Gravitas: Two Year Rut

July 07, 2023 | Michael Newton


The Newton Group Insights

While short-term equity market returns over the last year have handily exceeded the long-term average, performance over the last two years has been equally extreme in terms of underperformance. As easy as it is to say the market has gotten ahead of itself, it is just as easy to look over a different time period and say that it has fallen behind. It all depends on your timeframe. Taking a slightly longer-term perspective, the S&P 500’s returns look a lot less extreme and, in some cases, even paltry. Look at the last two years for example. With an annualized gain of 3.4%, the S&P 500’s performance is one of the worst 24 months in history. In other words, as extreme as the last year has been in terms of better-than-average performance, the last two years have been just as extreme in terms of underperformance!

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

Portfolio Notes

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

(+) Bank of America (BAC-US) The bank announced that it was hiking its quarterly dividend to 24 cents per share from 22 cents. The increase of roughly 9% puts the bank’s dividend yield at about 3.3%. The hike comes days after Bank of America said it was discussing with the Federal Reserve differences in the results between the central bank’s stress test and an internal version of the test. Shares are still down 13% in 2023. Owned in US Portfolio

(+) Constellation Software (CSU) deployed $424MM on acquisitions in the 2nd quarter this year, below RBCCM’s estimate of $484MM. However, we would note that the pace/scale of acquisitions has risen, and this was the 4th largest quarter on record. Additionally, RBCCM estimates that these acquisitions are expected to be 5% accretive to 2023 earnings. Bigger picture, we continue to see CSU as a core tech holding for Canadian total return mandates due to its decentralized model, ability to compound capital at high rates of returns, and its robust pipeline for potential acquisitions. CSU is trading at ~20.2x EV/EBITDA on consensus estimates, a slight premium to its 5-year average of ~19.2x. Stock is also up 27% in 2023. Owned in Core Portfolio.

(+) Enphase Energy (ENPH-US) is one of the S&P 500's worst performers this year. The maker of solar panel microinverters is effectively being punished for slowing growth after growing revenue 79% and 69% in 2021 and 2022 respectively. Due to higher financing rates and lower California grid reimbursement rates, residential solar demand is expected to slow in the coming quarters and, along with it Enphase's financial results. We added to the name only recently. Today, less than 4% of U.S. electricity is solar generated. By 2050, this figure is projected to rise to 20% or more — and experience similar trends in international markets. Enphase has a leading position in this space because its microinverter technology comes with reliability, efficiency and cost benefits. The company's expansion in the EV battery market also bodes well for multi-year growth. The vast majority of analysts are bullish on Enphase and see the first half decline as an opportunity. Last week, B. Riley Financial upgraded to Buy, citing valuation. The stock trades at 23x next year's earnings, a low price to pay for the anticipated 31% profit growth. If ENPH rebounds to $255 over the next 12 months, as the Street is targeting, it will have gained more than 50%. Owned in ESG+ Portfolio.

(+) Eli Lilly (LLY-US) Biogen and Eisai's early Alzheimer's treatment Leqembi received full approval by the FDA and Centers for Medicare & Medicaid Services (CMS) confirming broader coverage is available under the government registry system. All as expected, so not new news, but sets the stage for Eli Lilly's rival Alzheimer's drug donanemab to gain approval at a later date. Eli Lilly is now world's largest health care company by market value. Owned in US Portfolio.

(+) Palo Alto Networks (PANW-US) While PANW has had a good year from a stock performance perspective, we remain bullish on the opportunity to benefit from waves of innovation and subsequent s-curves of growth opportunities. In addition to their core firewall business, most important in our view is success with Prisma Access, Prisma Cloud and Cortex XSIAM as we believe the company continues to help hybrid-cloud customers consolidate spend and futureproof their security framework. Owned in Opportunity Portfolio.

(+) Shopify (SHOP-T) Shopify's change in strategy has restored Wall Street’s confidence in the stock. Most importantly, Shopify entered into an agreement to sell its logistics business to Flexport in exchange for a 13% equity interest. While the logistics business had plenty of potential down the road, the investment needed to continue to build it up would be massive. The company also announced a 20% reduction in employee headcount. The combination of these moves led to a jump in the company’s share price. The company continues to see strong trends in most of its operating metrics, including gross merchandise and payments volume. Our long-term projections suggest strong growth will continue. The company’s ability to add clients at a brisk pace and develop new platforms augurs well for the long haul. Too, there remains plenty of room for expansion overseas. We continue to recommend Shopify. Owned in Core Portfolio.

(+) Tesla (TSLA-US) delivered a record 466,140 cars worldwide in the second quarter, outpacing Wall Street estimates. The results, posted last Sunday, demonstrated that Elon Musk’s vow to chase volume by cutting prices have had their intended effect. The deliveries are the most ever in a quarter for Austin-based Tesla, and a 83% increase from a year ago. The company also managed to trim the gap between production and deliveries — a figure closely watched by analysts — to 13,560 units in the second quarter. In the first quarter, it produced nearly 18,000 more cars than it delivered to customers. Owned in ESG+ Portfolio.

(+) Vale S.A. (VALE-US) a major Brazilian mining company. It engages in the production and exportation of iron ore, pellets, manganese, and iron alloys. Vale has seen its share price fall significantly in recent months, making it an inexpensive investment option despite political risks. The company also offers a high dividend yield of around 8%. Vale's current valuation is at 3.8x this year's expected EBITDA, which is in line with the 3-year median multiple, but significantly below the 5-year and 7-year median EBITDA multiple. Even with potential macro uncertainties, Vale still has potential. Vale has consistently paid large sums to its shareholders over the years. Over the last three years, Vale's total return was 80%, or around 22% per year, making it a compelling investment option. Owned in Opportunity Portfolio.

Weekend Reading

FHSA: 9 Questions Answered About the New First Home Savings Account RBC

The Satellite Renaissance A deep dive into the burgeoning space economy EVERY

When the Walkman was Banned Once headphones were controversial, heavily regulated wearable tech PESSIMIST ARCHIVE

Portfolio Nuclear After decades of stagnation a notable uptick in global nuclear generation will occur over the next three years. And because of this advance—estimated by the IEA at over 300 TWh—the world’s electricity system is expected to meet nearly all marginal growth during this period with renewables: wind and solar clearly in the lead, and nuclear pulling up the rear. GREGOR

Apple's Road to $3 Trillion The following chart illustrates Apple’s unparalleled rise from a struggling $5-billion company in 2000 to world-beating powerhouse over the past 23 years, while also highlighting some of the most notable product launches along the way. STATISTA

How to Create a Digital Estate Plan – 3 Steps You Can Take Our digital footprints are likely complex and growing. For someone to make sense of it after you are gone requires some serious planning. KINDNESS

16 Year Flashback. This article came a year before the Great Financial Crisis. A fright in the bond markets may end the cheap funds era. FINANCIAL TIMES


“Doubt is an uncomfortable condition, but certainty is a ridiculous one.”

- Voltaire