Sep 23, 2019
Rob McConnachie's Top Picks: Sept. 23, 2019
Full episode: Market Call for Monday, September 23, 2019
Rob McConnachie, managing director at Cypress Capital Management
Focus: Canadian large caps
Firstly, I agree that you can’t time the markets. However, I think investors should expect lower returns over the next decade, especially from the U.S. market, based simply on the fact that returns from current valuation levels have historically been quite poor. The Shiller cyclically adjusted price-earnings (CAPE) ratio and market cap to GDP ratios are very high right now. These measures have higher (negative) correlations with market returns than a simple price-to-earnings ratio.
I don’t see the Canadian market value as being as stretched, and we have many oligopolies in Canada that are protected from competition (banks, telcos).
HOW WE CHOOSE STOCKS
At Cypress Capital, we start with the quantitative. Translating accounting income into economic reality (free cash flow) is fairly easy.
Then, we mix in the qualitative to see how sustainable the cash flow stream is. Figuring out the sustainability of a company’s competitive advantage is a harder step and more of an “art” than a science. You have to see if your expectations of the future are already priced in. In other words, results need to be above market expectations to earn excess return. Such opportunities are rare: either the market has misunderstood the company’s business model (for example, people avoided Visa with many thinking it had credit risk when in fact it did not) or a new market is created with people underestimating its size (like with smartphones).
EVERTZ MICROSYSTEMS (ET:CT)
S&P/TSX COMPOSITE REAL ESTATE SECTOR INDEX
MORTGAGE INVESTMENT CORPORATIONS