David Driscoll

Markets. You have to think about discount rates and where interest rates were in 2020 relative to where they are today. Back in 2020, the risk-free rate was 0%. So if you tack on a 2.5-4% discounting rate to the present value of future cashflows, you end up with very high cashflows, which is why at 0% interest rates, growth stocks did very well. Today, the risk-free rate is around 4.25-4.5% on 3-month T-bills. So if you tack on 2.5-4% there, you end up with a 7-9% discounting mechanism, which brings cashflows down and, therefore, earnings down. That's why growth stocks capitulated the most in 2022. As Fed and others continue to raise rates, they're still going to suffer. We've already seen a move from growth stocks to value stocks, which are trading at much lower multiples with higher dividend yields.

Impact of strong USD in 2023? Emerging markets, because they trade at the lowest multiple and because their currencies are down the most against the USD this year, could be the news of 2023. But only if and when the Fed stops raising interest rates, as that could cause a drop in the USD. Then you'd see EM currencies start to rise, they'd have more spending power, and it would get the economies moving in the right direction. If the S&P is trading at 22x earnings, and the EM indices only at 10x, that's where he could foresee investors moving, since that's where the value is right now. The USD rose along with interest rates, because foreign bond investors would buy US treasuries because they have the highest rates out there, and would have to convert local currencies to US dollars.

It's OK. Problem is still trading at 42x earnings, extremely rich. Price to book is 6.2x, which is very high. Price to sales also high. Payout ratio 48%, not a problem. Long-term dividend growth rate is 7%, the historical norm for public companies. Long-term compound 5-year return is 11%. At risk of PE multiple contraction due to increasing rates. He owns AOS and LNN. Yield is 1%.

Lower multiple at 18x earnings. Water purification as well as fuel-efficient water heaters. Lower price to book and price to sales. Dividend growth rate in 15% range.

Water irrigation equipment using satellite image technology, allowing farmers to move equipment to the driest parts of the land. Leads to better water usage and higher crop yields.

Chemical companies are industrials, and industrials do poorly during recessions. Shipments are down 14%, so earnings will struggle. 7x earnings. Dividend hasn't grown in last 5 years, so higher inflation wipes out your income. Yield is unattractive at 5.6%, which is only high because stock price has come down. Instead, he owns DHR and TMO.

An industrial in the life sciences. High quality company generating consistently growing free cashflows. He's always liked the life sciences area because laboratories need to be given products, and experiments continue. Covid involvement has ended. Great ROIC and margins. A good buy when it gets under 20x earnings.

An industrial in the life sciences. High quality company generating consistently growing free cashflows.

Business risk in China and Hong Kong, but the biggest part of their business is in Indonesia. Tentacles in all the EM countries in Southeast Asia. Hotels, grocery stores, car dealerships, IKEAs, Starbucks. Stock's suffered, as they show earnings in USD. He's been buying heavily. 6x earnings, 4% yield. Weaker USD in 2023 should make stock price pop.

With concept stocks like this one, his discipline is that every time it doubles, sell half. Not a buy for new accounts until the valuation gets to a more predictable level. While rates continue to rise, hard to grow earnings. Avoid tech right now, because things can get worse before they get better.

Portfolio construction. He still owns 30 stocks at a 3% weighting each. That's been his strategy for 40 years. Each stock you own thereafter does not reduce your risk at all. If one of them becomes a 6% weighting, he automatically sells half. A stock that does get to 6% has probably gone too far, too fast, and will come back down to earth or at least go sideways. If a stock makes an all-time high, chances are the next year's going to be pretty ugly, as we saw with RY, SHOP and TSLA. His #1 rule for picking companies is that if you choose one that can generate free cashflow and grow it, you have a long-term winner.

(A Top Pick Dec 24/21, Down 5%) He likes the insurance companies right now, as they have pricing power. Banks in US and Canada will struggle in the next year as interest rates rise. Loan loss provisions are already going up, job layoffs. Yield over 4%, and grows over 10% a year.

(A Top Pick Dec 24/21, Down 11%) Proxy for small business in the US. Announced 2023 revenue would come down to 7% revenue growth. The business is really good. Every 1/4 interest rate increase adds 3M in profits to earnings. Not the time to buy in a big way. Earnings and multiple contraction could easily push it below $100.

(A Top Pick Dec 24/21, Down 26%) Profits flat, as governments haven't been spending. Testing and quality control. Relatively cheap. Long runway of growth. Grows dividend over time. Strong free cashflow generator. He's buying.

Building EV charging stations. Will benefit as people start taking more trips. Added attraction is opportunity to buy food while you wait. Higher margins on private label foods. European outlets are all fully chargeable. 15x earnings, still cheap. Held its own this year. He's buying at these levels.