The Dow Jones Industrial Average has received a lot of attention lately from posting a 13-day winning streak (which broke this week) after significantly lagging the S&P 500 in the first half of 2023. The Dow has had a strong start in July because some of its highest weighted holdings have started to work. For example, the Dow’s two highest weightings – UnitedHealth (9.42% weight) and Goldman Sachs (6.63% weight) – were two of its 3 worst performing stocks in the first half, but have accounted for almost half of its July rally. One oddity of The Dow is each company is weighted by its price. For example, United Health, which trades close to $505 has a weighting 10x larger than Cisco, which trades near $53. It has nothing to do with the size of the company or its market capitalization. The table below is fascinating. In the Dow, Apple is half as important as Home Depot. Verizon hardly registers.
The idea behind stock market indexes came from Charlie Dow. He created the Dow Jones Industrial Average (the companies that produce the goods) and the Dow Jones Railroad Average (the companies that deliver the goods). Now known as the Dow Jones Transportation Average, these 2 indexes remain a great gauge of the overall health of the stock market even to this day. Dow Theory indicates that the broader stock market is likely to be headed higher if those two averages reach new highs in the same short period. One of the tenets of Dow Theory is that the averages must confirm each other, meaning breakouts and breakdowns should happen in concert, and that’s what happening now. Given the recent breakouts in both Dow Jones indexes, a “Dow Theory" buy signal has now been triggered adding to the evidence of the sustainability of this bull market. In a nutshell, The Dow is benefiting from the market rally broadening out beyond Big Tech. A bullish signal, yes, but it needs to continue.
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Portfolio Notes
(+) indicates a positive development, (-) indicates negative, and (~) indicates neutral
(new) ServiceNow (NOW-US) Founded in 2004 by Fred Luddy, ServiceNow is an enterprise IT cloud company that delivers SaaS-based applications to automate and standardize IT business processes. We are bullish on the company’s ability to take share in the IT Service Management (ITSM) market as ServiceNow becomes the “ERP for IT”. Its technology centers on a suite of applications built on a proprietary platform that automates workflow, processes, and integration-related business activities. Customers deploy its services to create a single system of record for IT, which reduces costs and streamlines operations. Moving beyond IT, ServiceNow could become the platform for the enterprise as customers and partners write custom SaaS applications for HR, finance, facilities, legal, and procurement on its platform. New Position in US and Opportunity Portfolios.
(+) Agnico Eagle (AEM-T) Shares in the gold miner were mixed after reporting better than expected Q2 adjusted earnings and reaffirming full-year guidance for production, cost and capital spending. Owned in Core Portfolio.
(-) Crown Castle (CCI-US) Based on management's comments, leasing activity seems unlikely to rebound in 2024. However, it is somewhat comforting to know that 75% of the 5% organic growth is contracted. We believe its tower business in particular should continue to benefit from the ongoing exponential increase in mobile data usage (+30% per year) and will be an integral part of the US mobile networks over the long-term. Owned in US Portfolio.
(-) Chipotle Mexican Grill (CMG-US) reported quarterly earnings that crushed expectations, but the burrito chain’s sales fell short. The stock fell on Thursday although shares were up 50% this year. Last quarter, Chipotle said it was done raising menu prices after hiking them earlier to mitigate rising labor and commodity costs. We added to shares on weakness this week. Owned in US Portfolio.
(-) Canadian National Railway (CNR-T) faced a challenging Q2, with lower customer orders, wildfires, and a preemptive traffic slowdown to mitigate the impact of the B.C. port workers' strike weighing on volumes. CNR's current share price fails to capture the company's long-term value proposition, which is underpinned by operational efficiency gains from its return to scheduled railroading principles and future volume growth opportunities tied to port expansions, bulk commodities, and continued natural resource development in northeastern British Columbia. Owned in Core Portfolio.
(~) Canadian Pacific Kansas City Railway (CP-T) Q3 results that were well below consensus expectations as the railroad had a surprisingly weak operating ratio (O/R). The weakness in the O/R resulted from the company carrying excess capacity to prepare for expected growth related to the KCS merger. In our view, this should resolve itself as the integration of pushes forward. The key takeaway though is that Mgmt reiterated its guidance, which means the second half of the year should be strong. Owned in Core Portfolio.
