Teal Linde, manager at Linde Equity Fund

FOCUS: North American mid, large cap stocks

MARKET OUTLOOK:

With stock markets, Bitcoin and gold recently hitting record highs, how responsible is speculation in driving prices up? If we look at the options market, the level of speculation is now exceeding the frothy levels witnessed three years ago. Options are used for either hedging, generating income through covered calls, or raw speculation. In recent years, speculation has become the dominant purpose of options with year-to-date 2023 options trading of zero-days-to-expiry (0DTE) options, where people bet on where prices will close at the end of the day, hitting their highest levels ever. In 2016, 0DTE option trading represented five per cent of all options trading activity. Year-to-date, it represents 43 per cent. Making intraday bets is the purest form of stock market speculation.

We would also suggest the surge of Bitcoin above US$72,000 last week, up more than 150 per cent from one year ago, has also been driven by speculators piling into recently rolled-out spot Bitcoin ETFs.

The weight of high-momentum stocks in U.S. markets is also the highest since the “Nifty 50” in the early 1970s – another sign of increased speculating.

One asset hitting new highs without strong speculative tailwinds is gold, which is benefitting from increasing demand from China, as sagging real estate prices are prompting citizens to park their money in gold instead, and central banks are buying for diversification.

Investors should exercise prudence by being aware of whether they are buying a security riding high on speculative fervour or not.

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TOP PICKS:

BROOKFIELD (BN TSX)

Brookfield Corporation is focused on compounding capital over the long term to earn attractive total returns for its shareholders. The company's capital is deployed across three businesses – asset management, its operating businesses, and its insurance solutions – all of which is underpinned by a conservatively capitalized balance sheet. Over the last 10 years, Brookfield has delivered a 15 per cent total annualized return to its shareholders. Based on their Investor Day presentation from last fall, management believes they can increase their net asset value at a 17 per cent compound annualized return from 2023 to 2028. At the time of their presentation, they expressed their net asset value at US$74 per shares. This is equivalent to CDN $100, which puts it current share price of CAD$56 at nearly a 44 per cent discount to net asset value, thereby providing a healthy margin of safety or additional share price upside upon a narrowing of the discount, further supported by planned accretive stock buybacks. 

BLUE OWL CAPITAL (OWL NYSE)

The first time we recommended Blue Owl last month, we highlighted it as an industry leader riding three secular waves in the investment world: the growth of private credit; the growing opportunity to capitalize on sale and leaseback transactions with investment grade companies seeking to monetize their real estate assets; and the opening up of alternative investments previously reserved for institutional investors to the untapped retail investor market. Another interesting part about Blue Owl is that they own general partner stakes in dozens of private equity firms. So as an investor in Blue Owl, you also get exposure to the massive wealth creation business model that successful private equity firms achieve. Blue Owl expects to achieve double-digit top and bottom-line growth rates this year and next.

TC ENERGY (TRP TSX)

We've touted TC Energy in the past where we have talked about its attractive seven per cent dividend yield, attractive valuation at 13 times this year's expected earnings, and how the stock only has to rise three per cent to generate a 10 per cent total annual return for shareholders. But this time we'd like to suggest that there is upside coming from analysts moving off their cautious take on the company. Currently, analysts have more holds than buys, but with the most recent quarterly results, the company beat earnings expectations by about 20 per cent, which reflects their overcautiousness. Interestingly, while the analysts have mostly held ratings on the stock, insiders from across the C-Suite and board have bought a sizeable $8 million worth of stock over the last year. The insiders usually know more than the analysts.