Teal Linde, manager of the Linde Equity Fund

Focus: North American mid and large caps


Why the Sharp Market Reversal?

December saw the S&P 500 decline by 9.2 per cent to log its worst December since the Great Depression while the first two months of 2019 saw the same index jump 11.1 per cent to record its best opening two months since 1991.

The December sell off was triggered by a number of factors including concerns about weakening economic growth, U.S. trade policy, U.S. government dysfunction and a U.S. Federal Reserve intent on tightening monetary policy prompting concerns it would drive the economy into a recession.

However, the December selloff appeared overdone. There is little doubt the economy is slowing.  Predictions of a full blown recession were not supported by economic data. The monthly JP Morgan Global Composite Purchasing Managers Index amalgamates the results of surveys of purchasing managers around the world. Readings above 50 indicate economic expansion and below 50 economic contraction, so by definition this indicator approaches the 50 level before a recession. While the indicator peaked about a year ago, the recent decline has been slow, steady and much less pronounced than a drop in the index in early 2016 which provided greater grounds for recessionary concern than today.  The current reading of 52.6 suggests that a recession is not imminent.

In early January the Fed blinked when it softened its tone on further interest increases saying that it would be sensitive to what the markets were indicating about downside risks and would be prepared to change its policy if it believed it were part of the problem. Markets raced higher as all of a sudden investors felt that the Fed was on their side.  Investors’ worst fears were alleviated and the Fed no longer appeared it would continue tightening into a slowing economy.

The Fed’s pivot dramatically impacted investor sentiment. A number of investor sentiment gauges moved from pessimistic (fearful) levels back around Christmas to optimistic (greedy) levels today.  For example, bearish sentiment among those answering the American Association of Individual Investors sentiment survey dropped from 50 per cent to just 20 per cent (its second lowest reading in the last three years) over a nine week span. It appears much of the December market overreaction has been worked off in early 2019.

Looking ahead, if the Fed keeps monetary policy constant or even eases later this year and the economy continues to grow at a slow pace while staying out of recession, stocks should benefit. Since the 2008 financial crisis, most gains have occurred when the Fed has been supportive, which has often been when economic growth rates have been low. Not too hot and not too cold. Such are the characteristics of a Goldilocks economy, ideal for perpetuating an extended bull market.

Could 2019 growth projections be overly optimistic?

Current projected earnings growth rate for the S&P500 in 2019 is  more than 9.5% per cent, but heavily weighted to the fourth quarter.  These are the year-over-year expected growth rates by quarter:

  • Q1: more than 1.8 per cent
  • Q2: more than 6.2 per cent
  • Q3: more than 4.6 per cent
  • Q4: more than 27.1 per cent

Operating Margins are shrinking

Margins were at 10.08 per cent for Q4 last year, versus 12.13 per cent in Q3 of 2018 and 10.27 per cent in Q4 a year ago in 2017. This is the biggest quarter-over-quarter decline in margins since Great Recession.  Savings from U.S. corporate tax cuts buoyed 2018 earnings.  Now the extra margin is being squeezed away by competition, which is the typical historical pattern following major corporate tax cuts.



Last purchased on Feb. 20, 2019 at $50.74.

Linamar is ranked 33rd among the top 100 automotive suppliers in North America and 65th among the top 100 automotive suppliers globally in terms of automotive parts sales. The company has current operations in North America, Europe, Asia and has further expansion plans underway in China, Brazil and India. Linamar is well positioned to support the continuing original equipment manufacturer (OEM) trend of global automotive platforms. Linamar has strong historical sales growth, a stable balance sheet and a willingness to invest in new capital and technologies.  It is currently trading at a historically cheap 5.3 times 2019 expected earnings per share (EPS) of $9.52.  Recognizing this value, CEO Linda Hasenfratz purchased 50,000 shares on the open market on December 17 at $45.36 for a total value of $2,268,000.


Last purchased on Feb. 20, 2019 at $38.68.

Air Lease engages in the purchasing of commercial aircraft for lease to global airline customers. As one of the largest buyers of planes from Boeing and Airbus, it enjoys front of line and volume discount purchases making it cheaper for most airlines to lease new aircraft than to buy direct.  The company is expected to benefit from the $153 billion of new aircraft financing needs which are anticipated in 2019, and Boeing expects this to grow at a seven percent plus compound annual growth rate (CAGR) from 2019 to 2022.  Continued portfolio expansion on aircraft deliveries are expected to support continued strong revenue expansion and robust 20 per cent plus EPS growth ahead.  The company has experienced high-teens return on equity (ROE) above its peers, while leverage of around 2.5 times debt-to-equity ratio (D/E) is below.  Air Lease trades at 6.3 times 2019 expected EPS of $5.65. 


Last purchased on Feb. 7, 2019 at $1.30.

From a valuation perspective, Trican’s net tangible asset value is over $600 million or approximately $2.00 per share. Recognizing its equipment would likely fetch a less than tangible book value if auctioned off in today’s weak market, we will apply a 25 per cent discount to the net tangible book value to arrive at an estimated liquidation value of approximately $1.50 per share.  Therefore, at its recent share price of $1.36, Trican is trading below its liquidation value.  With minimal debt to service, Trican has the ability to endure through this downturn until the cycle eventually improves.  For the patient investor Trican offers a “heads you win, tails you lose a little” proposition. A return to tangible book value of $2.00 offers 40 per cent upside and a return to the $5.00 share price reached in 2017 offers over 250 per cent upside with downside appearing more limited.


PAST PICKS: Feb. 26, 2018


  • Then: $184.93
  • Now: $172.92
  • Return: -6%
  • Total return: -6%


  • Then: $194.19
  • Now: $181.04
  • Return: -7%
  • Total return: -7%


  • Then: $97.78
  • Now: $110.11
  • Return: 13%
  • Total return: 16%

Total return average: 1%


WEBSITE: lindeequity.com