(+) Cenovus Energy (CVE-T) There were no major surprises from CVE this quarter and the company continues to use strong FCF to pay down debt (net debt stood at $6.4B at the end of Q2). Overall, valuation remains attractive and FCF generation remains strong, and we continue to be buyers of the name at these levels. Owned in Core Portfolio.
(~) Danaher Corp (DHR-US) We like DHR because it holds leading positions in attractive and fast-growing end markets. It enjoys a sticky recurring revenue stream (80%) that is fortified by differentiated technology, high switching costs, and intangible assets. Its strong balance sheet supports the company's disciplined acquisition strategy, driving improvement to its product portfolio, expansion into attractive markets, and strong profit/cash flow growth. We believe the current headwinds will prove transitory and are happy to keep buying shares. Owned in US Portfolio.
(-) Enphase Energy (ENPH-US) Despite beating the analyst consensus estimate for quarterly earnings, the company’s stock plunged after its second-quarter earnings report. And right on time, the board authorized a new share repurchase program, under which they may repurchase up to $1.0 billion of the company’s common stock. Enphase Energy makes micro inverter systems for the solar photovoltaic industry. Owned in ESG+ Portfolio.
(~) Enovix (ENVX-US) This advanced silicon battery company announced results and the market was initially impressed but shares later fell. We have done very well with these shares in 2023. The company’s disruptive architecture enables a battery with high energy density and capacity without compromising safety. Enovix is rapidly scaling its silicon-anode, lithium-ion battery manufacturing capabilities to meet customer demand. In Q2, They produced 22,502 units, which beat their plan of 18,000 units by 25%, due to continued operational improvements in Fab1. Owned in Opportunity Portfolio.
(+) Freeport McMoRan (FCX-US) rallied as prices climbed for copper and other base metals after top consumer China pledged to step up policy support for the economy, focusing on improving domestic demand. Copper is still down more than 9% from its mid-January peak achieved during a short-lived period of bright expectations for a post-pandemic boom in China. Owned in US and Opportunity Portfolios.
(-) CGI (GIB.A-T) shares fell after the firm saw organic growth slowing to 5% from 9%. We believe CGI’s strong exposure to the government vertical—which is currently a source of high growth—will help bridge any near-term uncertainty. CGI continues to evaluate M&A opportunities but sees more emphasis on buybacks. Owned in Core ESG+ Portfolio.
(-) Louis Vuitton (LVMUY-US) reported strong numbers in its second-quarter as consumers in Asia and Europe fueled its sales growth. The US luxury market slowed, the LVMH chief financial officer said the following: "aspirational customers are not shopping as much as they used to." Very wealthy individuals are less affected by economic factors like inflation and student debt. The stock price has had an epic run in the last five years, but softened a little after this update. Owned in Core Portfolio.
(+) McDonald's (MCD-US) traded higher after reporting yet another nice EPS and revenue beat. In fact, this was MCD's largest EPS beat of any quarter in the past five years. The stock is getting close to that $300 level which has acted as resistance. Maybe this report can push it through. Owned in US Portfolio.
(-) Microsoft (MSFT-US) Shares slide after issuing quarterly revenue guidance that fell short of analysts’ expectations. The soft revenue outlook was partly due to weakness in the segment that contains Windows software. Microsoft did report earnings and revenue that beat Street estimates for the calendar second quarter, however. Microsoft has a had a great run this year and are up almost 40% in 2023. Owned in Core and US Portfolio.
(-) NextEra Energy (NEE-US) delivered overall better than expected Q2 results, beating consensus on both top and bottom line. We like NEE because it provides a secure 2.5% dividend as well as industry-leading renewable energy growth potential. Given the recent weakness in the stock, we are comfortable modestly adding to positions at these levels. Owned in Cash Flow Portfolio.
(-) Norfolk Southern Corporation (NSC-US) Q2 results and management's 2023 revenue guidance both came in below expectations but shares traded flat. Following a derailment earlier this year the worse may be behind it. Overall, we believe that the rail sector as a whole has positive fundamentals that we expect will drive long-term growth in free cash flow. Owned in US Portfolio.
