Gravitas: The Less Glamorous

May 10, 2024 | Michael Newton


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The Newton Group Insights

So far in 2024, three sectors have outperformed the rest: utilities (+15.05%), Communication Services (+14.92%), and Energy (+13.19%). These sectors, often eclipsed by the more glamorous tech and consumer goods sectors, are revealing significant trends that investors should not ignore. While these sectors share similar infrastructure, technology, and regulatory support, an under-explored commonality is their reliance on metals, notably copper and silver. Copper, affectionately known as 'Dr. Copper' is a bellwether for economic health due to its extensive use in construction, electronics, and manufacturing. Analysts often interpret rising copper prices as a sign of economic growth, as more copper is required for various development projects. Right now, Copper is about to eclipse its all-time highs. Silver may not be as celebrated as gold or copper, but its role is equally pivotal. Primarily driven by industrial demand, silver's superior thermal and electrical conductivity makes it essential in electronics, solar panels, and batteries. Its prices are approaching new 11-year highs. There are growing concerns about potential shortages, particularly evident in the raw materials used in electric vehicles compared to traditional combustion engines. As copper and silver prices move higher, sectors that leverage these metals are emerging as prime opportunities for investors. This shift could redirect attention from the tech-centric trends that have dominated investor focus, presenting new avenues for diversification and investment.

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Portfolio Notes

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

(+) Berkshire Hathaway (BRK.B-US) Overall Q1 results beat expectations on stronger than expected operating profits, driven by strength in its insurance business (mainly Geico, the number 3 auto insurer) supported by higher pricing (+10% y/y) and lower costs (cuts to advertising and headcount). This was partly offset by weaker results at Burlington Northern Santa Fe (railroads division), which saw profits of -8%. We believe CEO Warren Buffett’s comments on Saturday's annual meeting are not market moving. Long-term, we continue to like BRK for its diversification, attractive risk-adjusted return profile in financials, earnings power, and ability to grow its book value per share. It is generally a good name to own for downside protection during market selloffs. The stock is +12.4% YTD, outperforming the SP500 +7.5%. Owned in Core, ESG+ and US Portfolios.

(+) Costco (COST-US) reported broadly in line April sales despite recent consumer volatility and the Easter timing headwind. Total Core comps of +5.5% were in line with street estimates, transactions accelerated to 1%, while global traffic was +4.6% (decelerating from +7.2% in March) with e-commerce moderating from very strong performance in the prior month. We continue to like Costco for its expanding loyal membership base (steady 90% renewal rates) and substantial cost-advantage achieved through scale and concentrated procurement (fewer SKUs). The company's business model has proven its durability through numerous macro market shifts (financial crisis, Amazon Prime, e-commerce expansion, pandemic, inflation). We believe their concentrated purchasing model will enable it to shift with demand more quickly, and its value orientation will remain compelling for consumers in the current uncertain economic environment. The stock is up 16% year-to-date, outperforming the S&P 500. Owned in Core and ESG+ Portfolios.

(+) Enbridge (ENB-T) reported a good Q1 with EPS and adj. EBITDA coming in well ahead of consensus estimates, with the variance stemming from renewable power. With the acquisition of additional interest in German offshore wind farms, generation of investment tax credits, and strong European wind resources, EBITDA was able to grow 100% Y/Y. Lastly, leverage remains at the midpoint of its target between 4.5x and 5x and mgmt. reaffirmed its 2024 guidance. Valuation is slightly above its long-term average and higher than midstream peers (ENB, TRP) and we would view the name as suitable for income-oriented investors given its 7% yield and sustainable payout ratio. Owned in Cash Flow Portfolio.

(-) Ferrari (RACE-US) shares lost this week as flat shipments and underwhelming 2024 guidance overshadowed above consensus results for Q1. The carmaker earned a profit of €1.95 per share which was up from €1.63 in the same quarter last year, beating the consensus estimate by €0.10. Revenue increased 11% to €1.585B. Adjusted EBITDA and adjusted net profit all improved from a year ago. Shipments, however, failed to impress investors as the number of new supercars sent to Mainland China, Hong Kong, and Taiwan were down by 20%, offsetting a 3% increase in EMEA and 4% increase in the Americas. As a result, total shipments were unchanged year-over-year. Owned in Opportunity Portfolio.

