Full episode: Market Call Tonight for Friday, February 14, 2020
Barry Schwartz, chief investment officer and portfolio manager of Baskin Wealth Management
Focus: North American large caps
In the short term, stocks go up and down with the worry of the day, but in the long run, we think there are only two things that matter — and neither starts with “Donald” or ends with “Trump.” What matters with a business, as with stocks, are the earnings it generates and the interest rate at which those profits are discounted.
Stock prices follow earnings and if earnings are rising, the stock’s price will eventually follow. In our opinion, the most successful businesses in the world are companies that are asset-light. An asset-light business doesn’t require significant ongoing capital to make a product or service. We like these companies for good reason: These are businesses that can raise the price of the product or service it sells at any time.
For the most part, the best-quality investments are in the U.S. The performance of U.S. stocks has beaten every other country’s returns for the past one year, three years, five years, 10 years, even going back thirty years. The best earnings growth in the world over the past 15 years has come from U.S. companies. This outperformance is due to the earnings growth of asset-light technology companies. We believe that investors are underpricing the potential future growth of these companies and that they have superior economics and long runways of growth.
Those earnings are worth a whole lot more when interest rates are low. If interest rates are high, you would demand a higher return for a risky investment, but if they’re low companies that generate a rising stream of earnings are worth a significant amount. That’s where we are today. We see low interest rates for many years and continued strong returns from asset-light businesses.
VISA (V NYSE)
Visa has one of the best business models we have ever seen. This company is a toll road with an immense runway of growth and inflation protection. If you are a merchant, you must accept Visa, and you must pay the toll. Chances are that going forward, any purchase that you make anywhere in the world will be done with either a Visa or Mastercard.
Visa supports nearly $9 trillion of payments a year, but there are still $18 trillion in cash and check payments in the world which will slowly shift to digital payments or online shopping. Through initiatives like Visa Direct, Visa is also investing to play a role in new streams of payments such as business-to-business, business-to-consumer and person-to-person.
BERKSHIRE HATHAWAY (BRK/B NYSE)
Has Warren Buffett lost it? Berkshire’s stock has underperformed the overall market recently and many are concerned that Buffett hasn’t been aggressive enough. The truth is that Buffett likes to acquire assets in a downturn and he will patiently wait for the right opportunity. In the meantime, Berkshire continues to gush cash. We believe the stock is way too cheap at 1.3 times its book value. There has rarely been a better entry point.
HYATT HOTELS (H NYSE)
Hyatt Hotels is an operator with a focus on luxury-end hotels. It has historically owned a significant amount of real estate and is transitioning to a capital-light franchising business by selling its hotels and re-entering into management agreements. Hyatt is using hotel sale proceeds to buy back stock and has reduced its share count by 30 per cent over the last four years. We believe shares are extremely cheap given management’s belief that the real estate is worth $120 per share today and its large hotel pipeline. There is a short-term risk related to the coronavirus in that Hyatt has a big China business.
PAST PICKS: APRIL 1, 2019
INTERTAPE POLYMER (ITP TSX)
- Then: $18.36
- Now: $16.53
- Return: -10%
- Total return: -7%
WASTE CONNECTIONS (WCN TSX)
- Then: $116.69
- Now: $137.53
- Return: 18%
- Total return: 19%
LIVE NATION (LYV NYSE)
- Then: $64.48
- Now: $74.02
- Return: 15%
- Total return: 15%
Total return average: 9%