Sector Spotlight: Canadian Telecom Major decision by the Canadian Radio-television and Telecommunications Commission (CRTC) last night. Rogers and Quebecor/Freedom have been before the CRTC trying to agree on rates Quebecor will pay to Rogers for using its network to provide cell coverage outside of Quebecor’s home network. The CRTC sided with Quebecor’s proposed rate structure. While the CRTC did not disclose the rate, most analysts today are viewing this as positive for Quebecor and negative for incumbents like Rogers, BCE and Telus because it could put further pressure on prices. As part of the decision, the CRTC says when making considerations about deciding what rate new entrants will pay to established networks the regulator said reasonable rates may not provide an immediate term return on investment or possibly require an otherwise profitable enterprise to incur a modest or temporary loss. In other words, the CRTC could force the incumbents to take a short-term financial hit in order to allow new entrants to survive. We own Bell and Telus in portfolios we manage.
(-) Silgan (SLGN-US) Not a good earnings report. Sales fell 8% to $1.43 billion. The real stinger is that Silgan lowered its outlook for this year. I haven’t given up on SLGN just yet, but will be watching. Silgan is a leading global sustainable packaging provider for consumer goods products to many of the world's best known consumer products companies. Owned in US Portfolio.
(-) Taylor Morrison Home (TMHC-US) The home builder beat on Q2 top and bottom line estimates but shares fell. Q2 GAAP EPS of $2.12 beats by $0.45. Revenue of $2.06B (+3.0% Y/Y) beats by $340M. Owned in US Portfolio.
(+) Visa (V-US) reported steady growth for the second quarter of 2023. Both revenue and profit figures came in higher than Wall Street expected, reflecting a resilient global consumer. Visa processed total payments volume of $3.17 trillion for the quarter, representing a 9% increase from a year ago. Cross-border swipes increased by 17%, consistent with strong tourism figures reported by travel companies. Visa made $8.1 billion from facilitating all those money transfers, and racked up profits of $4.2 billion for shareholders. This really is an amazing business, with very juicy margins! They generate $1 of net profit for every $2 in revenue, and are the envy of most businesses. Owned in Core and US Portfolios.
(+) Verizon (VZ-US) beat Q4 profit estimates on the back of lower costs and a surprise rise in wireless subscribers as efforts to grow its enterprise customer base and super-fast 5G network paid off. Shares now yield close to 7.78%. Owned in Cash Flow Portfolio.
(-) Exxon Mobil (XOM-US) Shares slipped after missing Q2 adjusted earnings estimates while revenues fell 8% year over year to $82.9B, hurt by the drop in oil and gas prices from last year's highs that were driven by Russia's invasion of Ukraine. Owned in Opportunity Portfolio.
Weekend Reading
The Problem with Valuation Investing is much simpler today than it used to be. With the rise of cheap diversification over the last half century, investors today are willing to accept lower future returns (i.e. higher valuations) than their predecessors. This has fundamentally changed valuation metrics and made historical comparisons less useful than they once were. DOLLARS AND DATA
High-tech pastoral as the new aesthetic Explaining a common taste of aging millennials. "Taking a Zoom call in your home office, pajamas underneath a suit jacket, just out of frame. There are trees out the window." INTRINSIC PERSPECTIVE
Scott Galloway: Boys to Men Every segment of society, except the wealthiest, can point to setbacks. One group’s slide is particularly steep, and its decline presents a threat to the commonwealth and our prosperity: Our young men are failing, and we are failing them. SCOTT GALLOWAY
Stronger, faster, smarter: The transportation strategy Canada needs to win post-IRA (US Inflation Reduction Act) “Can I get my product to global markets?” It’s a nagging question for Canadian businesses and international investors eyeing new opportunities for Canada to feed the world, become a critical minerals hub, an electric vehicle powerhouse, and export Canadian copper and cheese around the world. RBC
Birth, Death, and Wealth Creation: Why Investors Need to Understand Corporate Demographics Investors seeking to generate excess returns can benefit from understanding the demographics of public companies and their patterns of wealth creation. PDF
Of Lucky Idiots and Orangutans How often in our business are people right for the wrong reason? These are the people Nassim Nicholas Taleb calls “lucky idiots,” and in the short run it’s certainly hard to tell them from skilled investors. SAFAL NIVESHAK
From The Archives: The Death and Birth of Technological Revolutions (2021) AI and crypto are two very different, but very much related, elements of society moving from the industrial age to the digital age. Introducing the Carlota Perez framework, which studies how techno-economic paradigms unfold over eras. Ben Thompson has a good summary of her ideas in this article from 2021. STRATECHERY
