I recently hosted a webinar with Anthony Scilipoti, President and CEO of Veritas Research, based in Toronto.
Anthony’s parents immigrated to Canada from Italy, and he is the first generation of his family to be born in Canada. He founded Veritas as an independent research company, because there was a need for objective, unbiased investment research (the vast majority of research departments also receive fees from the companies they are covering, which causes an inherent conflict of interest). As a result, Veritas will have almost as many sell recommendations as buys.
Veritas means truth in Latin, which should come as no surprise from a firm with an Italian heritage, but it does gain particular relevance at a time when truth is “twisted by knaves to make a trap for fools” to quote Rudyard Kipling. So Veritas’s objective is to use a forensic accounting framework to arrive at a transparent view of the company, and provide their independent, unbiased assessment of the company for investment purposes.
Limiting losses is a key part of investing. If a holding drops from $100 to $50, it’s a 50% loss, but you need to make a 100% gain to get back up to where you started. That’s why a sell recommendation is as important as a buy. And also why it’s important to have an independent, unbiased approach.
Veritas was among the first research firms to put a sell recommendation on Nortel in February of 2000, when it was close to its peak. It took courage and tenacity to come out with a sell recommendation on Canada’s towering technology icon of the time. That recommendation caught the eye of a Senior Manager at RBC Dominion Securities. The Manager read the report, met with Anthony, and Veritas has since been a provider of independent research to RBC DS, on an exclusive basis.
Veritas also runs two investment funds which are driven by the teams’ best investment ideas. It’s a case of the proof is in the pudding. The two funds have delivered.
I asked Anthony to join me on a call because of his passion for sharing his message, which can be unpopular in many circles. For instance his firm currently has a sell recommendation on RBC stock with a target price of $68 (currently trading at $94).
According to Anthony, while it’s difficult to predict what will happen, we can draw upon history to provide us with some parallels.
The recent market sell off was the fastest in history, trimming 35% off the S&P 500 in just over 20 days. The ensuing recovery was also very quick, fueled by economic stimulus packages to support a reeling economy.
Interestingly the strongest weeks in the market’s recent performance drew close parallels with another period. Of the top 10 weeks posted by the Dow Jones Industrial Average, one was March 27, 2020, another was April 9, 2020 (Easter which was a short week, meaning it might have been even stronger), and then October 11, 1974. The other seven strongest weeks all occurred in the 1930s following the 1929 crash. The crash of 1929 was brutal, but it took several false starts to get the economy going again.
The parallel is that after a significant selloff, there comes a rally, which is then followed by several subsequent selloffs and rallies, until the market finds equilibrium. The current pattern seems to be consistent with the historical trends, which would imply that we should expect at least another selloff.
It’s important to note that though we can draw parallels, each period has its own characteristics or idiosyncrasies. In the current environment the defining characteristic is lack of clarity. Though we understand more about the virus than we did at its inception, there is a lot we still do not know. We see unemployment numbers at levels not seen since the 1930s, but we don’t know how the numbers will look when, or if people can return to work. We are seeing business and personal bankruptcies, but again the full picture is not yet clear. As well, there are mortgage and debt deferral programs in place, but it is unclear how long these will continue, nor what will happen when it is time to begin repaying when income has not been restored.
In times like these it pays not to be a hero. Anthony advocated looking for companies that have government support, low debt levels, a business model that is sustainable even in challenging times. He also stated that liquidity is key. Playing safe and smart will allow us to get through this cycle and prosper leading into the next.
This was an excellent call with a very valuable resource. The link below will provide you with access to the call recording. I will be hosting Anthony again later this month. If you have a moment, dial in, you won’t be disappointed.
Call recording (please email me for the slides, password: 8w?5!a7G):
I will host two calls each month as we move through these uncertain times. Next dates:
June 10th at 10am PST – Matt Casas, CFA, Lead Portfolio Manager, Saratoga RIM on the US markets
June 24th at 10am PST – Anthony Scilipoti, CPA, President & CEO, Veritas Research on the Canadian markets