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

This is going to be a pick-your-spots year. You don't necessarily want to just throw your money into an index and have it passively managed. Maybe stock-picking will be back in vogue. Seeing a big rotation to value from growth. Those themes are definitely going to continue.

His team also thinks that the previous generals may not be the generals for this year or this cycle. May see a lot of capital flows into previously unloved areas.

Geopolitics are very hard to discount. Canada and the US are very linked in terms of the auto trade. Would take years for the US to no longer depend on Canadian auto parts manufacturing and trade. Could that happen in the future? Yes. Do we know how CUSMA negotiations are going to go? No.

Worst-case scenario is that if CUSMA is not renegotiated in its current form, there will most likely be a level of tariff. Well-run operators such as LNR and MG will be able to overcome it through efficiencies in production. So he's not that concerned about the geopolitics.

Has many facets to it -- pharma, biotech, equipment makers, HMOs. He owns two healthcare names right now, MRK and BMY, as well as positions in some HMOs.

Likes healthcare in general. Balance sheets are great. Has been unloved in last little while. Seeing $$ rotate back into the sector after the big scare with Trump coming in and reducing pricing. That rhetoric's died down a bit, especially with deals being made.

Huge opportunities with AI, especially with pharma. Can use it to reduce R&D, accelerate development pipelines, and streamline businesses. A lot of costs can be reduced and head straight to the bottom line.

Natural gas prices in the US have gone up. In Canada we're more land-locked, though that's getting better with LNG Canada. But we don't necessarily benefit from the high price that you see quoted on the screen. So you can't expect it to translate into the same degree of free cashflow for Canadian companies.

Investors are probably looking for more than he is. For example, he doesn't understand TSLA. He has a Tesla car, but he doesn't understand the valuation and what people are willing to pay for those pie-in-the-sky promises coming down the road. 

Some of those stocks are overvalued right now, while others like MSFT have a bit better valuation after the recent correction. The street needs to see results a lot higher than expectations to extend the rally. 

A lot of big tech will be reporting over the next 2 weeks. If we come through the next 2 weeks and the S&P 500 is breaking out to new highs, above 7000, that would be very bullish. But if we're below and starting to roll over, that would be very bearish in the short run. He wishes he knew which one it was going to be. At this time, he'd probably argue that it's going to be higher than lower.

Yes, it's always about what companies expect going forward. A name like NVDA, which doesn't report for another month, is pretty critical about the guidance going forward. 

But for some of the more speculative AI names, it's going to be about whether we're starting to see current revenues. For a name like MSFT, is the AI investment starting to pay off and is Copilot adding value that people are willing to pay for?

Some names, yes. But it's still very early in this era, only inning 2-3 of this AI revolution -- to be measured in decades. 

Similar to the internet 30 years ago, and that's now become a mature industry. Someday, AI will be in the same position. Similar to the dot-coms of the 1990s, if you can figure out which of the dot-AIs today will be around 30 years from now, then you'll be quite wealthy. For venture capital firms, for every 20 investments they make in dot-AI, probably 1-2 go public.

The productivity enhancement coming from AI (for example, in healthcare) is going to be huge. In theory, increased productivity means increased profitability. So it should really boost earnings in the coming years. It's not just the tech names, it's broadening out. 

That scope is measured in years and years. Not now, but a year from now, the impact will start to play out.

He's mentioned how he's a very nervous bull in the PM space, as everything's gone parabolic. We can't time when the end is going to be, but when it corrects it's likely to be extremely violent. Keeping up with the trend and staying invested at this part of the cycle in precious metals is going to be a challenge.

Silver miners will probably enjoy permanently higher valuations, even though you can expect a big correction after the runup. Silver could easily be cut in half from where it is in now, yet still be in a decades-long bull market. That's the risk.

You really need to understand the risks very well and the liquidity concerns. Many funds have monthly liquidity and they tell you they have it, until everybody wants their money in the same month for some reason. That's when they gate it, and you can't get your $$ out. In many cases, the loans they give out are locked up for many years and they can't give you your money back until the loans mature.

Diversification among sectors (such as residential, large businesses, small businesses, construction, litigation finance) is your best friend in reducing this liquidity risk -- 5 or more names in your portfolio. This means you won't panic when things get gated.

