Does today’s CPI number change how you’re looking at the markets?

• No, not really but I really do believe that visibility is improving
• 6+ months ago there was this big fog, you had no idea what was coming except Fed raising rates to shut down inflation
• Now we’re starting to get an idea of what everything looks like, and today’s number is just part of the story
• The market is like a juvenile child, it tries to price every little wiggle and bounces all the time
• We have a lot of answers now that we didn’t have 6 months ago
• We now know where the peak in oil is for example
• Supply is getting better; oil prices peaked around $120
• Oil drives inflation, it’s an incredibly powerful inflationary force
• If oil has peaked, inflation has also likely peaked
• Doesn’t mean that it won’t stay higher for longer or be persistent
• But the market is all about rate of change and inflation is starting to roll over
• This probably means we have an idea where long rates will peak and that’s the big variable
• Pretty clear that 10-year will likely peak around 4 and as a result, I feel as though the valuation destruction we’ve seen over last 18 months is likely over
• Time to look at the good secular growth stories
• I would argue earnings are still too high; it’s still going to be bumpy (like today)
• It is time to look for those opportunities that you want to own for the next cycle

Is that what you’re doing now?

• Yes, absolutely
• I’m moving defense out of the portfolio and going towards offense

• I’m starting to find ideas that are no longer expensive, with solid business fundamentals
• In a lot of growth stocks, management never needed to run their business like a business
  • They had all these projects and just grew and grew
  • Now, they’re focusing less on the other projects and more on their core projects
• Recessions are healthy: you get rid of all these side projects and focus on what you’re good at
• We haven’t had a normal recession over the last 20 years: dot.com, GFC, Covid
• You have to go back to 80s and 90s to see a normal Fed induced slowdown and recession
• And I think that’s what we’ll experience
• Consumer is in a good shape pretty much everywhere, balance sheets are in good shape, banking system is fine
• There are imbalances but in general, doesn’t feel like those imbalances are what I need to worry about
• There are inflationary forces absolutely but as economy slows, those will get better
• There are also supply responses starting to occur in a variety of places
• The second derivative of all the bad stuff that has hit the market all year long is starting to improve, and we need to start getting interested in the stock market
• It will be bumpy but now is the time to start buying stuff

What does the Innovation picture look like, is it a good time for it?

• It’s great
• We’ve seen a lot of market destruction and a lot of inefficient capital allocation going on 12-18 months ago, people were funding all kinds of crazy stuff
• We all get caught up in it, it’s an emotional procedure
• Businesses are now taking this cathartic look at themselves to see what they’re doing well and focusing on becoming efficient around it
• You would not believe how many conversations I’ve had in the last 6 months with a lot of tech companies about that very thing
• The more layoff announcements we see, the more bullish we can all get
• The more bad news you see over the next 3-4 months, the better it will soon be
• The market will start to look through it
• I don’t know where market will go over next 6-12 months but I know that companies are rationalizing and trying to get more efficient which is a healthy thing
• Economy will slow but if you have some secular growers that aren’t spending money on stupid things, they can show some leverage on the profits front
• There’s a lot of opportunity right now and it’s time to do the work to find the ideas you want to own when the market is ripping

Was June the bottom?

• I couldn’t tell you if that’s the bottom - I don’t think that it necessarily is but we’re getting close
• If we end up going down another 10%, I need to take that next 10% to buy the right companies so that when things turn, there’s a big upside
• We’ve experienced the down, still grinding through it but I can start to see the other side

You talk about this shift going on, what do you like as you shift?

• We have to look at what’s worked well this year (energy, utilities, staples, healthcare a bit) and think about if you want to own them in this next period
• The question is: What does the economy look like in 18 months?
• I would argue that it’s going to be relatively inflationary, maybe inflation at 4%, not 8%
• Rates will likely still be structurally higher but that will be priced in
• Growth will probably be slower, but we’ll still be doing the big things worldwide (climate change, tech, cloud transition, etc.)
• A lot of those secular themes we’ve been investing in probably won’t change
• What’s changed is the capacity of the economy to grow quickly - that will be reduced because inflationary pressures are real, and rates will be higher
• Where do I want to be in that sort of economy and what do I want to pay for it? That’s what I’m focusing on today

Does crypto have a place in the portfolio?

• I think it has a place, but it’s really hard to come up with a value for it
• I still pay attention and own some crypto exposed stocks
• I don’t consider it the best idea ever
• I have two great ideas that I think will be amazing but can’t tell you what they are yet (not cyrpto related)
• Definitely getting to that point where there are opportunities and it’s not just ‘don’t lose money’ which was the winning strategy for the last 12-months
• It might be the right strategy through Christmas but if you follow that too long, you’ll miss out when things get better

Is Growth as a style, redefined?

