The 2022 bear market looks to be on thin ice. The S&P 500 has successfully broken out above January 2023 highs. This is a positive development which not only has surpassed minor downtrends from last Fall, but also is serving to exceed the entire downtrend from last January. This is also occurring in the NASDAQ Composite, the Toronto S&P/TSX and more recently was seen in the Russell 2k index in recent weeks. While this doesn’t preclude some backing and filling if tech earnings start to come in sub-par, it does look like an important structural positive which likely turns the trend higher between early February and mid-March. This directly goes against the popular narrative that the economy and markets might be weak during the 1st half 2023 before strengthening in the 2nd . This consensus view is getting easier and easier to challenge as earnings reports and technicals continue to improve. Overall with a cyclical bottom having been projected near Wednesday-Friday of last week, this could still very well play out.

Should you have any questions or concerns, please feel free to reach out.

Portfolio Notes

(+) indicates a positive development, (-) indicates negative, and (~) indicates neutral

(new) Agnico Eagle (AEM-T) The gold miner is trading at appealing multiples for its level of risk and very cheap compared to its historical trading range. In 2022, its EPS suffered due to the dilution from the Kirkland Lake acquisition. We expect earnings growth in 2023 due to less dilution and the timing of the Kirkland Lake consolidation. 93% of production is in developed markets, which justifies higher a multiples than peers. New position in Core Portfolio.

(++) Evoqua Water (AQUA-US) surged after Xylem (XYL-US) agreed to acquire the company in an all-stock deal that reflects an implied enterprise value of ~$7.5B. The two companies generated more than $7B in combined revenue in the 12-months ended September 30, 2022, with $1.2B in adjusted EBITDA; they said the combination will unlock new growth opportunities and should deliver $140M in run-rate cost synergies within three years. Water usage is growing driven by population growth and socioeconomic development. The combination of rising water use in emerging markets and a crumbling infrastructure in developed markets have resulted in a greater need for investment in water projects. Evoqua shareholders will receive 0.480 shares of Xylem for each Evoqua share, representing a value of $52.89/share, or a 29% premium. Upon closing, Xylem shareholders will own 75% and Evoqua shareholders will own 25% of the combined company on a fully diluted basis. Owned in Core ESG+ Portfolio.

(new) Boardwalk REIT (BEI.UN-T) is a leading owner/operator of multi-family rental communities. Providing homes in more than 200 communities, with over 33,000 residential suites totalling over 28 million net rentable square feet. It is known as the "Western Canadian apartment play". Boardwalk’s portfolio is heavily concentrated in Alberta (62%). Including Saskatchewan, the REIT generates 73% of its profits from energy-centric markets. As a result, the movements in crude oil often impact shares. We believe Boardwalk is well positioned and current valuations provide a wide “margin of safety”. New position in Cash Flow Portfolio.

(+) Chipotle Mexican Grill (CMG-US) Wells Fargo started off coverage on Chipotle with an Overweight rating on its view the restaurant stock features best-in-class unit economics and ample growth drivers. The firm sees CMG as a levered recovery play and a core long-term holding for large cap growth investors. In making the bull case on CMG, the team pointed to top-tier economics, an arsenal of comparable sales growth levers and accelerating shareholder returns through buybacks. They have an $1,8000 price target or 12.5% upside. Owned in US Portfolio.

(-) Canadian National Railway (CNR-T) Fourth-quarter revenue grew 16% year over year on higher fuel surcharges, core rate gains, and modest volume growth. Revenue was mostly in line with forecast. The volume shortfall stems from a faster-than-expected falloff in international-intermodal activity as retail-sector inventory restocking has dried up quickly. Relative to fourth quarter 2022, total volume rose 2% on strong Canadian grain (favorable harvest), higher export coal, and recovering auto carloads, offset in part by flattish chemicals and plastics shipments and declines in intermodal and forest-product volumes. Shares declined on weak guidance. CNR also raised its dividend by 8%, marking its 27th consecutive year of dividend increases. Owned in Core Portfolio.

