A longer than normal post today on information. Good information is something we are all looking for. I have three discussions to present. Gell-Mann Amnesia, Information Tortoise and Page Sixteen.
Michael Crichton coined the term Gell-Mann Amnesia effect to describe forgetting how unreliable a source is in one area when you trust it in another area. Michael Crichton was a writer and filmmaker, best known as the author of Jurassic Park, The Andromeda Strain and the creator of ER. He passed away in 2008. Murray Gell-Mann is a Nobel Prize-winning physicist with whom Crichton discussed the following thought with: "Briefly stated, the Gell-Mann Amnesia effect works as follows. You open the newspaper to an article on some subject you know well. In Murray's case, physics. ( In my case, show business. You read the article and see the journalist has absolutely no understanding of either the facts or the issues. Often, the article is so wrong it actually presents the story backward-reversing cause and effect. I call these the ‘wet streets cause rain’ stories. Paper's full of them. In any case, you read with exasperation or amusement the multiple errors in a story-and then turn the page to national or international affairs, and read with renewed interest as if the rest of the newspaper was somehow more accurate about far-off Palestine than it was about the story you just read. You turn the page, and forget what you know.”
Next time you are consuming the morning media ask yourself, "Am I the information tortoise vs. the breaking news hare." Strategist Joachim Klement discussed this subject. We live in an age where breaking news dominates the financial media. Information about major company X missing its revenue or profit targets immediately leads to a reaction in the share price. But not all news travels so fast. Some news is only incorporated slowly into the share price. And that provides opportunities for investors. There are frequently cases when positive news is temporarily ignored or overlooked by Mr. Market and only slowly incorporated into the share price over the course of days or sometimes weeks. In my experience, this happens particularly often in a bear market when a company has positive news. Because the mood is so negative, this kind of positive surprise in a negative sentiment environment tends to be integrated into the share price much slower than negative news in a negative sentiment environment. Researchers from the University of Reading in the UK concluded that an investment strategy of investing in shares that incorporate news slowly manages to outperform the S&P 500 by more than 1% per month. This is most likely due to the limited attention effect. Stocks in the spotlight of investors tend to incorporate news quickly and efficiently. But other stocks do so much more slowly. Which stocks tend to incorporate news more slowly? Smaller stocks, less liquid stocks, stocks followed by fewer analysts and stocks less covered by the media are the ones that fall under this category. And looking for investments where few others are looking can be a significant advantage as this study shows.
Page-Sixteen. When a story shows up on a magazine cover, the biggest profits have generally been made. An investment process that looks for “page sixteen” stories can be very profitable. The basic idea is this: You don’t make money from stories on the front page. You make money from the stuff on page sixteen...as it steadily moves forward toward page one. By the time it hits page one, the big gains have been made. Does that mean a move is “over” once a magazine cover shows up? Not necessarily. Sometimes, when a story hits page one, the final stage of the move is yet to play out — and that can be the most spectacular. Think “blow-out” in terms of euphoria or pessimism extremes. But still, you want to be well positioned before that happens. And sometimes, a trade is so powerful and so long-lasting, it goes further than anyone could have thought possible. This, in turn, circles back around to that “page sixteen” focus. Getting your size on relatively early (yet wisely and safely) is key. You don’t need a crystal ball to trade markets successfully. But you need the ability to anticipate. We don’t know what the future holds. And that is where the art and science of trading comes into play.
Should you have any questions or concerns, please feel free to reach out.
Portfolio Notes
(+) indicates a positive development, (-) indicates negative, and (~) indicates neutral
(~) Alimentation Couche-Tard (ATD-T) The Canadian convenience store leader has reached a binding agreement to acquire a number of locations from Big Red Stores. The Quebec-based parent of Circle K and On the Run stores will now operate 45 fuel and convenience retail sites in the state of Arkansas as a result of the deal. All but one of the sites is placed upon real estate owned by the company and “predominantly” feature “enhanced foodservice and product offerings” in updated storefronts. "We are very pleased to add Big Red Stores' high-quality locations to our footprint in the state of Arkansas.” said Alex Miller, COO at Couche-Tard, said. “As we expand our presence in the area, we look forward to bringing the Circle K experience to new customers and making their lives a little easier every day.” Owned in Core Portfolio.
