This is my first blog post of many to come. For now, the plan is to post at least once a month in this format, with additional posts on topics of interest from time-to-time. I want to sincerely thank you for reading this post, and welcome any feedback on the content and/or format. Please feel free to forward this link to anyone you think would benefit from the information.

 

The format of my monthly blog posts will be as follows:

 

1. I will highlight a different Wealth Management Topic each month. This month I will be focusing on our Investment Process.
2. I will Spotlight a company from our Guided Portfolios that I believe is particularly interesting. I would like to remind you that this represents one part of a larger portfolio, so the information should be taken in the context of your own personal circumstances and the bigger picture. The month I will be discussing DowDupont.
3. I will discuss what worked in Portfolios over the last month; and,
4. I will discuss what did not work over the last month.

I would like to make this a dialogue. Please feel free to call or email with any questions or comments about this or anything else on your mind. Please share this with anyone you think would have an interest.

 

Investment Process

 

You can click here to be directed to the page on my website devoted to our Investment Process, however I wanted to dig into it a bit here for this first post.

 

While Investments are only one component of Professional Wealth Management, they are an important part of the equation and a building block for your Wealth Plan.

 

With the help of the RBC DS Portfolio Advisory Group, I construct portfolios designed to be properly diversified, with a focus on owning high quality investments at reasonable prices that have the potential to add value over time. We are able to build out these portfolios using individual stocks and bonds, mutual funds or third-party managers and/or exchange-traded funds. In most cases, clients have a mixture of all of these types of investments. The actual investment proposal only comes after careful consideration and I have taken the time to connect with a client or prospect to find out what is most important to them.

 

The key components of the Investment Process are: Portfolio Construction, Security Selection, Buy and Sell discipline, and Performance Evaluation. For the purposes of this post I will offer a brief overview of each item.

 

Portfolio Construction: the first step is to sit down for a comprehensive discovery meeting, where I can gain a clear understanding of your thoughts on investing, your risk tolerance, investment time horizon, tax situation and your purpose for these investments.

 

Based on your unique goals and objectives, we will determine the appropriate Asset Mix.

 

The Asset Mix is diversified:

1. By Asset Mix: Stocks vs. bonds vs. cash; and,
2. Globally: Canada vs. US vs. Global.

Security Selection: we use a combination of top-down and bottom-up evaluation.

 

Top-down evaluation determines the allocation of Fixed Income between Government and Corporate bonds, High Yield Bonds and Preferred Shares and Equities between all major economic sectors.

 

Bottom-up evaluation filters bonds according to credit quality, duration and yield and stocks according to three research disciplines – fundamental, technical and quantitative analysis.

 

Buy and Sell discipline: the decision to buy, or hold is driven by specific criteria – effectively removing the guesswork and emotion from investing: match RBC Wealth Management sector recommendations, only hold recommended companies, and rebalance large positions.

 

Performance Evaluation: we will mail out performance statements on a quarterly basis and schedule regular calls and face-to-face meetings to discuss the results, as well as what worked and what did not work over the course of the previous quarter.

 

Company Spotlight: DowDuPont Inc.

 

DowDuPont is a holding company that formed through the merger of equals between Dow Chemical and DuPont, which concluded on August 31, 2017. DowDuPont intends to separate the businesses over the next 18 months, resulting in three independent, publicly traded companies: an Agriculture business, a Material Science unit, and a Specialty Products company.

 

We added DowDuPont to the Focus List for several reasons:

 

• Sum-of-the-parts valuation supports our view of further upside: Following the merger of Dow Chemical and DuPont, the management team plans to split the business into three separate publicly traded entities: Materials Science, Specialty Products, and Agriculture. Under the current conglomerate structure we believe that the assets of DowDuPont trade at a discount to their value as stand-alone businesses. Our research providers forecast a range of $80–$88 for the company’s assets on a sum-of-the-parts basis. The Investment Committee believes that as we get closer to the eventual split-up of the company, the share price will converge on the sum-of-the-parts valuation.

• Significant cost reduction opportunities: Following the merger, management has indicated that its portfolio optimization strategy could generate at least $3B in cost synergies with $1.6B from the Materials Science business, $1B from the Agriculture business, and $400M from Specialty Products. Given the significant overlap between the predecessor companies, we are confident in the execution.

• Under-levered balance sheet represents additional possibilities for value creation: Our research sources project DowDuPont’s net debt-to-EBITDA at 1.3x and 0.8x for 2018 and 2019, respectively. Given the strong cash flow generation of the business, management could comfortably increase its leverage and repurchase stock. Bringing the leverage to 1.8x EBITDA would allow the company to retire roughly 12% of its shares outstanding or repurchase $20B worth of stock.

 

Risks

 

Risks include the cyclical nature of demand of the chemicals business. Commodity chemical margins are volatile, which can impact cash flows. Missed synergy targets could also result in share price underperformance.

 

What Worked in the last Month

 

Amazon: Shares of Amazon were up 15% in October after posting very strong Q3 results.

 

The company beat expectations and raised their guidance, both with and without Whole Foods Market (which they recently acquired).

 

Revenue Growth accelerated across Amazon Retail, and Amazon Web Serviced Growth & Profitability Improved.

 

RBC Capital Markets rates the shares Outperform, with at $1,200 Target Price.

 

What Did Not Work in the last Month

 

Newell Brands Inc.: Shares of Newell Brands fell 4.4% in October and another 31% so far in November.

 

The company suffered greatly because of exposure to the retail space, which (ironically) has been struggling against the competition from Amazon (see above).

 

What has not changed about the company is that they are better resourced to invest in resources to enable to gain share from weaker competitors. The company is cutting costs, although they may choose to reinvest these savings back into the business.

 

The company has positive earnings, however these earnings were less than expected. As such, the shares look very inexpensive on a Price to Earnings basis. The company is also growing in e-commerce.

 

RBC Capital Markets lowered the rating on the Shares from Top Pick to Outperform, with a revised Target Price of $35.00.

 

We are carefully monitoring this and all holdings in the Portfolio. The next quarterly update for the full Portfolios is due in early December, and as always if there is any change in the meantime I will let Clients know.

 

I intend for these blog posts to be a dialogue, so please reach out by phone or email about this or anything else on your mind.