Gordon Reid, president and CEO of Goodreid Investment Counsel

FOCUS: U.S. equities

MARKET OUTLOOK:

With the strength of the stock market recovery since last March (+96 per cent for U.S. stocks), many investors have turned their attention to when the next inevitable CRASH is destined to occur. We would like to nip that speculation in the bud. The term “crash” denotes a very sharp, very unexpected move in a market and is invariably caused by an event-driven event. The pandemic fit that bill.

Looking ahead, we certainly will not pretend to know what might trigger another event-driven recession, but we can think critically about what might prompt a more garden-variety cyclical or structural recession, and we simply don’t see the warning signs for either of these today, and accordingly can’t get on the ‘pending crash’ bandwagon, knowing as we do that economic cycles typically last 6-8 years, or more.

Cyclical recessions, as noted above, are most commonly caused by sharp interest rate hikes or inventory de-stocking, neither of which strike us as being imminent. The Federal Reserve has signalled clearly that they are in no hurry to raise interest rates from the current extraordinarily low levels. Despite current inflation rates of five per cent in the U.S., the Fed has convincingly painted a picture of inflation, which is transient, rather than entrenched. As for inventory excesses, which oftentimes prompt firms to reduce production and employment levels to trim surplus inventories, these also seem completely at odds with the current circumstances. Warehouses are clearly too empty, not too full.

Structural recessions are brought on by economic imbalances and financial bubbles. Economic imbalances are usually evidenced by overinvestment in one or more areas of the economy, as in the U.S. residential housing 15 years ago and technology and telecom equipment globally 20-25 years ago. We cannot entirely rule out the possibility that cheap money is blowing financial bubbles, but our assessment is that these bubbles, if anything, are limited to narrow niches like SPACs, cryptocurrencies and other speculative assets such that if they were to pop, they would be unlikely to have far reaching systemic or economic consequences. 

TOP PICKS:

Amazon (AMZN NASD) Latest Purchase June 2021 @ $3500

A year-long sideways move in Amazon’s shares coupled with rapidly growing revenues, earnings and cashflow allowed us to enter this position with a valuation that we can justify. A US$25 billion budget for capital spending generates outstanding growth prospects, which we project to be 30 per cent plus for the foreseeable future.

Hexcel (HXL NYSE) Latest Purchase June 2021 @ $62

Hexcel is a structural materials company, with about two-thirds of its business coming from commercial aerospace. With the decline in the order books of its major customers, Boeing and Airbus, earnings are currently challenged, but Hexcel represents a huge opportunity as the commercial aerospace business improves.

Nasdaq (NDAQ NASD) Latest Purchase June 2021 @ $169

Nasdaq has been growing rapidly on the back of an expanded offering and large volume increases. Their basic business provides trading and clearing for 3400 securities as well as market technology and data analytics.

PAST PICKS: July 23, 2020

Emcor (EME NYSE)

• Then: $64.22
• Now: $122.66
• Return: 91%
• Total Return: 92%

Morgan Stanley (MS NYSE)

• Then: $50.56
• Now: $93.53
• Return: 85%
• Total Return: 89%

Sherwin Williams (SHW NYSE)

• Then: $206.16
• Now: $278.72
• Return: 35%
• Total Return: 36%

Total Return Average: 72%

Company Website: www.goodreid.com