(new) Traeger (COOK-US) This was once a $35 stock and is now down over 70%. I am an owner of a Traeger grill and I love it. When they went public I had no interest. But recently a CG analyst penned a report that got my attention. They said, "it is an innovative, premium brand with mass market appeal, low awareness and powerful word-of-mouth marketing from passionate and engaged brand evangelists (the “Traegerhood”), and should continue to benefit from a secular disruption of the outdoor grilling category." Grills sold fairly well over the holidays, with Traeger outperforming with several retailers stating that Traeger was either the most popular brand or shared top brand status with Weber. Owned in Opportunity Portfolio.

(new) Canadian Pacific Railway (CP-T) Arguably the best rail network in North America, run by the best railroaders in the industry. The company is busy working on its Kansas City Southern deal and the publicly disclosed synergies likely understate long-term potential. With these shares in the portfolio we gain a relatively defensive name to protect against a potential recession and also has some inherent inflation protection as fuel surcharges and strong core pricing power can provide an offset to rising costs. New position in Core Portfolio.

(new) Capital Power (CPX-T) A new utility position for us. Their thermal and renewable assets represent approximately 7,500 MW of generation capacity. Alberta thermal fleet is a low cost baseload contributor to the grid. Long-term contracts support dividend sustainability and growth. Dividend growth of 6% is expected through 2025 with a solid A-grade credit. Shares yield 5.06%. New position in Cash Flow Portfolio.

(-) Danaher Corporation (DHR-US) reported a good quarter with beats on revenues and earnings. DHR holds leading positions in attractive, fast-growing end markets. The business model is largely skewed towards recurring revenues given its large installed base that requires consumable sales as much of its portfolio follows a “razor/razor-blade” model. DHR is in the process of spinning-off its Environmental & Applied Solutions (EAS) segment into a separate publicly traded company by Q4/23, thereby transforming itself into a focused pure-play life sciences and diagnostics company. With the separation of the two businesses, the new DHR will become a less-cyclical company, with a better organic growth and margin profile. Owned in US Portfolio.

(+) Estee Lauder (EL-US) Piper Sandler on Wednesday said it sees considerable upside for EL as China’s long-awaited economic reopening drives pent-up demand for luxury goods. The Chinese market is a “vastly underappreciated opportunity” for Estee Lauder, analysts at Piper Sandler wrote in a research note. U.S.-based Estee Lauder, which manufactures luxury skin-care products, makeup and fragrances, relies on China for more than a third of total sales. It sells products under the following brand names: Estée Lauder, Clinique, Origins, MAC, Bobbi Brown, La Mer, Jo Malone London, and Aveda. Owned in US Portfolio.

(new) Enovix Corp (ENVX-US) engages in the design and development of silicon-anode lithium-ion batteries. An emerging battery technology play looking to disrupt the industry with its proprietary technology advancements enabling 100% active silicon anodes (solving several key challenges versus the well-established graphite anodes used in the majority of lithium-ion cells today). Specifically, the company has developed innovative intellectual property in both 3D cell architecture and related manufacturing capabilities to introduce its better battery cells to the market, with first commercial sales just now occurring. Enovix is bringing a groundbreaking architecture to battery design and manufacturing that has the potential to revolutionize the sector. The company has also amassed a strong sales funnel, endorsements from hefty industry participants (e.g., Samsung), and seasoned leadership with Executive Chairman T.J. Rodgers — all critical ingredients for long-term success. With impressive new hires at CEO and COO, the company must now prove it can manufacture its cells at scale and profitably. We have confidence it can and that this process will result in strong equity returns for shareholders. The company was founded in November 2006 and is headquartered in Fremont, California. New position in Opportunity Portfolio.

(+) Freeport McMoRan (FCX-US) reported better than expected Q4 adjusted earnings and revenues that nevertheless fell from a year ago in an environment of lower copper prices and higher costs. Q4 consolidated sales totalled 1B lbs of copper, 458K oz of gold, and 19M lbs of molybdenum. The company said market sentiment improved late last year due to rising demand from China, demand from decarbonization projects, supply constraints, U.S. dollar exchange rates and low inventories. Freeport McMoRan shares have gained 23% so far this year. Owned in US and Opportunity portfolios.

