Independent Insight
“We Have 25% Cash and Have Hedged 25-30% of Our Portfolio.”
More from the leadership team at Davis Rea Investment Counsel, in Part Two of our latest conversation. This time, John O’Connell and Don Ritchie provide a glimpse into how they’re managing through the current market environment by holding more cash than usual and, to avoid triggering capital gains, putting on some hedging strategies. Other topics include hedge fund activity, the rising odds of a slowdown, and why Blackstone’s Momentum Fund may be late to the party by buying technology stocks.
“The Glass is Half-Full for the Companies We Own.”
Glass half-full, glass half-empty.
Those are generally the two most prominent types of investors.
But who has done the work, assessed the data and made informed decisions about the companies they’ve invested in?
And who is jumping from headline to headline and/or on the lookout for views that will confirm their bias, either positive or negative.
The leaders of Davis Rea Investment Counsel are in the former camp and see the glasses of the companies they own for their clients and themselves as half-full.
They’ve been more optimistic than many and have been mostly right with the Davis Rea Equity Fund higher year-to-date by more than 17%, as of this writing.
John O’Connell and Don Ritchie believe the S&P 500 is more likely to visit the 5,000 level before 4,000.
In Part One of our conversation, find out about:
– The factors that give them a positive yet cautious view for their stocks…
– A six-point checklist of the traits their companies must possess…
– Two stocks that have performed well…
– And one they’re looking at that is geared toward consumer spending.
Why Economic and Earnings Recessions May Already Be Over
Germany this week technically fell into recession with two consecutive quarters of GDP contraction. It’s been the consensus for a long while that the U.S. will eventually do the same. After all, most of the economic data, with the exception of resilient employment numbers, indicates that will be the case. Or does it? The major stock indices continue to rise and we haven’t seen a flight to the safety of government bonds. Is it possible that economic growth and corporate earnings have already troughed and that the stock market has it right in front running a pause on interest rate hikes by the U.S. Federal Reserve and eventual rate cuts? That forms part of the argument in a report from a macroeconomic strategy team. We present the highlights here, including some intriguing charts.
Latest Stories
Best Stock Ideas for 2023 From Our All-Star Roster
Time once again for a list of compelling stock ideas for the new year courtesy of our all-star roster of eight money managers, analysts and investment newsletter writers. From real estate expert Dennis Mitchell doubling down on a large cap stock to Davis Rea Investment Analyst Matthew Aspro’s favourite U.S. bank to market-beating contrarian Benj Gallander, who won last year’s stock picking challenge with a gain of 40 per cent. Large caps to small, dividend payers to growth companies and turnaround stories, we’ve assembled an eclectic array of top stock picks for you to consider to freshen up your portfolio.
Meta’s Big Plan to Grow WhatsApp
Do you use Meta’s messaging service WhatsApp? If your answer is no, that’s not uncommon for people who live in Canada and the United States. The messaging app, which Facebook (now Meta) bought nine years ago for $19 billion, is much more popular in Europe, South America and Asia with more than two billion users worldwide. (See chart below). My daughter lives in the UK and WhatsApp has been our main form of communication for several years now. What’s interesting is that WhatsApp is set to become a much bigger driver of Meta’s revenue and earnings because the company is converting it to a “super app” capable of payments and transactions. Super apps such as WeChat are big in Asia and Meta wants in on the opportunity. Here’s the latest on Meta’s plans for WhatsApp.
Record Number of Canadians Restructuring Their Debts
How have higher interest rates affected Canadians? The Bank of Canada’s key rate has risen “quickly and forcefully”, as the central bank puts it, to 4.5% from 0.25% in about 15 months. A definitive answer came this week from the Office of the Superintendent of Bankruptcy Canada which showed a record number of Canadians trying to restructure their debts.
