Gravitas: Three Years On

February 24, 2023 | Michael Newton


The Newton Group Insights

This week marked the 3-year anniversary of the US stock market's peak closing level prior to the COVID Crash that saw the S&P fall 33.9% from peak to trough over a 23-trading day period from Feb 20, 2020 through March 23rd, 2020. But the US stock market as proxied by the S&P500 has posted a total return of 25.69% (annual compound return of 7.88%) in the three years since COVID hit. From a Canadian perspective, the S&P/TSX is up a total of 19.2% (annual compound return of 5.99%). Looking at US sector ETFs, Energy (XLE) is up the most over the last three years with a gain of 79.4%, while Communication Services (XLC) is the only sector down at -2.9%. Outside of the US, country ETFs like France, India, Mexico, and Australia are up 15%+, but Brazil, Hong Kong, and Israel are in the red. The all-world ex US ETF is up 7.6% over the last three years, while the emerging markets ETF is down 5.6%. The range of returns across the commodity exchange traded products shows how risky they can be. The overall commodities ETF (DBC) is up 61.2% over the last three years, but West Texas crude is actually down 25% over the same time frame. Finally, the aggregate bond market has posted total losses of -9.5% since 2/19/20, while the longer-duration 20+ year Treasury ETF (TLT) is down a whopping 26.9%. The only fixed income ETF listed that's up over the last three years is the inflation protected Treasury ETF (TIP) that's up 1.35%. After all the ups and downs since COVID hit in early 2020, stock market returns over the last three years look remarkably average (but still a little below average).

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Portfolio Notes

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

(+) Boardwalk REIT (BEI.UN-T) reported a solid but in-line quarter relative to street estimates. BEI.UN continues to benefit from strong momentum out of Western Canada as proven by its ~6% growth in same property NOI. Occupancy also edged up 80 bps on a sequential basis to a strong 98%. We also note that leasing spreads were healthy (+10%), supported by the combination of higher rents and lower incentives. Additionally, 2023 guidance appears to be in-line with consensus. This was a solid quarter for BEI.UN and therefore should be supportive of BEI.UN’s premium valuation. Units yield Owned in Cash Flow Portfolio.

(+) Coterra Energy (CTRA-US) delivered a fourth-quarter earnings beat. The Texas-based oil-and-gas firm reported a total revenue increase of 2.5% year-over-year, to $2.28 billion, beating analysts’ forecasts of $2.11 billion. Coterra’s adjusted EPS grew 40% compared with the year prior, to $1.16 a share, narrowly beating expectations for EPS of $1.10. Owned in US and Opportunity Portfolios.

(++) Enovix (ENVX-US) engages in the design and development of silicon-anode lithium-ion batteries. The message of stabilization, progress, and optimism brought by Enovix’s new CEO and COO during the 4Q22 results call was welcomed news. Importantly, the company expressed confidence in its promise of doubling cell shipments every quarter in 2023. With operations on the mend, management can now focus on progressing to Gen2 production and building its revenue funnel — which impressively just experienced its largest quarter over quarter increase. We remain confident that as industry participants continue to sample Enovix’s groundbreaking cells, traction will continue to multiply. Through its new method of design and manufacturing cells, Enovix has leapfrogged the slow slog of historic advancements in battery performance. Enovix is an architecture-first, materials agnostic company currently leveraging the advantages of 100% silicon anodes. Owned in Opportunity Portfolio.

(-) Home Depot (HD-US) reported a miss on revenue and provided fairly muted guidance relative to Street expectations. The weak quarter was attributed to record levels of inflation driving a shift in consumer behavior (from goods to services) coupled with a housing market slowdown. Specifically the company pointed to a drop in lumber costs which negatively impacted comparable sales. Despite tougher comps, the company posted decent margin performance in our view which was in-line with consensus. The muted outlook, which incorporates a $1b investment in wage growth, is based on expectations for pressure in the goods sector and flat consumer spending. Consistent with the company’s history, HD increased its dividend by 10% to $2.09, suggesting a new annualized yield of 2.63%. Valuation of 19x on a forward PE basis sits at a modest discount to its 5-year average of 20.5x. We continue to like HD for total-return and dividend-growth oriented investors though acknowledge that headwinds will likely remain with respect to a pullback on discretionary spending on goods in the short-to-medium term, while comparables are unlikely to ease until the Q1 reporting timeframe at the earliest. Over the past 20 years, Home Depot has compounded at over 16% a year. Owned in Core and US Portfolio

(-) Nice Ltd (NICE-US) Shares dropped this week on Q4 Non-GAAP EPS of $2.04 - a beat by $0.11. Revenue of $568.56M (+10.3% Y/Y) misses by $1.14M. The company plans to fully execute the $250M share repurchase program announced last quarter in its entirety by the end of 2023. With year-over-year cloud revenue growth expected to be in a range of 22% to 25% for the full year 2023. Nice is the worldwide leading provider of both cloud and on-premises enterprise software solutions that empower organizations to make smarter decisions based on advanced analytics of structured and unstructured data. NICE helps organizations of all sizes deliver better customer service, ensure compliance, combat fraud and safeguard citizens. Over 25,000 organizations in more than 150 countries, including over 85 of the Fortune 100 companies, are using NICE solutions. Owned in US Portfolio.

