Gravitas - Spotlight On Canada

Dec 11, 2020 | The Newton Group


I don't discuss Canada’s stock market as much as I probably should but the good news is that it has found its groove heading into the final weeks of the year. After surging more than 10 per cent in November, the S&P TSX Composite Index has rallied another three per cent so far in December. Canada’s benchmark index has added nearly $1 trillion in market value since bottoming out in the spring. The TSX is now up more than 3% for the year. In fact, it is not too far away from its record closing level on Feb. 20. The TSX though remains dominated by economically sensitive companies which have had a difficult time this year but has begun a fresh charge of late, as vaccine optimism rippled through the markets. Since Nov. 9, when Pfizer first announced encouraging trial data for its COVID-19 vaccine, the TSX has gained in 19 of 22 sessions, up 8.3% and ahead of US markets over that stretch. That’s because Canada’s rally has been led by hard-hit energy stocks and financials, which have lagged the market for much of the year. Collectively, those two industry groups make up 42 per cent of the Canadian market. By comparison, those sectors, combined, account for just 13 per cent of the S&P 500. Cannabis stocks have also enjoyed a recent lift, helped by optimism surrounding legalization in the United States. Of course, the TSX’s advance this year would not be possible without outsized gains in the gold sector. Meanwhile, tech darling Shopify — which is now the most valuable publicly-traded company in Canada — has been the single biggest stock contributor, adding more than 650 points in value to the index. But Canada still continues to rely heavily on old economy businesses. For example, railroad stocks such as CP Rail and CN Rail have been the second and third largest point creators for the index this year.

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Portfolio Notes

(+) indicates a positive development, (-) indicates negative, and (~) indicates neutral (AI-US) provides enterprise artificial intelligence (AI) software for digital transformation. It delivers the C3 AI suite for developing, deploying, and operating large-scale AI, predictive analytics, and Internet of Things (IoT) applications in addition to a portfolio of turn-key AI applications. The company was founded by Thomas M. Siebel, Patricia A. House and Stephen Maurice Ward, Jr. on January 8, 2009 and is headquartered in Redwood City, CA. It went public this week.

New position in Opportunity Portfolio

Airbnb (ABNB-US) made its public debut Thursday morning, opening at $146 after being priced at $68 per share. Airbnb is a vacation rental company. The travel restrictions from COVID-19 hurt the company in early 2020. Since then, the company's filing shows a recovery in July, August and September, with nights booked down 28% year-over-year compared to triple-digit declines in the earlier 2020 months. In April, the San Francisco-based vacation rental company was valued at $18 billion when it secured $2 billion in funding. At the time, the company disclosed plans to enact cost-cutting measures which included downsizing 1,900 employees, around one-fourth of its total workforce.

New position in Opportunity Portfolio

(+) Adobe (ADBE-US) reported a top and bottom line beat driven by strong double digit Digital Media (+20%) and Digital Experience (+14% ) growth. Adobe remains the gold standard in content creation and has benefitted tremendously from a shift towards a Software-as-a-Service model over the last several years with subscription revenues representing the majority of total revenues. ADBE’s Digital Media and Digital Experience business verticals are facing a combined total addressable market of $100B+ that suggests significant upside as the company gains further market share and realizes increased profitability driven by higher price point solutions and the cross-sale of new creative offerings such as Sensei artificial intelligence.

Owned in Core and Opportunity portfolios

(+) Costco (COST-US) posted a 17% comp gain in and outside of the US. We continue to believe that Costco has the highest barriers to entry of the major retailers and remain buyers. Despite trip consolidation, traffic grew by 5.5% worldwide even as ticket growth increased by 9.4%. E-commerce sales remained very strong, up 86% with online grocery up a whopping 300% and now accounts for 7% of sales or $3 billion for the quarter. US comparables moderated a bit during the quarter (+16.7% in September, +16.4% in October, and +14.2% in November), but this modest deceleration seemed to be driven by pull forward activity and more aggressive Black Friday promotions starting as early as late-October from some competitors.

Owned in Core Portfolio

(+) Disney (DIS-US) revealed that its Disney+ service now has 86.8 million subscribers. The company revealed a slew of impressive Disney+ announcements, with over 100 movies and shows connected to franchises like Star Wars, Marvel, FX and National Geographic. Disney now expects to see between 230 million to 260 million subscribers to Disney+ by 2024. Lucasfilm will present “Rogue Squadron,” a new Star Wars film due out in 2023. Disney+ also will be getting a price hike, up $1 to $7.99 a month. Star, Disney’s international answer to Hulu, will roll out in Canada on February 23rd next year. The entertainment giant saw its stock hit an all-time high this week.

Owned in Core, U.S. and Opportunity portfolios

(+) Enbridge (ENB-T) Enbridge's investor day reaffirmed a 5-7% growth target through 2023+ and the company announced a 3% dividend increase effective March 2021. There’s been a lot of talk on whether Enbridge even needs to raise its dividend given that the current yield is north of 7.5%. At the margins, we’re pleased that the dividend was raised less than expected as we believe allocating capital towards a debt repayment or even buybacks arguably makes more sense at this juncture. Stock has recovered well off its 2020 lows but is still down about 11% YTD on a total return basis. To get improved performance and for this stock to significantly re-rate higher, consumer demand (and therefore oil production) needs to ramp back up.

