David Burrows' Market Outlook
David Burrows, president and chief investment strategist, Barometer Capital Management
FOCUS: North American large cap stocks
Despite widespread expectations by investors and leading investment banks for a 10-20 per cent market correction, the Barometer team does not believe the conditions are in place to support this view. Regarding seasonality, while September and October are often difficult, it is often due to reduced earnings expectations as we enter Q4…this year estimates have continued to rise.
Another common belief is that after such a strong 500+ day rally off the lows of 2020 that the market is due. Historically speaking, very strong 500+ day rallies off significant lows have not ended with sharp deep corrections but rather shallow more time based corrections. This is something that has been going on for months under the surface with the average S&P 500 company down 12.5 per cent and average Nasdaq 100 stock down 13.4 per cent as of Sept 20.
Finally, the Barometer Team believes that market signalling says investors are beginning to look beyond supply constrained slowdown as breadth models have held up through the market wobble and offensive sectors have been improving vs. defensive sectors for six weeks. These comparisons include Semis vs. Software, Discretionary vs. Staples and Transports vs. Utilities
Barometer believes that given these points, as we move into Q4 we are likely to see equity markets surprise to the upside on short covering and rebuilding of investor risk positions.
SIVB growth is still vastly outpacing peers with eight per cent loan growth in Q2 2021. They continue to expand product offerings in a mindful way by entering private and investment banking and they are recognizing big gains from warrant holdings, continuing to benefit from a healthy environment for VC and PE backed companies.
During Q2: Had loan growth of eight per cent – high single digit loan growth is really strong, bulge brackets have flat loan growth. Client funds in Asset management grew 18 per cent. NII grew 11 per cent (material for them because they are primarily a corporate bank). Fee income grew by eight per cent. When lending to early stage companies, they take warrants. In H1 2021 SIVB booked $700mn of warrant and investment gains so this strategy is working well.
LightSpeed is well positioned to show meaningful growth in both the short-term and long-term. In the short-term, LSPD will be a natural beneficiary of the restaurant, retail, and hospitality recovery as more restrictions are lifted, as well as their activity in M&A, to which they’ve had a strong track record in.
Over the longer-term, LSPD is poised to continue to be the highest organic growth story in Canada given their push to accelerate the adoption of payments. Management recently launched their solution in Europe, and saw similar penetration levels as North America almost immediately, and they reported, globally, that ~60-70 per cent of new merchants are adopting payments, showing continued acceleration from previous quarters.
As of last quarter, ~10 per cent of gross transaction value was process by LightSpeed Payments, management anticipates reaching 50 per cent penetration within the foreseeable future. Looking at current consensus numbers, a 50 per cent penetration rate would equate to an additional $1.6B (FY23) to $2.4B (FY25) in revenue, compared to Fiscal 2021 revenue of $221M and current 2022 consensus of $530M. The market would pay a peer-leading multiple for organic growth of that scale
After the close yesterday, Tourmaline provided a positive business update where they raised the regular quarterly dividend by one cent to $.18 per share. The company also announced a special dividend of $0.75 per share that will be payable on Oct. 7. The company now anticipates generating $1.6B of free cash flow in 2021. Tourmaline also provided strong preliminary 2022 guidance which calls for $2.5B in FCF on strip pricing.
Management highlighted the company intends to return the vast majority of FCF back to shareholders on a go-forward basis via regular modest and sustainable base dividend increases, special dividends when appropriate and tactical share buybacks.
We continue to see a strong macro backdrop for gas pricing and TOU will continue to generate strong FCF with an emphasis on returning capital to shareholders.
TOU’s partnership with Cheniere is also a strong catalyst for the story as it opens up the potential for TOU to gain exposure to stronger international gas pricing. Management plans on executing two or three more similar partnerships to the Cheniere partnership which would further strengthen the company’s free cash flow profile.
PAST PICKS: July 27, 2020
CP Rail (CP TSX)
- Then: $74.00
- Now: $82.77
- Return: 12%
- Total Return: 13%
Home Depot (HD NYSE)
- Then: $267.42
- Now: $337.25
- Return: 26%
- Total Return: 29%
Rio Tinto (RIO NYSE)
- Then: $62.57
- Now: $67.48
- Return: 8%
- Total Return: 26%
Total Return Average: 23%