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

When we think about the M7 and the S&P 493, until recently all the earnings growth was coming from the 7 companies. So last year, people were complaining that the breadth was narrow, that those 7 companies were lifting all boats. But it was grounded in fundamentals.

Now we're seeing growth outside of the M7, which should lead to a continuation of the broadening out we've seen. That's healthy. We want more participation in the market.

The difficulty with the US, in particular, is that it always trades at a premium. And that's justified by its really good businesses. He thinks there's a lot of potential in Canada and Europe -- regions that are tilted less toward tech, and more toward cyclical/value like financials, energy, and whatnot. Those areas can benefit.

He's been seeing strength in Japan for a long time, which could be due to people avoiding China, so there could be some push/pull there. Definitely seeing opportunities across the globe.

For his core positions, you want to trade around them. If the thesis hasn't changed, story not broken, you want to maintain the core position. But if it gets expensive in absolute terms relative to itself or to peers, then you can take some off the table and recycle proceeds into a competitor or an undervalued peer. 

This is a good way to protect yourself and to have some discipline around the valuation.

Solid performance this year. Miners have lagged, people have been waiting for a revival, and this could be it. He's worried about what gold is telling us, why is it rallying so much? Combination of concerns about resurgence in inflation, along with government balance sheets still elevated. So people are trying to diversify.

He doesn't use them. Have to think about fees and volume. Same dynamics you'd think about with a stock listed on a foreign exchange vs. its ADR.

Industrial technology is going to become more and more important. Factory automation, sensors, internet of things. AI is really about productivity. These are productivity and cost-saving engines, increasing uptime. For example, by attaching sensors to a turbine, you can get ahead of maintenance before it becomes urgent.

His view is that since the generational low in rates in the early part of 2020, everything has changed. For 40 years, the power was in the hands of the borrower, and we went to a world where the power is in the hands of the lender. The economy is likely a lot more resilient in the face of inflation or higher interest rates.

It means that the things that benefited from falling rates, which are pretty over-owned, are not likely the places where you'll make money. Things like high-dividend-paying stocks, with lots of leverage and that generate a relatively small but steady return on capital, are not as attractive. Because as the cost of capital goes up, they're not going to grow their dividends. This includes utilities, REITs, telecoms, staples.

On the other hand, companies that have the ability to set price, and generate lots of excess cash, are more likely to return it to shareholders in the form of a rising stream of dividends. There's no question that we're going to have a higher cost of living, and so we need a rising stream of dividends. There are very specific companies and industries that are really well suited to that. You just have to get your head around the fact that the world is just a different place than it was before 2020.

People have been waiting for this recession, and piled into defensive sectors, but they're just not working and are now over-owned. Sectors that didn't do well for a decade, like financials in the US and around the world, as well as energy, materials, industrials, are all under-owned and unloved. But that's where the relative strength is. 

If you look at a chart that depicts results from a Fund Manager Survey, you can see where investors are overweight. Bonds, in particular, are overweight, as investors talk about bond prices going higher when rates go lower. The truth is that other things will add more value. For example, in the last 12 months the aggregate US bond index has been up 1.7%, but the world of dividend growth stocks is up 24-25%. 

We're in a different world, and both institutional and individual investors need to do some repositioning.

For a year now, he's been talking about buying large, cashflow-producing, resource producers. Names like CNQ and TECK.B. They represent one important component where we can get inflation protection.

People think about risk as prices fall. You have to remember that risk is also inflation eating your money. So you need to own things that protect you from that risk, and it's something we haven't had to think of much for the last 15 years.

Tech is not the only place to be. A lot of people are really overweight. He has about a 50% weighting. There's been some deterioration under the surface in some of the weaker companies. Just know that there are other things you can do.

Yes, but relative strength has been weakening since December for the group. His firm is about a 1/3 weight in healthcare, so pretty underweight. He often finds that if a company has a questionable technical setup, a little bit of bad news goes a long way.

In a world where there's lots of choice and you only need 20 names to build a portfolio, perhaps you don't need to focus in this sector right now.

When is the right time to sell?

In the book “Common Stocks and Uncommon Profit”, the famous investor Phillip Fisher said that “if the job has been correctly done when a common stock is purchased, the time to sell it is almost never”.

For example, investors who are skillful and lucky enough to own shares of Constellation Software (CSU), selling or even trimming the name at any time have looked like a mistake so far.

Some common mistake investors make

Most of the time, investors would try the game of selling at the top and buying them back at the bottom, which very few investors (if any) have done successfully and consistently over the long term.

In addition, investors’ psychology is usually that stocks are in the red, and investors will get out as soon as the investments move back to the cost basis. However, this is one of the most common mistakes in investing, making investors hold a loser for too long, thereby missing other opportunities that could earn better returns in the meantime.
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Oil prices slid last fall into early winter last year because demand was weak, US shale production was surging, and the Saudis reacted by surging their own production which lead to price crash. Today, oil demand is at record highs, US shale production is starting to fall given consolidation, and the Saudi/OPEC production cuts working which has reduced price volatility. Now, oil fundamentals are strong and support $80 WTI. There's moderate political risk, but summer demand is coming. A price spike is possible ahead. He's bullish Canadian oil stocks which don't need the oil price to rise, at least for some stocks.

How to tell a value trap from a value stock: A trap has no catalyst to re-rate it. In a value stock, management has a successful track record, valuation, the company has a strong balance sheet, and asset quality where the company doesn't need to keep companies to add inventory.