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

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.

Believes US President Joe Biden stepping down is good for the overall prospects of US politics. It appears Republicans have the advantage at this time, but regardless, high quality, bottom up approach to investing is best for investor portfolios. Generally speaking, politics are hard to predict. S&P 500 at all times highs, and TSX index also performing well. Sees an investment case for TSX catch up(lower PE ratio) to the S&P 500. Overall, it is an excellent environment for active stock picking investors - lots of under valued equities in the markets. However, sectors like Canadian Telecom sector will be difficult (very price competitive and hard to make a profit). 

Trump would benefit small business, a sector crushed by de-industrialization, a world he wants to bring back along with better wages for workers. Kamala Harris would be way better than Biden--and even Trump--for big business, because she believes in globalization like American world leaders before 2016. In contrast, Biden was adversarial to big business, because he admittedly didn't know much about business. Harris is an elected rep in California, and knows the people who run Silicon Valley. Her secret weapon is her brother-in-law who's general counsel at Uber. She will be friendlier to business than Biden was.

Company Highlight: CAE Inc (CAE):

CAE is a technology company which digitalizes the physical world by deploying simulation training and critical operations support solutions. It is managed through three segments: Civil Aviation, which provides comprehensive training solutions for flight and other personnel; Defense and Security, which provides global training to ensure mission readiness; Healthcare, which provides virtual education and training solutions.

For the third quarter of fiscal 2024 Revenue of $1094.5 million was up 12.8%; Operating income at $121.6 million was down 14% and net income at $56.5 million ($0.18 per share)was down 28% ($0.24). Adjusted order intake at $1273.9 million was up 7% leading to adjusted backlog of $11,746.3 million, up 9%. Civil service segment margins were a bit light with product mix being a factor;  defense revenue margins were low in part due to legacy contracts. Management remains confident in the future.
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Mainly the heavy oil side, the pure oil players. The whole industry will benefit from tighter spreads.

Believes crude oil prices will remain high throughout 2024. Under investment in energy development will ensure relatively high oil prices. Energy stocks are the cheapest they have been in recorded history. Is bullish on Canadian oil and gas sector. Gold prices have recently pulled back, and is a good time to buy. Any time investors have ability, it is a good time to buy gold. Physical gold is a very good hedge against inflation. Gold equities should close the cap between physical assets prices, and stock market valuations. Believes owning physical gold trusts is a good option for investors - don't have to physically own it "in person".

Market Update:

Canada’s inflation cooled down faster than expected in June to 2.7 percent compared to the consensus estimate of 2.8 percent, increasing the odds of another rate cut. On the other hand, the European Central Bank left interest rates unchanged at 3.75 percent after June’s cut, indicating that borrowing costs will remain restrictive for some time to ensure inflation returns to 2 percent. The Canadian dollar was 73.01 cents USD. The U.S. S&P500 ended the week down 0.5%, while the TSX was up 1.0%.

All but one sector rose this week. Real estate and financials added 3.2% and 1.8%, respectively, while consumer discretionary and industrials added 1.2%, each. Consumer staples rose 1.1%. Energy and technology ended the week slightly up 0.2% while materials gave up 0.2%. The most heavily traded shares by volume were Royal Bank of Canada, Bitfarms, and Air Canada.
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Panel guests:

Rob Butler
Butler Mortgage

Lauren Haw
Zoocasa

Bob Dugan
CMHC

Bob Dugan: Shortage of supply of housing in Canada, not building it quickly enough. Puts pressure on affordability. Tremendous growth in demand through population growth. Last year, Canada saw strongest population growth since 1957.

Because of high interest rates, home prices have come down. But because of mortgage payments at those higher interest rates, we still have an increased cost of home ownership. A lot of that population growth is moving towards the rental market, and we're seeing some frightening numbers in terms of rent growth, especially in units where there's turnover. Rent control protects a lot of people while they live in the unit, but as soon as they move out and someone else moves in, the rents correct to market prices.

Lauren Haw:  That's right. A lot of mortgages are still up for renewal. A lot of homeowners brought forward their refinancing to 2021 and early 2022, when you could essentially get free money. And then we had a 500 basis point jump. There are a lot of sellers in the market, but we haven't seen forced selling to a big degree.