Owned in Cash Flow Portfolio

(+) Linde (LIN-US) has signed an agreement with Daimler Truck AG, one of the world's largest manufacturers of commercial vehicles, to jointly develop the next generation of hydrogen refuelling technology for fuel cell-powered heavy-duty vehicles. The new fuelling process will be implemented in the series version of the Mercedes-Benz GenH2 Truck, which was unveiled in September 2020 as a concept vehicle, and will have a range of more than 1,000 kilometers. The companies plan for the first refuelling of a prototype vehicle at a pilot station to take place in Germany in 2023.

Owned in Opportunity Portfolio

(+) Netflix (NFLX-US) The Queen's Gambit has held onto to the top spot in Nielsen's weekly U.S. streaming video charts for the third week in a row. That makes the limited series the first to three-peat atop the young ratings system. It topped the chart with 1.373B minutes viewed during the Nov. 9-15 period, ahead of The Office (Netflix 1.0989B minutes); The Mandalorian (Disney 873M minutes); Schitt's Creek (Netflix 855M minutes); and new chart entrant The Crown (Netflix 807M minutes). The Queen's Gambit is the most-watched scripted limited series ever, with over 62M global views in its first four weeks. And while other streaming services are seeing user traction, so far Netflix dominates viewing time, holding all of the top 10 slots except for Disney's.

Owned in Core, U.S. and Opportunity Portfolio

(-) Royal Bank (RY-T) After sifting through all the financials and commentary from the Big Six last week, this comment from RBC stood out - RBC said it expects mortgage growth to slow as pent-up housing demand begins to cool. The bank also increased its weighting to its downside scenario by 10%, given the resurgence of COVID-19 containment measures. Rod Bolger, CFO, said that there is considerable uncertainty around the speed of the economic recovery and the availability of a vaccine, as well as renewed pressure on vulnerable sectors due to the newly imposed restrictions.

Owned in Core and Cash Flow portfolios

(+) Starbucks (SBUX-US) At its 2020 Investor Day, SBUX articulated a path to ongoing earnings growth of +10-12% beginning in 2023 with new long term guidance including a slight moderation in net new unit growth, offset by higher comp sales and operating margin targets. The Rewards program, which has been a bright spot for Starbucks throughout COVID-19 (90-day active members up 10%), dovetails well with the Mobile Order option, fostering deeper affinities within existing customers and expanding the base in ways that will benefit Starbucks for years to come Starbucks says it currently operates in 83 markets and a third of all stores are now international. New opportunities to unlock international growth are seen through adding licensing partners. On this news, RBC raised its price target to $115 from $109.

Owned in Core, Cash Flow, U.S. and Opportunity portfolios

(-) Sea Limited (SE-US) were off slightly this week as they announced the pricing of 13,200,000 American Depositary Shares at US$195. To address strong investor demand, the Company increased the offering size from an initial 11,000,000 ADSs to 13,200,000 ADSs. It is expected to close on December 15, 2020. Sea is a leading global consumer internet company founded in Singapore in 2009. They operate three core businesses across digital entertainment, e-commerce, as well as digital payments and financial services, known as Garena, Shopee, and SeaMoney, respectively. Garena is a leading global online games developer and publisher. Shopee is the largest pan-regional e-commerce platform in Southeast Asia and Taiwan. SeaMoney is a leading digital payments and financial services provider in Southeast Asia.

Owned in Core Portfolio

(+) SiriusXM (SIRI-US) Howard Stern said it all. "Now that I can work from home, I simply don't have an excuse to quit." SiriusXM announced a new agreement with Howard Stern where he will continue to produce and host The Howard Stern Show exclusively for SiriusXM for the next five years and SiriusXM will retain exclusive rights to Howard Stern’s audio and video archives for an additional seven years, extending the expiration of the initial 12-year arrangement from 2027 to now 2034.

Owned in Opportunity Portfolio

Weekend Reading

Canada’s Food Price Report 2021 Annual food expenditure could go up by as much as $695 compared to 2020. COVID-19 changes consumer behaviour and affects food prices in surprising ways. [READ]

Chart: Debt-to-GDP Continues to Rise Around the World Excluding the financial sector, Canada’s debt-to-GDP ratio increased by nearly 80%, the highest of any developed country. Government borrowing surged as the Canada Emergency Response Benefit (CERB), which provided struggling Canadians with roughly $1,500 a month, rang up a bill of $60 billion over 7 months. [READ]

Navigating 2021: 21 Charts for the Year Ahead Navigating 2021 will require Canadians to continue to build that decentralized future—and rebuild some of the centralized model that remains a powerful driver of innovation, efficiency and diversity. [READ]

Good looking CEOs Sometimes, life is really unfair. Attractive people are often judged more positively and treated preferentially in all aspects of life. In a professional setting this means that attractive people are more likely to be promoted or get a raise. [READ]

Crypto Wallets Are Not Bank Accounts [READ]

Banking on Status Signaling explains most of our everyday actions: what clothes we wear, which universities we pick and which religion we subscribe to. Everything has a hidden signaling component with which we communicate our desired tribal affiliation. [READ]

In this pandemic, the trillion-dollar coin is back What's the harm in minting a magical debt-vanquishing token? [READ]

“The most contrarian thing of all is not to oppose the crowd but to think for yourself”

- Peter Thiel


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