Spring Market Update
We got calm and sober insight this week into a myriad of factors affecting financial markets. That came courtesy of the management brain trust of Davis Rea Investment Counsel during the company’s live Quarterly Call. John O’Connell, Chairman, CEO & CIO, and Don Ritchie, President, fielded my questions and delved into an array of topics including whether stock investors are complacent at the moment, whether the regional banking issues are contained, interest rates, the glory of pricing power at PepsiCo and McDonald’s, Meta’s comeback, comparatively sluggish growth at Amazon, commercial real estate problems, and whether AI is being overhyped and investors are getting sucked in. Grab a beverage of your choice and enjoy this conversation.
How Two “Remarkable” Companies Became 100-Bagger Stocks
One of the main investing principles at Davis Rea Investment Counsel is to hold great businesses for the long-term. No doubt John O’Connell, Chair, CEO & CIO, and Don Ritchie, President, will be driving that point home in various ways during our live show this Monday at 11am EST. That got us to thinking about Chris Mayer, Co-Founder & Portfolio Manager of Woodlock House Family Capital, and author of 100-Baggers: Stocks That Return 100-to-1 and How to Find Them. Long time subscribers will recall we interviewed Chris two years ago (see the link below.) Mayer also writes a blog and here we feature excerpts of some of his latest investment musings. The first part discusses Constellation Software, the Canadian growth by acquisition software company, which Mayer owns, and which has hugely rewarded shareholders over the years (see chart below). In the next part, Mayer focuses on a case study of Nvidia, another 100-bagger (see chart below), and marvels at a few things that make Nvidia’s accomplishments remarkable.
“A Heightened Sense of Risk.”
Howard Marks became a billionaire in large part by specializing in distressed debt. The Co-Founder and Co-Chairman of Oaktree Asset Management (since 2019 majority-owned by Brookfield Asset Management) has also been fond for years of dispensing investment advice through his memos. Warren Buffett has said he reads Marks’ memos straight away when they are released. We have featured excerpts from these memos from time to time and this is another one of those times because his new memo is entitled Lessons from Silicon Valley Bank. We have zeroed in on the conclusion of Marks’ latest musings because it deals with the worries surrounding commercial real estate. Is the sector a slow motion train wreck or are the problems manageable? Keep reading to get insights on the topic from one of the market’s most experienced and deepest thinkers and for a link to the full memo from Marks.
Why Brookfield & Big Banks “Look Very Interesting.”
Brookfield Asset Management and the big U.S. banks look very interesting. Amid bank earnings season and simmering issues in commercial real estate, John O”Connell and Don Ritchie are busy analyzing various companies and their respective stocks. That’s because a) that’s what they do for a living and b) the management leaders of Davis Rea Investment Counsel know from experience that the latest disruptions in the stock market have presented a lot of investment opportunities at potentially attractive prices. In our ongoing conversation, other topics we delve into include why there will be more cracks in commercial real estate as pension funds, private equity and other investors will eventually have to value their assets at more realistic market levels. We discuss how some retail investors have been sold real estate products that are not suitable for them, and revisit the so-called tech safety trade and whether it can withstand economic and earnings reality.
“We Have the Highest Cash Balance We’ve Ever Had.”
Things are moving more quickly than usual in financial markets these days. The mini-banking crisis in the U.S. combined with uncertainty about the economy, interest rates, inflation, corporate earnings and a myriad of other factors requires calm and reasoned thinking to determine what investors should do, if anything. One thing John O’Connell has been doing for investors in the Davis Rea Equity Fund, and for clients with segregated accounts, is raising cash. The Chairman, CEO & CIO of Davis Rea Investment Counsel wants to have firepower at the ready when it’s time to pull the trigger on stocks that are trading at what appear to be very reasonable valuations. Do banks fit that bill yet? Is Brookfield Asset Management a screaming long-term buy here as the stock gets punished for the company’s exposure to commercial real estate? These are among the questions O’Connell and colleague Don Ritchie, President of Davis Rea, are mulling daily. Their experience tells them there are opportunities in the market. The question is when to deploy the record amount of cash they’ve built up. They told themselves during previous market downturns to have more cash on hand the next time a bear market reared its head. Keep reading and watch the video for answers to these questions during a thoughtful and informative conversation with a couple of pros about how to navigate this challenging environment.
