probably still at pretty good prices given the underperformance we've seen in the space. Doesn't see this aspect changing anytime soon.

A third thing, not much talked about, is that public market costs have actually gone up quite a bit. In this regulatory environment, it's expensive to be a public company, which takes substantial capital away from the business itself. Stripping that out becomes a meaningful synergy to the buyer.

Buy high-quality, small- and mid-cap stocks, especially in Canada. Lots of great assets trading at depressed prices. Take a barbell approach in your portfolio -- have some large-cap or ETF coverage, but start to sprinkle in some of these higher-quality smaller-cap names, and you might get a nice premium over the next year or so if they're acquired.

He has a lineup of stocks where he thinks there's a high probability of this happening. But if not, you want to make sure you own high-quality names where the fundamentals will help the multiple expansion.

Not a lot of Canadian REIT takeovers yet. Maybe that's coming. As we get more interest rate certainty, we should see a lift in the valuation. A lot of them are quite undervalued. These names will appreciate in value as interest rates come down and people get more comfortable owning that sector.

Over 500 points, amazing. And that's a good thing. On his fund, and a lot of separately managed accounts, he had a hedge overlay on top, which means he was short the indices. So he has an underlying stock portfolio, and then a short overlay of equity indices. The short overlay was a little bit of luck, to be honest. 

July, historically, is the best month of the year for the stock market and certainly for the NASDAQ. But he wanted to put on a bit of a short overlay, so he's up to about 70% short the notional value of the stock portfolio. A lot of that is put options. So when he went home last night, it was sitting in the mid-high 40s. But because the market's rolled over and volatility has gone up, those options are a lot more valuable. So in a market that's down 3%, his fund is down only around 0.2-0.3%.

The hedge overlay lets you weather down days like today.

As we go into this season of August-October, it's not very hospitable to the market. This upcoming period is going to be difficult. In his fund he has about 10% cash, so he'll add a little bit. In some of his separately managed accounts, he has 20-30% cash because he's been trimming as it went up.

It's a nasty market today, but it's worked out well for his strategies.

So many times he's been on the show and it's been difficult to find some runway in some of these stocks. But on a day like today, he loves coming on because the runway is a lot longer. There are some great opportunities, and the fundamentals haven't gone away.

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.