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

He's been looking at bonds vs. stocks. What is the long-term total return as opposed to what's going to happen next month or quarter? He's really not optimistic on the bond market. He can't see making money at a 4.2% 10-year treasury yield, with loss potentials coming in.

Second factor is how do you actually control risk in a portfolio? He defines risk as not having what you expect when you need it. Geopolitical concerns are high, and inflation risks haven't disappeared. He wants to balance his portfolio with things that can do well in that type of environment.

Gold is a major component of his portfolio, at a roughly 10% weight. He has gold bullion through an ETF, royalty companies, operating companies, along with a holding in Sprott (an asset manager tied to the sector). He's covered the whole waterfront. What he's looking for is income from those names, as income can get you all kinds of things. Ongoing dividends, and growing dividends are even better.

He looks at oil and traditional metal stocks as ways to participate to protect your assets against a major global currency upset. He doesn't know what that will look like, but it could happen. USD could start to weaken. We've seen the influence on markets of the carriage trade unwinding in Japan over the last few days.

So he's diversified. He finds growth in the US such as industrials and consumer stocks. One of his areas of focus has been the natural gas transition. For example, everyone's realizing that having a Generac generator is a good thing when the power goes out.

The mega-caps have done really well because they've done really well. Earnings have been growing. Whereas the rest of the market, the other 493, doesn't see much earnings growth. The Russell 2000, also, doesn't see much earnings growth and tend to have poor balance sheets.

The thought is that when the Fed starts cutting interest rates, the balance sheets of highly levered companies will fare better, the economy will do better, it's all good, let's go. Rotations happen, money flows in and money flows out. But when you're looking at 35% of the market sitting in these mega-cap stocks, it doesn't take much to move an individual stock or even the Russell 2000. 

So if you're going to play this, the best way to do it is to look for individual names that are good value and have a good balance sheet that will win for 2 reasons. One is that their fundamentals are good, so it's a good investment. Second, because money flow will go out of the Mag 7 fund and into the Russell 2000 fund, and the pure power of money moving in will take the stock higher.

If you need the money in 2 years then, frankly, the stock market is not where you should be. Remember, risk is not having what you need when you expect it. You don't need the surprise.

Buy a 2-year GIC, earn your 5%. You'll have, with 100% certainty, the money you need in 2 years.

Believes small & mid cap stocks are outperforming due to lag the past few years (sector rotation). Lots of opportunity in energy, industrial and other sectors of the market as well. Screening for opportunities will generate returns during small caps in both slow and strong markets (just need to know where to look). Small cap M&A trends will continue as valuations remain low (although they are getting better). Would not recommend buying stock based on takeout speculation, would rather ~20% growth that will re-rate the stock price eventually. 

That's right. Important to take stock that we've had a very strong year so far. So profit-taking from time to time is natural.

If we weren't talking about all the great things in AI, there are some other negatives bubbling up under the surface. Weaker economic data, headwinds with the consumer and not just those at the low end; high-end consumer is seeing headwinds as well. We're seeing those crosscurrents play out more directly in a quieter earnings season where profit-taking is taking place.

Quality, dividend-growth investing is the foundation of what he does. He keeps an open mind when it comes to companies, whether small or large. Different companies take different journeys.

If you're a growth firm, eventually you'll be on your way to being a dividend aristocrat. At the end of your life on your journey, you'll be more of a value stock on the way down as you reach maturity. It's all about the life cycle of the business, and he likes to stay in the camp of quality with dividend growth.

That's what we've seen, especially with politics. He's cautious to say that this is one of the few areas where politics has come into play in the markets. We've seen more of a value rotation, away from Mag 7, and a lot more into the dividend growers and quality-focused companies.

The reason for that is because we're seeing some questions around AI and the ability to monetize, as well as high valuations. Investors are rotating into more certain companies like utilities and staples.

We do. And where we have that especially is in consumer staples. Think about the Canadian grocers and Canadian utilties. He always differentiates between IPPs (independent power producers) and the regulated utilities.

By utilities, he means FTS, EMA and H. That's quality, defense dividend growth in the Canadian context. He doesn't mean the other IPPs.

You wouldn't really find a lot of mining or energy stocks in his portfolio. Very few. For example, AEM is the only gold stock he owns. It has a safe jurisdiction, safe netbacks, committed to returning capital. All that's hard to find in commodity land, where animal spirits seem to run high.

As a general rule when investing in commodities, focus on the bottom of the cash-cost car. So in energy, where you want to begin is with the highest margins and the last one to go bankrupt.

It depends where you go. If you're thinking the ENB's or CNQ's of the world, he agrees. If you down to the intermediates and the juniors, that's where those animal spirits tend to come back as well. 

The core thing when it comes to oil is that, at the end of the day, it's really an OPEC+ decision. We live at the mercy of OPEC+ and what they want to do with their supply.

The rate cut in Canada has flowed through into a slightly higher equity multiple. But Canadian telcos are indebted, so their leverage levels are not low and they do have to make some non-core assets sales. 

But the main point is that the marginal cost to get a new subscriber is nearly zero. This potentially makes for a very competitive environment no matter where you go. So he's more cautious, because every extra subscriber that comes in the door is that much more problematic, if everyone else is fighting for them.

You can break it down into the high-growth, momentum stocks (aka "the Magnificent 7 and then some"). What we've seen there are questions around the profitability of AI. It's also important to say that summer is here and liquidity is lower, so stock moves tend to get more pronounced. As a whole, it's not a great environment to be missing on earnings.

Two main reasons why tech stocks started to see more weakness. First, more export controls to China. Second, GOOG saying they were going to invest but don't see that clear a path to the killer app that will make AI useful for the masses.

Absolutely. And this has been the characteristic and hallmark of every single technology adoption cycle. The dark fibre era of the early 2000s became the lit fibre era, because all that technology in the ground ultimately got used.

But investors are focused on the quarterly sequential beats for NVDA, and how that flows downstream. One stat that many might not know is GOOG spends more as a percentage of its sales today on hard, capital expenditures than GE did in its heyday of the industrial boom. These companies are way more analog in their investments than most people realize.

If you're a long-short fund, which is very popular in the US, you are long NVDA and short IBM. So if you're selling your NVDA to flatten out your exposure as a hedge fund, you're buying back the IBM that you were short. So that's a lot of the technical momentum that we've been seeing. NVDA's at the top of the list for hedge funds.