(new) Fortis (FTS-T) is a holding company, which engages in energy generation and distribution. The company was founded in 1885 and is headquartered in St. John's. It is a great defensive investment. Fortis remains one of the “go to” stock for Canadian investors seeking a defensive utility, particularly should the recession rhetoric persist. Low-risk rate base growth expected to continue and support continued dividend growth. The company expects to meet its target of growing dividends by 4%-6% through 2027. Shares currently yield 4.11%. New position in Cash Flow Portfolio.

(+) Halliburton (HAL-US) Shares in the Houston-based oilfield producer rose after beating Q4 adjusted earnings expectations and raising its quarterly dividend by a third to $0.16/share from $0.12/share. Q4 GAAP net income fell to $656M, or $0.72/share, from $824M, or $0.92/share, for Q3, while total revenues rose 30% Y/Y to $5.58B. The company's results wrapped up a mixed quarter for the top oilfield service providers, as Schlumberger (SLB) beat Wall Street expectations for Q4 profit, while Baker Hughes (BKR) missed both quarterly profit and revenue estimates. Owned in Opportunity portfolio.

(new) Hamilton Canadian Financials Yield Maximizer ETF (HMAX-T) seeks to deliver attractive monthly income, while providing exposure to a market cap-weighted portfolio of Canadian financial services equity securities with an active covered call strategy. With an initial target yield of 13%+, HMAX will be the highest yielding financials ETF in Canada. New position in Conservative Portfolio.

(new) iShares Core Emerging Markets ETF (IEMG-US) Despite the generally unattractive nature of the U.S. equity market and the extremely tricky global economy, there are still a surprising number of reasonable investment opportunities even if they are not sensational. Emerging markets are reasonably priced and the value sector of emerging is cheap. Admittedly they came into this broad decline a year ago much cheaper than the U.S. yet have gone down similarly. With the S&P 500 down 22% last year, the highest beta, but much cheaper, emerging equities were down only 2%. This ETF provides country exposure to China (29%), India (15%), Taiwan (15%), South Korea (12%) and Brazil (5%) and 40% in other emerging countries. New position in Core Portfolio.

(~) Johnson & Johnson (JNJ) reported a mixed quarter with a revenue miss and earnings beat. More importantly, they provided guidance above street expectations, setting a positive tone for the year ahead despite inflationary pressures. The EPS beat in the quarter was driven by solid performance from the consumer health business and medical devices segment which offset weakness in pharmaceutical business. Going forward, we expect the pharmaceutical business to remain the key driver of growth for the company, while the Medical Devices segment should also see a healthy recovery with the impact of COVID-19 fading in the rear view mirror. We view JNJ’s decision to split into two publicly traded companies as a positive development to unlock shareholder value. As separate entities, we believe the consumer business and the pharmaceuticals and medical devices business will be global leaders in their respective markets. We continue to like JNJ for total-return and dividend-growth oriented investors. Owned in US Portfolio.

(+) Louis Vuitton (LVMUY-US) crossed the €20bn mark in revenue last year and has doubled in size in four years. This week, the world’s biggest luxury group LVMH raised its annual dividend by 20 per cent after delivering a second straight year of record sales and profits driven by its main brands Louis Vuitton and Dior. Once the Covid-19 crisis eases, analysts expect the Chinese consumer to resume shopping for high-end goods. LVMH said that it had seen signs of improvement in China this month. The two-year luxury boom has made LVMH the biggest listed company in Europe by market capitalization, and turned Arnault into the richest person in the world ahead of Tesla’s Elon Musk and Amazon’s Jeff Bezos. The 73-year-old built LVMH into a powerhouse through decades of acquisitions, including of US jeweler Tiffany in 2020. LVMH controls around 60 subsidiaries that each manage a small number of prestigious brands, 75 in total. These include Tiffany & Co., Christian Dior, Fendi, Givenchy, Marc Jacobs, Stella McCartney, Loewe, Loro Piana, Kenzo, Celine, Sephora, Princess Yachts, TAG Heuer, and Bulgari. Owned in Core Portfolio

(-) Microsoft (MSFT-US) shares declined after the software giant shared a dismal revenue forecast for the current quarter. The tech bellwether topped earnings expectations but said new business growth slowed in December, including within its Azure segment. Microsoft delivered better second-quarter results than many on Wall Street anticipated, initially sending shares soaring in afterhours trading but the stock retreated after management announced softer-than-expected guidance for the third quarter. Owned in Core and US Portfolio.

