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

While history doesn't repeat itself, it often rhymes. Normally, when markets are as strong as they have been in the US for the first half of the year, that should continue over the last half. Possibility for positive returns from now until the end of the year is quite high. His target for the S&P 500 would be somewhere between 5800-6000, which means 8% or so in upside gains.

It will still come from the leaders that have been paving the way so far. Traditionally in a bull market, you can just keep buying the winners because they continue to perform the best. So he'd be looking at mega-caps, chips, and AI. Some financials are starting to show a few interesting characteristics.

Don't overthink it. Look at what's been working, and you can follow that template for the next 6-12 months.

In lower interest rate environment, growth will generally outperform value. Might get periods of sector rotation, but growth will probably outperform in next 6-12 months.

What to do with winners in a short timeframe?

Have to be prudent. Take stock of the risks you're holding within a portfolio. At the end of June, he did some rebalancing where a lot of targets had been achieved. You don't want to get too greedy. Sometimes it does hurt as you watch a stock continue to go up.

For the tax implications, talk to a qualified tax advisor. Unique to each individual. Not a lot of upside for Canadian banks, though they are nice for an income stream. Look elsewhere for growth, such as in the US, despite debt and economic headwinds.

Company Highlight: Alimentation Couche-Tard (ATD) 

ATD is a global leader in the convenience store sector. It operates under different brands including Couche-Tard, Circle K, and Ingo. It provides food and non-food items, as well as fuels. It has a large network of convenience stores through company-operated stores and franchise stores. We consider it to be one of the highest-quality businesses that trades on the Canadian markets, and it has the ability to grow predictably over a multi-year period. 

In terms of its financials, it reported recent results which were weaker than expected, but fuel was the main factor, which is a volatile component of earnings. Inflation may put some pressure on consumers at the lower end, but the long-term prospects for ATD have not changed. It recently signed a deal with Too Good To Go to increase foot traffic. It pays a small yield of 0.9%, it has a history of margin expansion, and it trades at an attractive forward P/E of 18.5X.

We believe that ATD can continue to grow its free cash flow, acquire and integrate more convenience stores, and integrate them effectively while expanding its profit margins. We can see that its profit levels have largely grown over the years and its stock price performance has been excellent, proving itself to be a quality compounder. 
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It's all about interest rates. When the Bank of Canada recently cut rates, bond prices started to rise in Canada. Since November, when the US Fed announced it will stop raising interest rates, Wall Street cheered, expecting six rates, which have not happened. Mega tech stocks continue to rule because the hedge funds have piled into the AI trade. When Powell last month said that inflation is still a concern, the hedge funds started migrating out of megatech and the market has done sideways. Earnings are at the end of this month; this is the worst quarter of the year, so expect things to stay sideways. The US dollar is artificially high, because foreign investors must buy US bonds in USD, and the US has the highest interest rates in the G7. The strong USD is hurting emerging markets. He's holding both stocks and bonds. 70% Canada's stocks amount to financials and resources, so you need to look abroad to diversify. The mismatch in interest rates between Canada and the US means a weaker Canadian dollar. China is not attractive given its aging population and economic problems.

In AI, software has taken over from the chips, because of valuation. Semis have run up recently and now investors are locking in some gains (but still in tech). Therefore old tech and software are benefiting now. 

Company Highlight: Brookfield Renewable Partners (BEP.UN)

The top performer of May was Brookfield Renewable Partners whose stock price rose 32% on the month, 9% year-to-date, but was still down 7% from the year prior. One year ago, at the end of May 2023, BEP.UN stock’s price had unknowingly been peak trading at $38.89, just shy of 52-week high levels of $39.90 which were achieved in June 2023. Things have been up and down since, with the stock hitting a 52-weeek low of $27.43 in October 2023 but the recent recovery bodes well.

BEP.UN is one of the largest pure play renewables companies in the world. BEP.UN has a 23-year history as a publicly traded operator and investor in renewable power and sustainable solution assets, currently employing approximately 4,770 workers. BEP.UN’s portfolio of assets spans hydroelectric, wind, utility-scale solar, and other sustainable solutions assets, including distributed generation solar and storage. BEP.UN’s portfolio of sustainable solutions assets includes investments in Westinghouse (a leading global nuclear services business), investments in an operating portfolio of carbon capture storage (CCS), renewable natural gas, and over one million tons of recycled materials annually.

The big pop in share price was driven by news that BEP.UN had entered into a contract with Microsoft as their renewable partner. BEP.UN will deliver an incremental ~5,200 GW hours per year of generation under the finalized partnership with Microsoft to deliver over 10,500 MW of renewable capacity between 2026 and 2030. First quarter earnings also came in in May which were decent and pointed to potential fundamental changes with positive tailwinds from electrification and data center demand trends. The company also increased its distribution by 5%.
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In first-half 2024, the S&P is up 15.5%, the Nasdaq 20% and the Dow 4.5%. She expects gains in the second half, though lower. It's prudent to take profits after a strong 18 months. The economy will remain strong. The rally will broaden. We will definitely see a soft landing. Companies like General Mills are actually lowering prices to help a sold consumer. She projects 8-10% corporate earnings growth.

It's time to tap the brakes after a strong first half 2024, led by tech and telecommunications. But other sectors are declining, not merely trailing, led by materials, staples, energy and industrials. Shares are priced to perfection. He expects a pullback coming.

US political situation not a major concern for investors - retail investors should focus on buying quality companies. Cooling inflation numbers pointing towards strength in the markets. Overall, markets are pointing towards strength. However, there are some weak spots in the market with recent weakness in retail companies like Nike. Without strength in "Big Tech" names, could be weakness in the US Economy for the second half of the year. Consumers are facing headwinds even with cooling inflation numbers - will be interesting to see how this plays out. Bankruptcies and credit card defaults are up which is another sign that points to weakness. Expecting strength in under valued sectors like energy in the not too distant future. Will see broader market strength at some point in the future - especially with falling interest rates. 

The Rationale for Investing in the Canadian Market:

1.   Owning the TSX is similar to buying insurance for the portfolio against a market downturn. This is because the Canadian market is heavily dominated by defensive sectors which could act as a hedge against market downturn.

2.   Discrepancy between the two markets has never been wider than before. For example, the TSX is trading in the range of 17x – 19x multiples, the S&P 500 is trading in the range of 25x – 27x multiples.

3.   The opportunities set for Canadian investors are even more attractive in the small and mid-cap space, where we think there are tremendous opportunities for undervalued long-term compounders that if being traded in the US market would see a much higher multiple.
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It's really been a tale of two markets. Large-cap tech stocks are dominating everything, and investors have completely forgotten about 95% of the S&P 500.

We've seen this before, where diversification has become a dirty word -- "Just give me more NVDA." Even though markets are at all-time highs, there are so many great companies that have lagged badly over the last number of years and that offer compelling value.