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

Company Highlight CGI (GIB.A):

CGI is a Canadian company that provides IT and business process services to clients worldwide. It has over 90,000 employees and operates in more than 40 countries. It is one of the largest IT services providers in the world and has a strong reputation for delivering high-quality solutions to its clients.

Over the past 10 years, its price has appreciated at a 14.8% annualized rate, with good forward analyst expectations for sales and earnings growth, and a five-year sales CAGR of 4.4%. It currently has a market cap of $24.3 billion, it has strong net profit margins of 11.4%, a free cash flow yield of 5.9%, a reasonable forward P/E of 17.9X, and has demonstrated low volatility over the years.

Growth is somewhat muted on a constant currency basis, but it continues to execute a balanced approach between growth through acquisitions and share repurchases. It has a buyback yield of 2.5% and has reduced its outstanding shares by 24% over the past 10 years through buybacks.

CGI has an impressive trend of beating earnings expectations, and its profit metrics have shown expansion over the years.
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There was a chase to year end and a bit of a Santa Claus rally. The crowd was really mispositioned for the widening chances of a soft landing, which are still about 85% according to Goldman Sachs. He's still constructive. 

There's been a big rally. Most watchers are waiting for this rally to thicken, widen out from the Magnificent 7. We've seen that in the last couple of days, with the NASDAQ struggling a little bit and the baton passing. That will continue. 

2024 is a year of tremendous uncertainty. US election coming, wars unfortunately, earnings expectations that may be a little high. People are more aggressive on the markets and looking for the Fed to lighten rates faster than will actually happen. 

Ton of opportunities in dividends, tech, industrials throughout this recovery. But he's also saying that fixed income is still very attractive, and you can enjoy it for the balanced part of your portfolio.

A base asset allocation is 70/30. In a strong bull market, where we don't see the market going down, you can get a swing where you get up to 90% equities. You could also swing the other way, going down to a 50% equity weighting.

In an environment like this, even though we're in a bull market and in the middle of a recovery, you have to have respect for the fact that bond yields are so high. In a registered account you can still get 5%+ on a GIC without any sort of headache. In non-registered accounts, you can buy coupon bonds that are very attractive from a tax perspective. 

There are still all these risks in the market and valuations aren't cheap anymore. From a risk/reward perspective, being on your asset allocation makes sense.

Who knows what this year will bring? You want to construct your portfolio with things that aren't going to lose. Companies, like POW, where it's not a question of "if", but "when". Let them be the meat of your portfolio. 

Around the edges you can have the satellites like SHOP. If you have the risk tolerance and you see them, occasionally from time to time you can add in a small position like ABXX.

Let's say you have all your assets in a non-registered account. And you wanted a 70/30 asset allocation. For the 30%, you could use GICs which attract the highest tax rate. In Ontario, if you're at the top income level, that means you're giving 54% or thereabouts to the government.

What you can do is buy coupon bonds, which were issued when interest rates were lower. We're talking investment grade like banks, municipalities, governments -- attractive pieces of paper where you're going to get your money back. So the price moved down to, say, $90, and the maturity is 2 years from now. The coupon is only about 1.2-1.5%. The yield would be the same as a GIC. But the capital appreciation from $90 to $100 gives you about the same yield as a GIC, but most of the move, about 3/4 of the return, is capital appreciation which is taxed as a capital gain.

Because of that, it works out to a lot more money in your pocket, with the same amount of risk.

Owning gold over the last 20 years has been a tough game. If you want a miner, go with the copper miners, better risk/reward, part of the next ESG evolution/revolution of where the world is going.

Canada is only 3% of the world's opportunities, so you want to be global to a large extent. Don't ignore currency. You want to be a lot in the US, but the US is quite expensive. Also depends on what type of portfolio we're talking about.

If it's a non-registered portfolio, dividend tax credit really matters, so how high the dividend is matters more. 

TSX is known for 3 sectors: materials, oil/gas, financials. This is a bit of a weakness. When they don't work, the TSX doesn't look very good. Hides the fact that there are lots of nice little industrial and other plays that are quiet, more mid-cap, and the bid/ask spreads can be quite large. They provide wonderful opportunities, and that's what he tries to pick up.

Be balanced -- 40% Canadian, maybe 50% international with a lot of that being US in your equity sleeve.

What made this rally happen? First the Fed, which signalled that it was at the top of the rate structure. Then it was OSFI saying that banks were capitalized enough, and there was a huge move from there. 

Banks change as interest rates change, including profitability. Massive move down in bonds, except for the last 2 days.

Let's take BMO as an example. Today it's trading around $130. It's had quite a move. 

Wait for a bit of a pullback, because there's lots of optimism in the market right now. Let's say you're comfortable buying at $110 or $120. You could put in a limit order for the next 6 months and just wait for that to happen, and if it hits, it hits. Or you could write a put and oblige yourself to own it at $120, get paid a nice premium over the next 6 months, and if you get put in, you get put in. You need to have the money set aside, or have a margin facility, and be ready to be put in. 

The real risk is if you do it with the wrong stocks, and you get put in and then the stock goes down. More often, the risk is that you get this nice little premium, but then the stock rallies, and you don't get filled at that low level. Your return is not as good as if you'd just bought it.

A tool to use at the right time and place.

Two days in, and he wants to throw up because it's started off so lousy. He doesn't want it to go up as it did last year, because then we'd be into absolutely silly valuations again like 2021. 2023 was a terrific year, especially for the Magnificent stocks. But they were just recovering from a terrible 2022.

It's totally uncertain what it's going to do in 2024, no one knows. Interest rates are going to come down, as is inflation, and this will probably be good for stocks. But there's going to be something thrown at us that we can't prepare for.

He's going to spend most of his time thinking about the companies he owns, how they're going to get better in good times and bad, how they're going to allocate capital, and sticking with strong management. That's how a long-term investor thinks.

It depends. The great move from 0% to where they are today was fast, but where rates are right now is normal, they're not high. BOC will reduce rates before a lot of the refinancing pain happens in 2025-26. He's not a doom and gloomer.

The stocks that are doing poorly already reflect that in their prices such as office REITs and real estate companies, have already been beaten and battered. They're not going to do better until interest rates come down and that economy starts to turn.

It's all about the spread that people can make. No question, it's now more expensive to build. But if they can get higher prices for their projects, and immigration is exploding here in Canada, you still have to be bullish on real estate in Canada and NA long term. It's just a normal cycle with a bump in the road.

When clients start with him, he likes to start with about 30-33 names, each with about a 3% weighting. He wishes he knew which stock would do the best, and then he'd allocate more to it. But he doesn't. If things go well, he lets stocks run up to about 7-8% before trimming them back. If things get smaller, and he likes them, he buys more.

Don't focus just on dividend stocks just because you're a certain demographic or you like income. Don't just focus on growth names. Have a diversified portfolio of companies that will do well in lots of different environments.

Stocks have been struggling since the start of the year. Banks had a nice runup in December, as everyone thought rates would start to come down in 2024. But rates have peaked up a bit in the last couple of days. You can't learn much from what happens from day-to-day stock moves. Better to focus on the quality of your asset.

More comfortable about banks than he was a few months ago, since central banks are going to start lowering interest rates across the globe sometime in 2024. This should take a lot of heat off the Canadian banks, though it will hurt earnings in the short term. It's better for the world economy that rates start to come down.

Canadian railroads have been the crushing outperforming sector going back many years. Better than the banks.