MARKET OUTLOOK:
The September fall in stocks was not caused as much by typical worries about an economic slowdown or the long-awaited end of massive bond buying (quantitative easing) from central banks, but from worries about corporate earnings, which have been the backbone of the stock market’s strength over the past year.

The upcoming third-quarter earnings reports are taking on more importance after some major industrial and consumer companies all pointed to the supply chain disruptions and the negative impact of rising material and labour costs on profit margins. 

While making short-term predictions about stock market movements is always risky, what worries us now is that investors have become accustomed to massive earnings beats in the past four quarters, and we don’t see the same level of outperformance ahead.  

Meanwhile, investors are already ‘all in’ on equities, as stock fund assets as a percentage of investments in the U.S. are at their highest level in 70 years!  However, we remain invested since the issue are supply side driven while consumer demand is strong and we still have fiscal and monetary tailwinds to support growth.  

In our funds, we favour cyclical groups such as energy, industrials, financials and autos, where we see strong earnings recoveries and much lower valuations than in the ‘growth sectors’ of the market such as technology. The S&P Growth Index is at a premium to the Value Index not seen since the end of the ‘tech bubble’ in 2000, at which point the Value Index outperformed for the following decade, albeit during a period of strong global economic growth.

TOP PICKS:

North American Construction (NOA TSX)
Last bought $18.00 Sept/21
NOA is a lesser-known name in the engineering and infrastructure space since it has been so closely associated with oil and gas in the Fort McMurray area only. But the firm has diversified by resource and geography and has been adding new contracts and raising operating profit margins.  

It has been able to do accretive acquisitions which has doubled operating income in the past four years. The stock trades at about half the cash flow multiple of industry comparables despite stronger growth.

Martinrea International (MRE TSX)
Latest purchase $12.00 – Aug/21. 
This stock, along with the entire auto industry, has been hurt by the global chip shortage and its impact on auto production. It has a focus on the ‘lightweighting’ of vehicles through greater use of aluminum parts, a key factor in meeting the growing demand for electric vehicles.  

The stock has received almost no consideration for its ownership in Nanoxplore and Voltxplore, which give it graphene and EV battery exposure. Insiders at the company have also been active buyers of the stock recently, another endorsement of the attractive valuation and growth.

Alphabet (GOOG NASD) 
Last bought US$2,400 – June/21
Although we’ve reduced tech exposure, Alphabet continues to stand out as the best combination of growth and valuation. While dominant positions in search and online advertising drive the narrative, the company is also a major player in cloud services as well as having huge value in under-monetized assets such as the Android operating system for wireless devices, YouTube and Waymo (automated driving). Even with all this potential, the stock trades at only a slight premium to the market.

PAST PICKS: December 29, 2020

  
Shaw Communications (SJR/B TSX)

• Then: $22.43
• Now: $36.87
• Return: 64%
• Total Return: 69%

CIBC (CM TSX)

• Then: $109.58
• Now: $143.14
• Return: 31%
• Total Return: 35%

Tourmaline Oil (TOU TSX)            

• Then: $16.95
• Now: $44.27
• Return: 161%
• Total Return: 170%

Total Return Average: 91%