• Growth is just growth. The difference is the way people value it
• People were valuing growth in the low rate/no rate environment strictly on sales
• That paradigm of valuation is no longer going to be with us because we will be in a higher rate and lower growth environment
• That said, in a lower growth environment you’ll pay more for secular growth
• Growth stocks have traded the same for 100 years, it’s just the valuation metrics people use to figure out what’s it worth will change

Are you still finding opportunities from the green energy transition?

• There are a lot of science projects in that space which work well when rates are low
• But we’ll be in a high-rate environment
• There are a lot of industrial companies focused on this space that are real businesses that you can own and build into that - I own a lot of them
• Ex: if you’re a utility and want to put in a wind farm, you need to use this company
• It’s not necessarily a good idea in my opinion to own the core technology in a lot of these spaces
• Ex: you know we’ll need a ton of batteries but they’re terrible stocks. Tesla’s killed them all
• The fundamental tech isn’t necessarily what you want to own because that’s the science project
• You want to own the company that integrates it, who owns the business around that
• Utilities are fantastic - they’ll be the focus of a lot of capital spending as we electrify the world, they’re defensive, they pay dividends, and their earnings will be above trend for next 10 years
• Nobody would think of electric utilities as a growth stock but they’re growing!

Do you consider the health of the consumer?

• Yes, 100%
• This is not the financial crisis where the market fell 50% - it’ll be a garden variety recession
• Consumers are in a good place, with the exception of low-end consumer
• Most people have good balance sheets; banks and companies have good balance sheets
• Governments don’t but they never do
• I don’t see this as a financial crisis 50% Armageddon
• We’ve priced a lot of this in - I invested through the financial crisis - this isn’t even close
• There’s still downside but not tremendous downside in my opinion. Now’s the time to start looking for ideas

How do you look at energy?

• I think the group as a whole will continue to do well
• I think we’ll have structurally higher energy prices for a while and not just in Europe
• Absolute prices levels have probably peaked for a lot of them which takes out some of the heat
• If oil prices stay in the 80s for 5 years, a lot of these stocks will probably do very well
• It’s a nice group to own and I think you can stock pick your way through it - I am still overweight
• Back in June, the only group that was working was energy but that’s no longer true
• Relative performance of energy to the rest of the market has really fallen; there’s more upside elsewhere
• I don’t think that’s where the most alpha will be found over the next few years

Secular growers

• Yes, there are lots of them and many have been demolished in terms of future valuation
• A lot of the names I’m looking at is down 80% - there’s been real destruction in growth land and that presents opportunity

Have you seen management change over very much?

• Lots of change occurring (ex. Peloton yesterday)
• A lot of management teams are starting to figure it out: ‘I have 12 projects that are stupid and I’m going to cancel 11 of them and focus on my core business’
• That is the most consistent message I’m getting from everybody in the world of growth
• It takes time: you have to fire some people; some are further along than others but seeing that change occurring is bullish to me
• Ultimately that change will start to show up in results

Financial and fintech spaces

• Fintech has absolutely blown up - one of the most toxic groups
• A lot of the speculative areas of the market have been destroyed
• There’s a lot of opportunities there because in many cases, the trends these companies were working on haven’t changed, value proposition hasn’t changed
• I would argue that financial sector should go and buy these companies right now
• Financials in general aren’t a buy for me - there’s no growth
• Every fund manager in Canada owns banks
• Nobody buys my funds so that they can get exposure to the banks

Thoughts on emerging technologies: hydrogen and biotech

• Too soon for hydrogen for me, I don’t think you’ll make money investing in hydrogen stocks
• I keep going back to that well and it’s not working so I’ll stay away from hydrogen
• Biotech is interesting
• Healthcare is good for uncertain times, good pricing power, not economically sensitive
• Decent place to be hunting right now
• There’s been good data lately and good stuff in healthcare that we should take a look at
• I’ve been spending a lot of time on healthcare right now - seems like a good group to be in
• Maybe not so much in tools because hospitals have been wiped out by Covid, but a lot of big pharma look good and biotech in general looks good as a group

Opportunities geographically

• With strength of the USD, it’s been bad to be outside of US, but CAD has been strong and good relative to Euro
• Both of those two currencies are the best place to be
• North America has most efficient economies and cheapest energy
• Europe looks awful, Asia’s a mess
• I’m mostly still in US and Canada

Final message

• I’m probably close to 60 offense/40 defense
• Slowly selling defense to slowly buy offense - started 6 weeks ago and that will continue
• My goal: when market finally bottoms, I want as much offense as I can stomach so that when things get better the fund really moves
• Traditionally, my funds go down about same as the market and as things get better, I tend to do much better than market