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

Market Update:

Canada’s labour market started the year with the largest jobs gain in four months, the unemployment rate fell to 5.7 percent, adding 37,000, but wage growth cooled, suggesting the central bank is not facing pressure to cut rates. On the other hand, a minor adjustment was made to the consumer-price index (CPI) for December 2023, revising down by a tenth, to 0.2%, confirming the Fed is done raising rates. The Canadian dollar was 74.27 cents USD. The U.S. S&P500 ended the week up 1.3%, while the TSX was slightly down 0.3%.

Another week of greens and reds mixed. Energy added 1.5%, while technology and industrial staples added in the 1.3% range each and real estate gained 0.9%. Materials and consumer staples gave up 2.7% and 1.1%, respectively. Consumer discretionary edged down 0.7% while financials ended the week slightly down 0.2%. The most heavily traded shares by volume were TELUS Corporation, Enbridge and Bitfarms.
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Almost at 5,000. This is a big moment. He remembers at the start of his career, the Dow broke through 10,000 in 1998, hats on the floor and everything. It's the old story, where the Magnificent 7 or the top 10% of stocks are really contributing to most of the rally, and a lot of stocks are not participating that much.

Capital light, excellent free cashflow. Even though they were doing the heavy lifting for this rally, they were very soberly priced. Not AAPL, but META, GOOG, AMZN. 

Since the latest run over the last 6 weeks, they aren't as generously priced as in the previous 3 months, but they're not crazy. AMZN, for example, is 28% growth rate, trading at 30x, PEG ratio is a bit higher than 1, but still OK. Even names like NVDA still make sense.

The growth rate of a company compared to its PE multiple. Under 1 is desirable. Near 1 is fine. If you have the growth rate, slightly over 1 is fine, too. So a 20x multiple's OK if a company's also growing profits at 20%.

For sure. Market started out thinking there would be 6-7 cuts in 2024, and now it's down to 4-5. He thinks it will be more like 2-3.

Inflation will go down to 2%, that's the good news. But it's going to take a few years. This market is the reciprocal of what it was in October 2023. Then, people were positioned for a recession, leaning towards fixed income, under their asset allocation for equity. Now the crowd is very ebullient and looking for the next moves. 

We have a reasonable chance of some sort of selloff here, given all the optimism. It's really hard to see that big of a selloff when you have US earnings being so good, and inflation coming in line, even if rates don't come down aggressively.

All copper miners could be subject to a takeout, even some of the bigger ones like FCX. It's so time-consuming, expensive and cumbersome to build new mines, it's easier to just buy one. We need copper for the ESG revolution.

What do you do with a stock that doesn't work as soon as you buy it? If you buy it right and as part of a balanced portfolio, and it doesn't work in 3 years, it's not the end of the world. As long as you're getting your dividend, it hasn't fallen drastically, and you see a path to returning to where you bought it, keep holding. 

That should work with a name like ENB. Don't add right now, but don't have to sell either. A name like this can give you defensive qualities if markets go bust, as ENB probably won't do down that much from here.

To get a good return in a portfolio, you don't have to win on every position at all times.

Markets tend to be fairly placid or weak when it comes to what they want and need. For the last few years, it's all been rates. As a long-term investor of quality companies, he'd much rather have a strong economy with strong earnings, and let rates take care of themselves.

Good companies can navigate a variety of different scenarios. Historically speaking, rates, even where they are today, are lower than average. So the idea that the market's worried about whether a rate cut will come in March or June is completely incidental to him. He's looking for good companies, strong earnings, good revenue growth, moats to their business. All these things will lead him to good places in the long term.

Technology gets most of the headlines, and rightfully so. Another good earnings season by most companies, led by META, which has reinvented itself from the abyss and its fundamental numbers have proven that. We also got really good reports from AMZN. Though the market didn't react particularly positively, GOOG's report was solid, it's a great company.

Market weight on the Magnificent 7 is about 30%. At his firm, he has only about 15% exposure. He likes it very much, but doesn't want to overly concentrate and create undue risk for clients. The other 493 companies that aren't in the Magnificent 7 also have great value. Trading at 16-17x earnings, fabulous choice there from an industry, sector, and company standpoint.

Likes industrials. Still likes financials, though they're a quarter or two away from responding well. Lots of opportunity to look at.

Within the sector, there's really good fundamental growth and stocks are responding. Because they're somewhat cyclical, they tend to be more trading vehicles within a long-term portfolio, rather than growth stocks that you might own for multiple cycles and multiple years. You have to be on top of them and watch them. Make sure they don't grow themselves to a point where they're exposed from a valuation standpoint.

When you come across a company that you particularly like, make sure you don't just blindly buy it, and it turns out to be #3 or #4 in the industry. A tailwind can make a whole industry or sector do well. You want to buy #1. Do your peer group analysis and compare competitors to make sure you're making the best choice.

Not one unit. Different types such as digital, analog, PC cycle, phone cycle, AI applications. They'll act differently. Anything attached to AI has done extremely well.

Let's say a stock has done very well, the price is high, and you're thinking that maybe you've missed it. Price is just one element. The other inputs are equally important: company quality, earnings, earnings growth, cashflow. If fundamentals are keeping pace with the price, the price may be higher, but the stock isn't actually any more "expensive". Buy based on valuation rather than price.

What are the competitors trading at? What has this particular stock traded at in the past? Create a range of multiples. If you can buy at the lower-middle range of that valuation band, and know that the company is doing things that will allow the organic growth to accelerate, you might see the stock push through the top valuation level because the market recognizes that the company's doing something better than it has in the past.

This is a lot of information, but he wants to make sure investors aren't just price-centric. It's very important to analyze valuation and underlying fundamentals.

Market All-Time High Fears:

The fear of ‘too much risk’ and skepticism around new all-time highs is an innate human response that’s engrained into us. It is completely natural to feel worried about the potential downside risks when the market continues to roar higher and make new all-time highs, but, while this is a completely normal instinct, it is one that investors need to counter with facts and logic. Historically, when the market breaches a new all-time high, it tends to continue to make all-time highs. In fact, the number of times that we see the market mark a top and head 20%+ lower are few and far between compared to the market making a new all-time high.
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