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Market. Regarding the sell-off in the FAANG stocks, he said that it is normal to see a really big selloff when a rapid-growing, high-multiple company shows any kind of weakness, such as earnings or growth not quite up to expectations. The companies that continue to produce will inevitably have slower growth at some point and will gradually look more like utilities. With specific regard to the selloff in Facebook and Twitter, he noted that the problem is not just a one-off reduction in users as the companies shut down bots. It is also a user shift. Younger people are shifting away from Facebook. He also thinks that the metrics involving the value of advertising done through Facebook are soft. This creates a high level of risk going forward. Generally, he thinks that there is still an upward trend in US stocks. The US economy is strong, interest rates are rising, the value of the currency is rising and this is leading toward better opportunities elsewhere in the world. Emerging markets, Europe, Canada and Australia are all cheap if you are buying with US dollars. The short-term trading gains are in the US, but the longer-term investments are outside of the US.
On economic status. He does not expect a recession in the near future. He thinks a recession will be telegraphed well in advance. He does expect a correction and notes that the S&P, excluding the FAANG stocks, has already been trading sideways to down. If the FAANG stocks were to give back 20%, the US would already be in a bear market. Outside of the US, many companies have sold off. He expects to see a little more downside in Asian companies, Europe will trade sideways, and the US will give up value in the FAANG stocks. Rather than rotating into cash, he thinks there are companies that are cheap, such as commodities and oil.
Tata Motors sold off dramatically after Trump’s anti-foreigner rhetoric started. So did Subaru. These companies are trading at very attractive levels. He’s not a fan of the auto sector and so he doesn’t own it, but he sees a potential trade here. Tata sells one of the cheapest cars and has a huge addressable market. He would like to see Tata go a little lower before buying it.
Comparing this to Salesforce.Com (CRM-N). Both of these companies are attractive because their business (electronic customer relationship management) brings large, recurring revenue. However, he struggles with the valuation of both companies. They are too rich for his clients. In the context of concerns that tech’s valuation might be too far extended, he thinks it would be wise to step back from this one. At this time, if he was buying a tech stock, he would prefer one that showed more potential for structural growth. He gave IBM as an example of a tech company that is currently “on sale”.
After the global financial crisis, all banks under-earned because interest rates came down so far. As interest rates come back up, financials are starting to approach their historical earnings range. Banks in the US and Canada are leaders in this pack. European banks are a bit behind. 40% of HSBC’s business is in Europe, which has yet to see higher interest rates. 40% is in Hong Kong, which is the booking point for Asian business. Because the Hong Kong dollar is pegged to the US dollar, this part of HSBC’s business is pegged to the US interest rate cycle. Higher interest rates in the US are good for HSBC in Asia. He thinks the global banks are undervalued, and are good buys, especially for people with a multi-year horizon. This is not a good trade for 3-to-6 months but he thinks it will do well for someone willing to hold it for 3-to-5 years.
This is an industrial enzymes company, spun out of Novo Nordisk. It has been a solid performer with a good balance sheet. The problem is that there are rarely good buying opportunities. It trades at a high earnings multiple and rarely misses earnings estimates, for example. This would be a good company to buy in a recession.
This is a great company but its business has evolved. Its penetration in developed markets is very high and so its sales are replacement cycle. In less-developed markets, the phone is so expensive that it is difficult to increase penetration. The company has a lot of cash, but it is not using it. In addition, the company has grown so quickly over the last few years that continuing the momentum will be a challenge. For someone who has owned this company for a while, he would recommend taking the cost basis off the table. He doesn’t expect this to have a huge correction, which is what he expects for Twitter, but he does expect Apple to become range-bound.
Today’s paradigm is that growth is good and value is bad. Big dividend payers like BCE are out of favour and telecoms are down significantly globally. However, telecom companies tend to grow with the economy. If Canadian GDP grows 10%, the telecom market will grow 10% along with it. BCE provides a fairly safe income stream and at its current level, he would add more.
(A Top Pick August 11, 2017. Up 1%). This is still a core holding. They have made some smart acquisitions in the last year. At this level, he thinks it is attractive. They are increasing their dividend, which makes the rise in interest rates less of a challenge for the price of this stock than for the price of other interest-sensitive stocks that are not growing their dividends. He expects more of the baby boomers to buy stocks like this, to get stable income with a little bit of growth.
(A Top Pick August 11, 2017. Down 45%). At its current price, he thinks this is a cheap story. Aviation has worked well for GE; energy has not. With the re-industrialization of the US, GE is likely to do better. Higher interest rates will work for GE Capital. The chart is not pretty but when you buy a marquee capital goods company, they tend to recover and the dividends come back.
(A Top Pick August 11, 2017. Down 14%). This is a funds-flow story. Earnings this year grew 20% but they made some major acquisitions. There is nothing wrong with the fundamentals of this company. The balance sheet is very strong and they can continue to do acquisitions. This is one of his core holdings and he expects it to do well in the future. Over the long term, this stock has done well and the dividend has increased year over year. He sees its current price as a buying opportunity.
Buffett has bought many private companies at good prices and they have performed well over time. Recently, the stock has underperformed. He is running into the law of large numbers: when a company gets very large, it is hard to continue to grow at the same rate. The company’s management is evolving, but what will happen to the share price when Buffett dies?
This company lost its identity as it evolved. Was it primarily a drug company or a marketer of generics? Its price dropped substantially after its main drug came off patent. Since then, the CEO left and the Board has reorganized. However, Teva still has a lot of debt. The debt load was moderate, but earnings have fallen so much that the debt has become relatively much more important, making this a risky investment. 16. 3M (MMM-N)(Doesn’t own)(Buy on weakness). This company did very well when value stocks were in favor, and has traded down. It is modestly priced compared to its historical levels, not cheap. This would be a good company to buy at a discount and hold for a long time.