(-) NextEra Energy (NEE-T) headed for its lowest close in three months after Q4 earnings missed Wall Street estimates and the head of its Florida Power & Light utility was retiring, as the company refuted allegations it violated campaign finance laws in the state. NextEra boasts a diversified portfolio of electric generation assets that provide stable and predictable cash flows. NEE is a best in class utility at the forefront of renewable energy development coupled with earnings growth. Despite the drop this week, NextEra has outperformed the S&P 500 over the past 5 years. Shares yield 2.22%. Owned in Cash Flow Portfolio.

(-) Norfolk Southern (NSC-US) Railway operating expenses were $2.1 billion, an increase of 19% compared with the same period last year due to higher fuel prices, increased claims costs, and higher compensation and benefits. Income from railway operations was a fourth quarter record of $1.2 billion, up 5%, or $52 million, year-over-year. "In the fourth quarter and throughout 2022, Norfolk Southern (NSC) made significant progress in our financial performance, service improvement, and engagement with our craft team members," said Norfolk Southern President and Chief Executive Officer Alan H. Shaw. Owned in US Portfolio.

(-) Plug Power (PLUG-US) issued disappointing guidance for full year 2022, including full-year revenue growth of 45%-50% following an earlier forecast of more than 80% growth, saying the lower outlook reflects some larger projects being completed in 2023 instead of 2022 due to customer timing and broader supply chain issues. Q4 revenues were particularly affected by new product launch delays, prompting CEO Andrew Marsh to say it "was a tougher quarter than expected." For FY 2023, Plug predicts revenues of $1.4B, slightly above $1.37B analyst consensus estimate. Owned in Core ESG+ Portfolio.

(new) Restaurant Brands (QSR-T) is a holding company, which engages in the operation of quick service restaurants. It operates through the following segments: Tim Hortons, Burger King, and Popeyes. Consumers typically trade down from casual dining to quick-service restaurants in a recession. Company has several initiatives in place to drive value. Tim Hortons Back-to-Basics Plan is in progress: four consecutive quarters of double-digit SSSG. Burger King has a $400 million "Reclaim the Flame" investment plan in 2023 & 2024. US$250 million to refresh and remodel BK restaurants in the US. We expect QSR to open an average 1,200 new restaurants each year until 2029. QSR currently trades at 4.8% FCF yield, at a discount to McDonald’s, Starbucks and YUM Brands and has the highest dividend yield at 3.3% vs. its peers at 2%%. The Executive Chairman has significant skin in the game with an ownership stake of 5 million shares and must maintain the investment for five years. New position in Core Portfolio.

(+) Roper Technologies (ROP-US) Revenue increased 11% to $5.37 billion; organic revenue increased 9%. EPS increased 22% to $9.23; adjusted EPS increased 15% to $14.28. During the year, Roper deployed $4.3 billion toward acquisitions of high-quality vertical software businesses, highlighted by Frontline Education. Roper Technologies is a constituent of the S&P 500 and Fortune 500. The Company operates market leading businesses that design and develop vertical software and technology enabled products for a variety of defensible niche markets. Owned in Core and US Portfolio.

(new) Shopify (SHOP-T) Shopify announced that it is increasing the price of its Basic, Shopify and Advanced plans. Revised pricing equates to a 34% increase on these three plans. Shopify has not changed the price of its plans for the last 12 years, so a price adjustment was due, considering inflation and new feature additions over time. The price increase will likely add $235MM incremental revenue in FY23, which equates to a 3.7% tailwind to total revenue in FY23. We are back in the shares after a significant absence. Owned in Core Portfolio.

(+) Silgan Holdings (SLGN-US) Shares of the Connecticut-based packaging company gained after posting better than expected profits for Q4. For the fourth quarter, the company notched $0.84 in earnings per share, beating estimates by $0.02, and narrowly missing revenue expectations. The company indicated that the quarterly performance reflected record volume, sales and segment income in Dispensing and Specialty Closure, helping to lift full-year 2022 sales to record levels. Owned in US Portfolio.