(+) Nvidia (NVDA-US) Shares of the chip giant leaped after Nvidia posted beats on the top and bottom lines for its latest quarter. Wall Street praised Nvidia’s results , calling AI opportunities the next big growth vector for the chipmaker. Along with the improving gaming climate, building momentum in the Data Center segment underpinned NVDA's upside Q1 revenue guidance. The future does indeed look very bright for NVDA, which is distancing itself from other chip makers thanks to its AI-based growth prospects. Owned in Opportunity Portfolio.

(+) Palo Alto Networks (PANW-US) The software company surged after posting adjusted earnings and revenue for the fiscal second quarter that topped Wall Street expectations. It was the third consecutive quarter of profitability after a decade of losses. Palo Alto Networks’ forecast for fiscal third-quarter adjusted earnings also beat expectations. Overall, Palo Alto remains one of our top ideas as we find both durable and disruptive growth and margin expansion attractive. Owned in Opportunity Portfolio.

(+) Pembina Pipeline Corp (PPL-T) Another solid quarter from PPL as the company benefited from higher natural gas volumes, and higher toll rates due to inflation. All-in, a strong quarter and we continue to remain positive on the name as it should continue to benefit from growing WCSB nat gas and NGL production. Valuation remains undemanding, at 10.4x EBITDA, vs long term average of 10.7x and dividend yield (5.8%) is attractive for income oriented investors. Owned in Cash Flow Portfolio.

(+) Quanta Services (PWR-US) Q4 Non-GAAP EPS of $1.68 beats by $0.07. Revenue of $4.42B (+12.8% Y/Y) beats by $140M. FY2023 Outlook: Revenues to range between $18.40B and $18.90B vs. consensus of $18.26B. Quanta is engaged in the provision of specialty contracting services, offering infrastructure solutions to the electric power, oil and gas, and communication industries. Owned in US Portfolio.

(+) Sunrun (RUN-US) The solar company rose after its fourth-quarter earnings topped Wall Street’s expectations. Earnings per share were 29 cents, compared to 1 cent expected. Its adjusted net income came in at $63 million, above the $37.3 million expected. According to Bloomberg, the company deployed a record 275.4 MW of panels in the quarter, surpassing the 272 MW added by SolarCity in Q4 2015, less than a year before it was acquired by Tesla. Annual recurring revenue from subscribers totaled $1.04B at year-end 2022, with an average contract life remaining of subscribers at 17.6 years. Sunrun said it expects Solar Energy Capacity Installed growth of 10%-15% for FY 2023, with more upside opportunity than downside risk to achieving growth in this range while also anticipating market share gains in 2023. Owned in Core ESG+ Portfolio.

(~) Starbucks (SBUX-US) The coffee behemoth is rolling out a new line of beverages made with extra virgin olive oil. They're set to debut in Italy this week and the U.S. in the spring—and the company is betting that they'll be as successful as their signature Frappuccino. Each one is made with a spoonful of oil. The Oleato beverages will include an oat-milk latte imbued with extra-virgin olive oil, and a cold brew drink topped with “golden foam” infused with the oil. Howard Schultz, Starbucks's longtime leader, is overseeing the project and said that “this will be the most significant, transformative thing we've done in decades.” Owned in Core and US Portfolios.

(+) Timbercreek Financial (TF-T) is a leading non-bank, commercial real estate lender providing shorter-duration, structured financing solutions to commercial real estate professionals. Their sophisticated, service-oriented approach allows them to meet the needs of borrowers, including faster execution and more flexible terms that are not typically provided by Canadian financial institutions. By employing thorough underwriting, active management and strong governance, they are able to meet these needs while generating strong risk-adjusted yields for investors. Q4 Non-GAAP EPS of $0.17. Record quarterly net investment income of $31.3 million (up 39.7% from Q4 2021) and record annual net investment income of $109.8 million (up 21.7% from 2021). At the end of the period, net mortgage investments were $1,195.8 million (versus $1,159.6 million at year-end 2021) bearing interest at an average rate of 9.7% (versus 6.9% at year end 2021). Timbercreek units currently yield 8.3%. Owned in Cash Flow Portfolio.

(~) UnitedHealth Group (UNH-US) Within the Managed Healthcare space our preferred play remains UNH. Following an outperformance relative to the market and the broader Healthcare space, the stock is underperforming both on an YTD basis. We do not believe the YTD weakness in the stock is company specific however. Other stocks within the same sub-sector are also underperforming. We believe that this is a reflection in part of the rotation out of defensive sectors over the last few months as investors weigh the possibility of a soft landing for the economy later this year and redirect flows to more growth-oriented stocks. Owned in US Portfolio.

(-) United Therapeutics (UTHR-US) Q4 GAAP EPS of $2.67 misses by $1.83. Revenue of $491.5M (+18.4% Y/Y) misses by $27.7M. Their next-generation therapies are designed to address the unmet needs of patients living with conditions such as pulmonary arterial hypertension, pulmonary hypertension, and end-stage organ disease. Owned in Opportunity Portfolio.

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“Intuition will tell the thinking mind where to look next.”

– Jonas Salk