MARKET OUTLOOK:
Earnings season is largely complete in the U.S. and it yielded another surprisingly healthy result. The primary takeaway of Q3 earnings season was the maintenance of strong operating margins, which came in at 12.9 per cent, down only slightly from the record-setting 13.1 per cent in June of 2021. 

What this illustrates is that one way or another, corporations are maintaining profitability even in an increasingly inflationary environment. We suspect that this is mostly on the back of a very strong consumer. We have written extensively about how economic issues are rooted in supply-side issues and that demand is robust. Another profit generator is innovation, a lever that has been pulled more vigorously during the pandemic to use investments in technology to replace human capital. 

For the third quarter, earnings rose 39 per cent year-over-year, but of course that came off a very weak 2020 period. Of perhaps greater impact is that we expect 2021 corporate earnings to be 25 per cent greater than 2019 results, showing that if we bridge the chasm of an anomalous 2020, corporate America marches on. Preliminary expectations for 2022 corporate earnings show a 9 per cent increase.

Valuations remain full but strong earnings are allowing for very healthy market advances without sending valuations into bubble territory. On a forward basis the capitalization weighted S&P 500 index is trading at 21.4X EPS, above its 5-year average of 18.4X. On an equal weighted basis, valuations are a more reasonable 18X earnings.

All of this said, Goodreid expects that cost-push inflation will soon come off the boil and while there will be some stickiness to wage increases, we expect more of a step increase vs a steepening slope of rising wage pressure. Interest rates will rise but, in our opinion, in only a gradual manner. Broad market advances will slowly wane as earnings catch up, leading to lower valuations, but there will likely be many pockets of opportunity with sectors and industries to find strong growth.


TOP PICKS:

Amazon (AMZN NASD)
Latest Purchase Nov 2021 @ $3,583
The most recent earnings report for AMZN illustrated the dramatic economic effects of the pandemic. Ecommerce trends cooled somewhat as the stay-at-home influence pulled demand forward. At the same time Amazon’s cloud offering is on fire, growing very smartly. New CEO Andy Jassy is picking up where founder Bezos left off, making bigger investments in fulfillment infrastructure to satisfy future demand. This formula has been a winner and we expect much higher prices in the future.

Emcor Group Inc (EME NYSE)
Latest Purchase Aug 2021 @ $118
Emcor is a facilities service company, performing mechanical, electrical and construction functions. Positives include a strong balance sheet, a growing backlog, domestic focus (95 per cent of revenue is from U.S.), and a growing need for large domestic infrastructure projects. The stock has been a big winner for Goodreid clients but at 18x 2022 expected earnings, EME continues to represent good value.

Regal Rexnord Corp (RRX NYSE)
Latest Purchase Aug 2021 @ $151
RRX is a manufacturer of motors, generators, transmissions, and other mechanical and electrical products. A recent takeover of Rexnord’s Motion Control business yielded a healthy $8/share special dividend and a bump in the P/E multiple. At 17x 2022 estimated earnings this issue represents a stable industrial to tuck away in a portfolio.

 
PAST PICKS: December 16, 2020

General Motors (GM NYSE) 

• Then: $41.42
• Now: $64.78
• Return: 56% 
• Total Return: 56%

Morgan Stanley (MS NYSE) 

• Then: $64.23
• Now: $97.70
• Return: 52%
• Total Return: 55%

TRI Pointe Group (TPH NYSE)

• Then: $17.09
• Now: $25.88
• Return: 51%
• Total Return: 51%

Total Return Average: 54%