(new) NuScale Power (SMR-US) A bigger factor for uranium plays in the near-term is government policy. Some countries are getting more positive about nuclear. South Korea said that nuclear energy is likely to account for 32% of its power production by 2030, up from prior expectations of 24%. China is also betting big on nuclear, and should have the largest fleet of reactors in the world by 2030. In the U.S., nuclear power is also getting support, but it comes as the industry is in the midst of a longer-term decline. Nuclear power accounts for about 19% of total U.S. electricity production, a level that hasn’t changed much in the past decade. Most plants were built between 1970 and 1990 and six have closed since the end of 2017, with three more expected to go out of operation by 2025. Recently, the U.S. Nuclear Regulatory Commission had certified the seventh nuclear reactor design for use in the United States. The first six are large, traditional reactors, while the newest approved design is the first small modular nuclear reactor, a 50-megawatt advanced light-water version produced by NuScale Power. The approval means that it can’t be legally challenged during the licensing process, removing impediments for the adaptation of the low-carbon power plants. NuScale has already inked 19 agreements in the U.S. and abroad to deploy the small reactors. New position in Opportunity Portfolio.

(+) Visa (V-US) shares gained after the financial-technology powerhouse topped earnings and revenue expectations for its latest quarter. The company generated fiscal first-quarter net income of $4.18 billion, or $1.99 a share, compared with $3.96 billion, or $1.83 a share, in the year-before quarter. Revenue rose to $7.94 billion from $7.06 billion, while analysts were anticipating $7.70 billion. Payments volume rose 7% in the latest quarter on a constant-currency basis, while processed transactions increased 10%. Visa saw 22% growth in cross-border volume, or 31% growth when excluding transactions within Europe. Outgoing Chief Executive Al Kelly, who will step down from his role at the start of February, noted that the company benefited from a “continued cross-border travel recovery.” Owned in Core and US Portfolios.

(~) Verizon Communications (VZ-US) reported a mixed quarter with a revenues beat and in-line earnings. While post-paid consumer wireless additions returned to positive subscriber growth, the company disappointed on its 2023 earnings outlook which were below street expectations. The stock trades at a forward P/E multiple of ~8x, a discount to its historical long-term average of ~12x. Shares currently yield 6.47%. Owned in Cash Flow Portfolio.

Weekend Reading

RBC MacroMemo - January 24 – February 13, 2023 Good news / Too much optimism? / Chinese wave fades and economy to revive / Economic trends / Stall speed / Recession timing / Artificial inflation weakness / Central banks / Debt ceiling / Japanese risks RBCGAM

Hitting the ceiling hurts, even if nothing breaks While RBC Wealth Management’s Global Portfolio Advisory Committee sees a U.S. default as exceedingly unlikely, the political brinkmanship will likely bring higher volatility to both equity and fixed income markets, and may eventually risk the dollar’s status as the world’s reserve currency. We provide our perspective on the standoff and the implications for investors. RBC INSIGHT

How Transportation Technologies Shaped Empires Countries expand at the speed of transport technology. The Internet is having the same influence on the world. It’s eliminating the power of local governments and cultural nationalism. How will politics change as a result? UNCHARTED

Why are Canadian phone plans so expensive? Canadians pay more for their cellphone plans than nearly anyone and have few options for getting better rates. The big three telecommunications providers – Bell, Rogers and Telus – say there is competition in the market. But a CBC Marketplace investigation found that many of the industry explanations for high service prices are insufficient because cheaper plans are found in comparable countries. YOUTUBE

Are You a Strategist or an Operator? George S. Patton was born to be an operator and Dwight D. Eisenhower was the consummate strategist. ART OF MANLINESS

Uncertainty in Global Supply Chains is Going to Stay Trade flows are a fundamental driver of global economic growth and commerce, mitigating pressures and inflationary challenges, with social and environmental benefits intrinsically linked to that growth. Trade accounts for 52% of global GDP, according to the World Bank. CITI GPS

The Meh-conomy & Matterhorn-sized risks: 12 themes for a fragmented world JOHN STACKHOUSE