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

Does not think prospect of economic "soft landing" is a guarantee. Believes from bottom up/top down perspective, not much upside left in the markets. Upcoming earnings will need to beat by a lot in order to raise markets materially higher. Multiples are already priced for strength. Going forward, markets will remain strong given the strong employment numbers. Prospect of US Government shutdown still a reality, will cause turmoil in the markets. Does not think Biden or Trump will become President. Also watching tension in Middle Easte/attacks in the Red Sea. Energy prices may go higher if large amounts of conflict.

Investing in Bonds:

Believes markets pointing towards bond buying is no longer the best strategy. Too much demand for bonds with higher rates as of late. Bond prices are already baked in. With rates expected to fall, investing in bonds won't be as lucrative. Will be better options for investors in equities. Less globalization, debt issues, geo-political risk all pointing risky economic times ahead. Inflation problem will not go away, and does not think rate cuts will help. 

Company Highlight: Shopify Inc (SHOP)

Shopify Inc (SHOP) stock was up 51% , 110% YTD and 79% over the past year. 

Shop is a leading provider of essential internet infrastructure for commerce, offering tools to start, grow, market, and manage a retail business of any size. It is particularly attractive to small businesses and occupies a nascent software niche which is growing rapidly.

On November 2nd 2023 SHOP published its quarterly results for the period ended September 30, 2023. They were spectacular: Sales at $1.7 billion were up 25.5% over the prior period; Gross profit at $901 million was up 36.1%; Net income was $718 million compared to a loss of $159 million. In the nine months ended September 30, 2023, SHOP facilitated Gross Merchandise Volume (GMV) of $160.8 billion, representing an increase of 18% from the nine months ended September 30, 2022. Monthly recurring revenue at 141 million was up 31.8%. Cash on hand stood at $1.3 billion, down $324 million, partly to acquire marketable securities.
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Bullish on outlook for markets in 2024. Lower interest rates, and strengthening economy will support stock markets. Disruptions from Covid-19 (supply chain etc.) beginning to fade. Inflation appears to be falling along with lower energy prices. Expecting P/E ratios to rise across all industries. Favoring high dividend companies like Bell and Enbridge, especially if interest rates drop. Expecting share prices to rise in blue chip dividend companies as well. 

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.