Exuberant Investor Behaviour & Managing Risk
Part three of our conversation with John O’Connell and Don Ritchie of Davis Rea Investment Counsel. As the Mother of All Bubbles continues to unwind, investor behaviour in certain parts of the market remains curiously exuberant. As if the bailouts of U.S. regional banks, forced rescue of Credit Suisse and nearly $1 trillion worth of emergency funding U.S. financials have accessed the last few weeks at the U.S. Federal Reserve’s discount window and new funding program are all in the rear view and we’re good to go back into a bull market. O’Connell and Ritchie give their views on this behaviour, how they’re managing risk as algorithms and high-frequency trading exacerbate volatility and stresses in the stock market, why it’s easier to make money now, and discuss a few signs that indicate portfolio returns will be high single digits after the Fed first cuts its key lending rate.
Is the “Tech Safety Trade” a False Narrative?
Part two of our conversation with John O’Connell and Don Ritchie of Davis Rea Investment Counsel. A lot of investors have been piling into MAGMA stocks amid the simmering banking crisis in the U.S. on the idea that Microsoft, Apple, Google, Meta and Amazon are safe to hide out in while the economy and profits slow. Maybe. But if the economy is heading into a recession and profits follow, are these investors merely herding at the top of a sinking ship that’s not fully under water yet. Is Microsoft, for example, immune to having to report the reality of revenue and earnings that are slowing from much higher levels last year? The upcoming earnings season will go a long way in finding out. O’Connell and Ritchie offer their views and also discuss their expectations for regional banks, why the current turmoil is not like 2008, and which regional bank in particular should be a huge winner from consolidation in the sector and the one Canadian bank that should buy it.
Davis Rea CEO & President Talk Banking Turmoil, Recession Probabilities & Putting Money to Work
We sat down this week with John O’Connell and Don Ritchie to gets their views on a number of topics against the backdrop of the banking storm and volatility in financial markets. O’Connell, Chairman, CEO & CIO of Davis Rea Investment Counsel, and Ritchie, newly-appointed President at the investment management firm and a veteran of Canada’s big bank sector, discuss risks and concerns in the banking industry, the possibility of future credit events, recession probabilities, whether it’s a good time for long-term investors to put money to work, and much more. This is part one of a three-part discussion.
Yardeni & Rosenberg on Banking Storm
Ed Yardeni and David Rosenberg are two of the most respected and widely followed strategists out there. Yardeni, President of Yardeni Research, and Rosenberg, founder of Rosenberg Research & Associates, provide subscription-based research and their data-driven views are often utilized by money managers as point, counterpoint inputs to each other to give them a balance of information and opinion in order to help make their investment decisions. Generally speaking, Yardeni tends to have relatively optimistic impressions of the economy and financial markets while Rosenberg sometimes jokes about the perception of him as a perma-bear. Amid the bank-induced turmoil, and to get a deeper understanding of what is transpiring in the economy, credit conditions and financial markets, we have brief excerpts from some of Messrs. Yardeni and Rosenberg’s writings from this week. One from Yardeni’s Quick Takes and one from a Rosenberg Financial Post article.
What’s Causing the Largest Moves on Record for Safe Haven Assets?
Risk happens slowly then all at once. That axiom was in evidence this week across financial asset classes, which saw some of their largest moves on record. That as Silicon Valley Bank, Signature Bank and Credit Suisse all needed to be rescued and the U.S. Federal Reserve doled out more money this week to financial institutions at its so-called discount window than in 2008 – $165 billion vs. $111 billion. This long-time tracker of fund flows at the Global Markets Division of Goldman Sachs says he has been “shocked” by the magnitude off some of the moves. Here is one reason it is happening.
Why Dangerous Assumptions Are Embedded in “Cheap” Stocks
Based on valuation, this stock is “cheap.” We are sure you have heard that more than once from a portfolio manager, analyst or other type of market player. But what if their assumptions for economic growth and earnings are incorrect from the start? Then that valuation considered “cheap” is immaterial and the stock becomes a trap. There is a distinct possibility many stocks that appear to have reasonable price-to-earnings valuations right now are a risky bet based on overly optimistic profit margin estimates. That’s according to this former hedge fund manager and founder of an investment research firm.