(-) Bank of Nova Scotia (BNS-T) The negative performance in trading this week speaks to investor frustration with what many had already viewed as a low expectations bar. The reason for the weakness frankly, in our view, is that no one knows what earnings could possibly look like a year down the road. Although Scott Thomson took the CEO seat on Feb 1, with the bank not likely to provide an update on strategy/vision/direction until sometime next year, analysts/investors are essentially left in the dark, in our view. Thus, estimate and target price cuts have come fast and furious this week. Now there were positives from the quarter, such as credit reserve builds and the institution of a 2% DRIP, that suggest the tone at the top has changed, for the better, in our view. We only recently initiated a position. With the bank trading at the lowest valuation of the bank group, valuation is the only reason to add to shares at this time, in our view. I suppose we have to be happy with the 6.0% yield and we are happy to clip a healthy coupon while patiently waiting for a potential turnaround. Owned in the Core Portfolio.
(~) Canadian Natural Resources (CNQ-T) produced mixed results driven by healthy CFPS generation, but volumes came in modestly below expectations due to colder-than-expected weather. More importantly, we believe the focus will turn to the company’s return of capital strategy. To begin, CNQ increased its dividend by 6% to an annualized rate of $3.60 per share, implying a dividend yield of 4.6%. The company announced it is now planning to allocate 100% of its excess free cash flows (previously 80-100%) once net debt falls to $10B (previously $8B). As a result, the ramp-up in return of capital is imminent in our view. Overall, we are taking a positive view on the quarter and the update reinforces why CNQ remains our preferred energy producer. Owned in Core and Cash Flow Portfolios.
(-) Costco Wholesale (COST-US) Shares declined after Costco Wholesale reported a revenue miss in its fiscal second-quarter earnings. The wholesale retailer reported revenue of $55.27 billion, less than the consensus estimate of $55.54 billion. Costco otherwise beat earnings per share expectations. Longer term, the company remains best-in-class amongst big-box retailers due to its unrivalled value proposition, 90% membership renewal rate, and global growth opportunity. Owned in Core Portfolio.
(~) Enbridge (ENB-T) provided an update on strategic priorities. Announcement of $3.3B of new accretive investments to further advance their strategy. Through 2025, management expects to grow EPS and EBITDA by a CAGR of 4-6%. Enbridge to acquire Tres Palacios Gas Storage, advancing U.S. Gulf Coast Strategy. ENB acquiring a 10% stake in Divert Inc, a leading food waste Management Company. Hamilton Growth Project: The largest GHG emissions reduction project underway in Ontario, expected to reduce emissions by 60% from today. Shares yield 6.87%. Owned in Cash Flow Portfolio.
(+) First Solar (FSLR-US) The solar stock surged after it issued full-year guidance that was ahead of expectations on per-share earnings and revenue. They reported a fourth-quarter loss of 7 cents per share compared with a 17 cent per-share loss forecasted by analysts surveyed by FactSet. The company’s revenue came in line with expectations at $1 billion. They issued upside guidance for 2023 of earnings of $7.00-$8.00/share on revenues of $3.4B-$3.6B. The company expects to receive $660M-$710M in Inflation Reduction Act (IRA) tax credits. The company's earnings underscored its status as potentially the biggest U.S. beneficiary of the IRA. Owned in Opportunity Portfolio and Core ESG+ Portfolios.
(-) Royal Bank of Canada (RY-T) Q1 Non-GAAP EPS of C$3.05 beats by C$0.12. Revenue of C$15.09B (+15.5% Y/Y) beats by C$1.56B. Return on equity was 12.6%, or 16.8% excluding the specified item, reflecting strong organic capital generation. Capital position remained robust, with a CET1 ratio of 12.7%, supporting strong volume growth and $1.8 billion in common share dividends. Total PCL of C$532 million increased C$427 million from a year ago. Shares yield 3.95%. Owned in Core and Cash Flow Portfolios.
(+) Suncor Energy (SU-T) is selling its UK E&P business for C$1.2 billion. The deal is expected to close mid-2023. There is no impact on production guidance as SU already baked this into their guidance. Overall, we view this transaction favourably to the SU story. SU currently trades at a discounted valuation relative to its peer group, and we think this discount can narrow if SU is able to get its operational issues in order. Owned in Core Portfolio.
Weekend Reading
Infographic: Economic conditions weigh on Canadian investors’ minds From rising inflation and interest rates to stock market volatility, Canadian investors are feeling concerned about their retirement goals due to the current economic landscape, the latest Scotia Global Asset Management Investor Sentiment Survey shows. SCOTIABANK
Generational Wealth Needs A Rebrand You can inherit more than just money DOUGLA A. BONEPARTH
What is gendered ageism? Hear Dr. Paula Rochon, founding Director of the world's first Women's Age Lab, discuss gendered ageism and the importance of gender-based research. RBC
