The secret of change is to focus all of your energy not on fighting the old, but on building the new – Socrates
Our positioning for inflation is earning handsome returns, as the world and nearly all of North America is reopening for business. As I explained in my prior video below, I expect this reopening to generate significant consumer demand, at the same time North America is facing a supply crunch owing to shipping bottlenecks. In my view, this supply/demand imbalance, coupled with a spectacular amount of money printing and fiscal spending, results in a powerful inflationary force on markets. The most obvious example is the US 10 year government bond yield moving from 0.50% in September to about 1.40% today.
Over the last number of months we’ve been assembling a collection of companies poised to profit from such an inflationary outcome. Generally, we expect that companies with growing cashflow, pricing power, and tangible asset values benefit from inflation, as they have historically. However growth stocks, including those trading at excessively high valuations, are usually robbed of their future cashflows by inflation. This is exactly what we’ve seen play out of the latter weeks of February, as sky high technology companies have lagged while industrials, banks, energy and base metals have shot forward. It has been a world of atoms vs bits, and for the first time in a long time, the world of atoms is now winning.
Model Portfolio Highlights
For Model Portfolio Performance information please visit here (updated quarterly).
Over the last weeks we’ve purchased shares of TD Bank (TD) and Royal Bank (RY), giving both a hefty weight in the portfolio. As I described in my post-covid video above, I expect the Canadian economy to come back online in short order, with a post-covid recovery. I expect reopening to generate some inflation, which I think will be beneficial for the banks. In addition to helping mortgage service costs, inflation helps repair the banks’ capital ratios, and is likely to increase net interest margins as medium and long term rates rise. In due course, our national banking regulator might let banks resume dividend increases and/or share repurchases, which would be an important catalyst in share price increases from here. Already, share prices are moving higher after being stuck essentially sideways for 4 years.
American Growth Portfolio
We recently purchased shares of Cooper Companies (COO) in the American Growth Portfolio. Cooper is a global leader in contact lenses, an oligopoly market in which three companies make up 88% of revenues. Cooper has been spending lots of R&D on an emerging new field called “Myopia Management”. Increasing screen time and eye fatigue in adults and kids is leading to a myopia epidemic, with about 1/3 of the population expected to have myopia issues in their lifetime, particularly today’s kids. Cooper sees this as an emerging multi-billion dollar market. Cooper has a total monopoly on this product category, being the only company with FDA approved products and research. Shares just broke out into new high territory.
In the Income Portfolio this month we sold out bonds and utilities, and purchased a basket of Canadian dividend stocks, US dividend stocks and a basket of US dividend growers. These are mostly mature companies, which so far have lagged faster-growing tech counterparts. Dividend stocks are playing catchup now that the economy is reopening. Note that within these baskets we gain particular exposure to financials, which I expect to benefit from inflation. While I like the US companies, the USD currency exposure gives me some reservations vis-a-vis the US administration’s stimulus plans and currency devaluation risk. Therefore our US dividend exposure has currency hedges in place, so we maintain a pure play on the companies and their dividends.
Small Cap Portfolio
We recently purchased shares of Polaris (PIF) in the Small Cap Portfolio. Polaris is a Canadian firm that acquires, develops and operates renewable power projects in Latin America. Current project are generating 105MW, which is still considered small. However the company has a number of growth projects in the works, and is actively raising capital to fund more. PIF has lagged larger counterparts in the renewable sector like AQN, BEP, and RNW. With PIF just breaking out now to new highs from a four year’s long base, it looks like PIF is about to play catch up to the more well-known names.
Across all portfolios I look for mispriced opportunities, considering only those with a significant margin of safety and minimal risk of permanent capital loss. After identifying such opportunities, patience is the most important factor in realizing our expected long term return.
The Reading List
Last month’s most popular articles:
- Bill Gates lifts CNR holding over 16% (CNR a large position in our Growth Portfolio)
- Some stocks are breaking out of years-long ranges
- The covid recession is over
- 9 Uncomfortable Facts About the U.S. Stock Market
If you have any questions about your portfolio, financial planning or investments please be in touch. Click to book a meeting: https://calendly.com/bwk-wapw
Ben W. Kizemchuk
Portfolio Manager & Investment Advisor
Wellington-Altus Private Wealth
Ben Kizemchuk offers full service wealth management for high net worth Canadians including families, business owners, and successful professionals. Ben and his team provide investment advice, financial planning, tax minimization strategies, and retirement planning.