Explaining the Inverted Yield Curve & Why It Matters
So, the yield curve is inverted. What does that mean? Well, going back to the 1950s, it has a perfect track record of predicting recessions (except for one time in the 1960s), technically two consecutive quarters of negative growth. The yield on the U.S. Two-Year Treasury Note (some use the U.S. Three-Month Treasury Bill) has been above the yield on the U.S. 10-year Treasury Note for about nine months. The short end of the curve, the two-year, is tracking short-term interest rates, and the longer-end, the 10-year, is generally reflecting expectations for economic growth. The mainstream media caught up to the story this week because the yield curve inverted the most since the recession of 1981 (10-year below the two-year by 110 basis points, as of this writing). Keep reading for more on the inverted yield curve and why it matters to your portfolio…
Five Reasons These Three Companies Will Benefit from ChatGPT
It is not surprising the CEO of OpenAI is enthusiastic about his company’s language processing tool, or artificial intelligence chatbot, ChatGPT. But some of Sam Altman’s comments in a highly anticipated fireside chat smacked of hyperbole. He asserted that AI is ‘the next platform’ for explosive innovation, economic empowerment, and value creation. Altman also claims the AI tech revolution will be bigger than the Industrial revolution or any prior tech revolutions, with potential to create ‘unimaginable economic growth and prosperity’. He may eventually be right but we reserve the right to be at least a little skeptical of that type of proselytizing. Having said that, here are five points that Altman hit on that stood out for analysts from Morgan Stanley Research.
Five Under-Appreciated Catalysts May Drive This Tech Giant Higher by 50%+
Already the largest technology stock in the world with a market value of nearly $2.4 trillion, Apple features five under-appreciated catalysts that could send the stock higher by more than 50 per cent over the long-term. That’s according to analysts at Morgan Stanley, who have conducted one of their regular deep dives on the company. Find out how this innovative, heavily-owned favourite can can get even bigger.
11 Stocks Benefitting from AI & the Ones to Avoid
Like it or not, artificial intelligence is part of our lives and is only going to increase in use across multiple industries in the coming years. So it makes sense to learn as much as we can about AI and too try to discern the best ways in which to invest in this massive trend and be aware of the types of companies that may be left behind. We have culled the hi-lights from an exhaustive research report from Morgan Stanley in which they identify 11 companies that are beneficiaries of AI. the research team says their stocks could have a nearly 40 per cent extra upside in the 12 months across the group. Morgan Stanley also isolates 14 companies that may be challenged in the face of AI innovation.
How Rich Companies Get Richer When the Going Gets Tough
Rich Companies Get Richer When Things Get Tough. Sometimes it is helpful to think of companies like teams competing against each other. There are big, strong teams and there are wannabes. Recessions are viewed as bad by investors because profitability is impaired. Investors become pessimistic about the future. The question investors need to answer is how long profitability will be impaired, and when things improve, will profitability recover to past levels of growth or has something material changed. It has always been a good time to buy when pessimism is high, or investors are worried about profitability.
Aggressively Investing to Grow & Protect the Moat
Much has been made of the big layoffs happening in the big mega-cap companies. Some believe that these companies hired too much or built too much during the pandemic. It’s an interesting criticism when you consider how much these companies supported the whole world during the pandemic and in the process had explosive growth. We think the point often missed is that you don’t become successful, and you don’t win big, if you don’t take some risk.
Top Five Ranked Warren Buffett Stocks
Warren Buffett doesn’t lack for interest from the general public and media. Hundreds of books, for example, have been written about the multi-billionaire investing legend from Omaha. Still sharp at 92, along with his fellow nonagenarian colleague, Charlie Munger, a sprightly 99, Buffett and his favourite investments are still followed closely. That’s why we were interested when we came across a ranking of Buffett’s top 47 stock holdings at Berkshire Hathaway, the company Buffett has been running since 1965, which he transformed from a failing textile company into an insurance and investment colossus. Naturally, 47 is an unwieldy amount so we have narrowed it down to the top five.