Position Weight for Stocks, with MSFT as an example

Everyone wants to beat the market. So you have to pick a bunch of stocks and have a higher or lower weight in those stocks. 

Fundamentally, you start with the S&P 500. How many do you want to put in your portfolio? Obviously, not all 500. Say you have 20-40 names in your portfolio. When they're going up, they need to be at a bigger weight than they are in the index in order to beat the index. When they're going down, you need to be underweight them. So you have to be somewhat active.

If you don't care about beating the index and be passive, then ETFs are a great way to invest. 

When he's on BNN investors ask him whether to own something or to buy it now. There's a checklist he uses, and he's brought it along so you can use it too. These are some of the metrics he uses to add and subtract from portfolios over time.

First question is, fundamentally, do you want to own the name at all? The example he's using on his blog this week is MSFT. Great company, and great long-term track record. But what's its current valuation relative to history? In 2023 at the peak, MSFT had a multiple of 1.7x compared to the S&P 500 multiple. On the recent selloff, it was trading ~1.15x. So compared to the last 5 years, it's relatively cheap. It's an opportunity to start to overweight MSFT. If MSFT is 5% of the index, you want more than that in your portfolio. 

Then, ask if anything has changed to fundamentally change that valuation? 

Then he looks at forward earnings and the analysts' consensus. 

Then he runs a trend channel. You can see that the stock's trend is up for the last 4 years. Ideally, you want to enter the stock when it's in the bottom half of the channel. That's where it has better relative value. 

Look at relative strength index (RSI) and when it indicates a stock is overbought or oversold. Ideally, you want to buy when it's more oversold than overbought.

Finally, see where the stock's trading statistically (the z-score). That tells you how many standard deviations higher or lower a stock is trading, relative to the valuation over its historical and long-term timeframe. 

Very recently, MSFT traded down to the bottom of the trend channel and the valuation became relatively cheap. Anytime it dips below zero on the z-score, that means it's cheap relative to its long-term trend. The upshot is that now's a good time to overweight MSFT.

Compare that to AAPL -- cheap a year ago, but no longer.

Yes, because over the last 3 years we've had a momentum market. That's where you get the rise in the Mag 7, AI, and gold stocks. But now we're getting to the point where things are starting to get a bit tired. Money's starting to move into more value-oriented names or those that have been forgotten for the last few years. 

If you look at the overall markets, the Russell 2000 small-cap index is up 8% YTD, but the S&P 500 is up 1%. Japan is #2 at 7%, the EM index is up 6%, Canada's up 4%. Then you have the laggard of Europe at 2%, the global developed market at 1.5%, and the NASDAQ up 1%.

So we're starting to see movement away from what's been working the last 3 years, there's more diversification. Investors are moving toward what's cheap and what provides good long-term valuation.

Investors should be diversified across the board, as that's the best protection against any downside. 

The other thing that investors have to consider is return on invested capital (ROIC). This brings in the law of diminishing returns. For example, you can look at the gold sub-index and see that it's up ~98%, but over 20 years it's only up 1%. It's important for people to get away from the emotions of chasing returns. Try to create a portfolio that will get you through both the good times and the bad times. This lets you stay in the game, and if markets fall 30-40% you're not going down with it.

You have to think from a logical standpoint that there are 8B-odd people in the world, but NA makes up only 550M. There's a lot going on outside Canada and North America. 

The other thing is that, last year, both the CAD and the USD fell against a basket of global currencies. A lot of international investors, including pension funds and large institutions, are investing in tech but also elsewhere in the world to shy away from USD exposure. Let's say you get a total return of 10% on a stock. But if the home currency rises 5-10%, then your total return is 20%. Compare that to investing in a US stock where the currency went down 7%, then you have a total return of 10% minus the currency drop for a total return of 3%.

Software sector has issues because it can't get the pricing it had before. AI is starting to impinge on software businesses, which will hamper ability to sell as much or for as much profit. These stocks will continue to struggle over the next couple of years until they can prove that they can provide something over and above what AI may be taking away from them. Software could go the way of the buggy whip.

Last summer his team exited their software companies completely.