Gravitas: Two Year Safe Standstill

November 10, 2023 | Michael Newton


The Newton Group Insights

Time for a wakeup call! Most diversified portfolios as of the end of October have a negative 2-year return. By my calculations, 2022 was the third worst year for a diversified mix of stocks and bonds over the past 95 years. And 2023 is not shaping up any better. Unfortunately, the overwhelming majority of Canadians love a conservative approach as evidenced by where they invest. Here are the largest held mutual funds in Canada with total return data, where dividends are re-invested, to the end of October 31st, 2023:



2-year Total Return

RBC Select Balanced

$47.4 billion


RBC Select Conservative

$34.7 billion


PIMCO Monthly Income

$22.2 billion


RBC Bond Fund

$21.6 billion


TD Canadian Core Plus Bond

$20.8 billion


And look at these index statistics. Pretty grim!


2-year Total Return

S&P/TSX Composite Total Return


S&P/TSX High Dividend Total Return Index


S&P/TSX Canadian Banks


S&P/TSX Utilities


S&P/TSX Real Estate Trusts


Many believe that these sectors did well as a construct of the disinflationary era from 1980-2021. The only reason returns were so high was because rates and inflation were falling. Those tailwinds certainly helped. With rates, and returns on bonds, having increased, the fixed income side of a portfolio may start to get some love again. As should many of these bombed-out beloved Canadian stalwarts. But this only underscores my belief that total return can be found in every sector, and a good dividend is not the only factor one should focus on. At The Newton Group, we run the Cash Flow portfolio – which was named Cash Flow on purpose – meaning we try to identify companies with solid free cash flow + dividend yield + share buybacks. It has worked better than the data shown above.

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

Portfolio Notes

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

(+) Constellation Software (CSU-T) A solid quarter as earnings surprised to the upside driven by margins expansion (+202bps QoQ, to 27.4%). Organic growth of 6% YoY also came in better than expected, mainly driven by CPI based price increases. And finally, acquisitions totaled $907m for Q3, which was slightly below the $937m expected by RBCCM. We wouldn’t put too much weight on slower pace of acquisitions, as this can be lumpy quarter-to-quarter. The stock has massively outperformed the index, up 41% YTD, and trades slightly below its 5-year average multiple at 18.9x EV/EBITDA. We continue to own and recommend the name. Owned in the Core Portfolio.

(+) Coterra Energy (CTRA-US) is a 50/50 natural gas and oil company. They delivered strong results, including beating expectations where it matters most: free cash flow. It’s important to remember that cash flow is a function of energy prices and is therefore largely out of management’s control. No company, regardless of how big, is going to singlehandedly determine the price of a global commodity like oil or gas. As a result, it’s the production and capital expenditures forecasts that carry the most weight. And in that respect, Coterra delivered a favourable outlook for the year, which is helping to lift shares. Owned in Opportunity Portfolio.

(+) Hydro One (H-T) continues to deliver strong results while capturing growth beyond guidance. New transmission lines, outside its joint distribution and transmission regulatory application (JRAP), offer new investment opportunity alongside potential Ontario local distribution company (LDC) consolidation. At H's current share price, we expect impressive average equity returns above 11% through 2027. Shares yield 3.15%. Owned in Cash Flow Portfolio.

(+) Eli Lilly (LLY-US) officially entered the weight-loss drug race after the Food and Drug Administration approved its hotly anticipated competitor to Novo Nordisk’s Wegovy. Lilly’s Mounjaro, a Type 2 diabetes medication that has been used off-label for weight loss until now, will be branded Zepbound for that market. Lilly and Novo aren’t the only pharmaceutical makers racing to get a piece of what is expected to be a lucrative market. Lilly said it wants to persuade government and private insurance plans to cover Zepbound. Annual global sales of diabetes and obesity treatments are expected to reach $11.8 billion in 2025, up from an expected $4.5 billion this year. Owned in Core and US Portfolios.

(new) Netflix (NFLX-US) After a long hiatus, we initiated a new position in the streaming leader. JPMorgan seems to agree with me. They raised their price target to $510 a share, up from $480, while reiterating an overweight rating on the stock. The bank cites Netflix's ability to further grow revenues in 2024, expand margins and drive multi-year growth in free cash flow. It's the only streaming service to make money. Owned in Core Portfolio.

(+) Occidental Petroleum (OXY-US) Shares of the Houston-based energy producer - 22% owned by Buffett’s Berkshire Hathaway - climbed after quarterly earnings surpassed analyst expectations. Occidental reported earnings of $1.18 per share amid strong oil production, higher than the consensus estimate of 84 cents per share. Owned in Opportunity Portfolio.

(sold) NuScale Power (SMR-US) plummeted after reporting Q3 results. Q3 revenue of $7M (+118.8% Y/Y). Cash and equivalents of $196.6 million. Net loss of $58.3 million. Unfortunately, we were stopped out of what I consider to be a very interesting business. Was sold in the Opportunity Portfolio.

(+) TransDigm Group (TDG-US) Fiscal 4Q23 results were better than expected. The company provided an initial FY24 guide ahead of consensus estimates, and the capital allocation opportunity delivered both a $35/ share special dividend and a material acquisition. We believe the stock strength this week was justified, and we continue to view TDG as a high-quality way to get exposure to the commercial aerospace market. There are risks that AM growth will slow in 2024, but we believe visibility remains strong. Owned in Core and US Portfolios.

(--) The Trade Desk (TTD-US) Shares got hammered after earning were released. Interestingly results were good with outperformance in revenue and earnings, but Q4/23 guidance fell well short of expectations. Broadly, management highlighted more caution in the first two weeks of October followed by some stabilization in spend so far in November. We appreciate the conservatism into year-end and remain bullish on the long-term strategic growth opportunity. Owned in Opportunity Portfolio.

(+) UBER (UBER-US) earnings were well received this week. Shares of the ride hailing company rose after Uber’s third-quarter gross bookings of $35.3 billion topped the company’s guidance of $29 billion to $30 billion. Driven by improving revenue margin, higher advertising revenue, and solid expense management, Uber's profitability continues to expand. The profitability turnaround for Uber Eats continues to impress. It wasn't too long ago that many doubted whether the business could ever generate healthy, consistent profits due to its thin margins and the competitive landscape. UBER has proved the skeptics wrong, though, as Uber Eats adjusted EBITDA soared by 128% yr/yr to $413 million in Q3. The improvement is mainly attributable to better cost leverage from higher volumes and increased advertising revenue. Overall, this was another solid quarter for UBER. While sluggish discretionary spending likely did have some impact on both the Mobility and Delivery businesses, UBER's leadership positioning and its focus on driving higher profits came to the forefront once again. Owned in Core, US, and Opportunity Portfolios.

(-) Wynn Resorts (WYNN-US) posted better-than-expected third-quarter results, with adjusted property earnings climbing 206% year-over-year, to $530.4 million. But the stock was down on investor concerns over an uneven recovery at Wynn's properties in Chinese gambling hub Macao. Owned in Opportunity Portfolio.

Weekend Reading

Fission Chips How artificial intelligence could disrupt the energy market. DOOMBERG

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The 20 Most Common Investment Mistakes, in One Chart No one is immune to errors, including the best investors in the world. Fortunately, investment mistakes can provide valuable lessons over time, providing investors an opportunity to gain insights on investing—and build more resilient portfolios. CFA Institute CFA & VISUAL CAPITALIST

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- The Psychology of Money