Full episode: Market Call Tonight for Wednesday, October 17, 2018
Chris Stuchberry, portfolio manager at Wellington-Altus Private Wealth
Focus: North American large caps and global ADRs
We wrote in May that we think “sell in May and go away” was the wrong approach and we were right with regards to the U.S. stocks, but wrong when it comes to Canadian and global stocks. The latter stocks have continued to struggle and we continue to see further opportunity in the lagging stocks.
Year-to-date, we’ve reduced a couple of our U.S. winners and bought more global companies. We sold Starbucks, Loblaws and some Twilio to pay for purchases in China’s Tencent and more recently a bit of Box Inc in the U.S. Box is a leading company in cloud content management that is making inroads into artificial intelligence. It consistently grows revenue in the mid-teens to the early 20 per cent range and will become earnings break-even in the fourth quarter. Box trades at a far lower valuation than Twilio and we hope it will have a similar run.
In an unexciting update, with all the interest rate increases in 2018, we have invested capital into lowest risk government of Canada T-bills and U.S. T-Notes at yields of 1.91 per cent and 2.01 per cent. We have taken many profits over the last couple years and now that we’re running a bit of structural cash, it is nice to get a bit of a return on that capital in the risk-free world. We haven’t been able to do this for nearly five years, so this is a minor win, but we take all wins.
We sound like a broken record mentioning the fact that interest rates must move higher. Year-to-date the U.S. Federal Reserve has had three rate hikes good for 75 basis points, good to take us from 1.5 per cent to 2.25 per cent, or a 50 per cent increase. We think the other global central banks are going to have to play a big game of catch-up. The German bonds must go out six years before yields turn positive.
The German bonds are negative until out six years; we think this spread must fall quickly over the coming years, so we own European banks to take advantage.
Update: We took an additional profit in former top pick Twilio (TWLO.N) at $77.02.
ALIMENTATION COUCHE-TARD (ATDb.TO)
We’re very careful with our retail investments and generally do our best to avoid companies that we believe can be disrupted. We look at Couche-Tard and don’t think they can easily be disrupted: very few purchases at convenience stores are planned ahead and researched. Its model is to fill a void that a consumer can forget with great locations and quality stores. They have slightly higher leverage than we prefer, but are rapidly reducing debt and within a year we think they will be very well positioned on the balance sheet to grow the company via acquisitions or shareholder returns via payouts. They have a great management team and we’re confident they can weather transitions in electric vehicles versus gasoline.
BOX INC (BOX.N)
We’ve done very well investing in the software as a service investment model. Shopify, Twilio and Box all provide a software service to companies on a subscription model. Box has a strong team of developers that fortune 500 companies hire out to run their cloud content management. They’re almost EBITDA break-even and have break-even cash flow, with between 15 to 20 per cent annual revenue growth. We think it’s a great company and really like these business models.
BANCO SANTANDER (SAN.N)
We think it’s inconceivable that 2-year U.S. Treasuries yield 2.85 per cent and German 2-year bunds yield -0.55 per cent. The differential is over 3 per cent. We think European interest rates and yields across the board must go up, and when they do, these European financials will do very well. Banco Santander runs low-risk commercial and personally banking and interest income is nearly 80 per cent of all revenue. You can buy it a hair over book value, with a dividend above 5 per cent. We don’t know when rates go higher in Europe, but when they do expect a good move higher in Santander.
PAST PICKS: AUG. 22, 2018
- Then: $173.64
- Now: $159.42
- Return: -8%
- Total return: -8%
- Then: $177.85
- Now: $148.14
- Return: -17%
- Total return: -17%
ING GROEP (ING.N)
- Then: $13.92
- Now: $12.50
- Return: -10%
- Total return: -10%
Total return average: -12%
Custom managed account composites
Performance as of: Sep. 30, 2018
|S&P/TSX TOTAL RETURN||0.7%||5.1%||9.5%|
Returns are net of fees.