(~) Humacyte (HUMA-US) is a clinical-stage biotechnology platform company developing universally implantable, bioengineered human tissue at a commercial scale. They reported earnings at the end of the week. Q1 GAAP EPS of -$0.29 misses by $0.06. The Company reported cash and cash equivalents of $115.5 million. Owned in Opportunity Portfolio.

(+) Killam Apartment REIT (KMP.UN) reported funds from operations (FFO) per unit of $0.26 for Q1-F24, up ~2% YoY. The results were marginally below our expectations as three new development completions temporarily weighed on FFO growth. Having said that, leasing at these properties is progressing well, and management expects stabilization to occur over the coming months. Interest costs rose 15% YoY on elevated borrowing costs. Killam sold a parcel of development land in downtown Calgary for $2.4 million during the quarter and announced the sale of an 84-unit apartment building in Guelph, Ontario, for $19.2 million. Shares yield 4.02%. Owned in Cash Flow Portfolio.

(-) Palantir Technologies (PLTR-US) is failing to uncover any gains today even after topping revenue estimates in Q1, projecting Q2 revs above consensus, and raising its FY24 sales forecast. The AI-powered analytics software developer, whose roots began as a CIA-funded startup, was coming off an impressive Q4 performance that sent its shares toward 2021 levels. As investors piled in, pushing PLTR over +50% higher on the year, they were clamoring for another exceptional report in Q1. Facing this elevated bar, PLTR's results, albeit solid on the surface, proved rather dull this week. The company remains amid the early stages of a potentially long-lasting AI-induced tailwind. This week's quick drop offers a decent longer-term entry point, so we doubled our weight this week. Owned in Opportunity Portfolio.

(+) Pembina Pipeline Corporation (PPL-T) This was a good quarter for PPL with EBITDA 5% ahead of consensus expectations, which argues consensus figures should move higher. No major segment variances to note. FY2024 guidance was reiterated. PPL also raised its dividend by 3.4%. With respect to its Phase VIII Peace Pipeline expansion, it remains on schedule and below budget. Overall, the quarter is supportive of our positive thesis on the company and should support the shares in trading today. No update on the Cedar LNG project (final investment decision expected to be mid-2024). We continue to believe the company is well positioned to benefit from growing natural gas and natural gas liquids volumes in the Western Canadian Sedimentary Basin, alongside further infrastructure opportunities. Shares yield 5.30%. Owned in Cash Flow Portfolio.

(+) Pender Corporate Bond owns a 1.5% position in Novavax 5% convertible notes due in 2027 which were priced 61c on the dollar. On Friday, the company announced that Sanofi made a deal with them to commercialize its combination flu/COVID vaccine. The structure of the deal was that Sanofi pays Novavax $1.2B including a $500M upfront. The stock price surged over 125%. The convertible bonds? Trading near par this morning (up from 61 cents on the dollar). The impact on the fund is likely a +75bps for the Pender Corporate Bond Fund which is already up +5.25% on the year. Owned in Cash Flow Portfolio.

(-) Shopify Inc. (SHOP-T) delivered revenues and earnings that were slightly ahead of street expectations. However, shares plunged on the back of weaker-than-expected Q2/24 guidance. The company expects revenue to grow by high teens (vs the street at ~20%) and for operating margins to be around 11.5% (vs the street at 13.5%). All-in, growth-oriented companies are highly sensitive to the rate of change in the underlying business, but bigger picture, Shopify is still experiencing strong growth on an absolute basis. For context, they generated revenues of US$1.6B in 2019 and are on pace to produce more than US$8B in 2024, implying a CAGR of 38%. Furthermore, Shopify should produce more than US$1B in FCF in 2024 compared to US$14MM in 2019. Owned in Core Portfolio.

(-) Stantec (STN-T) reported Q1 results that were in line to ahead of consensus estimates and the company reiterated 2024 guidance. Looking ahead, we believe Stantec remains well positioned across its regions and end markets. As the Infrastructure Investment and Jobs Act (IIJA) activity ramps up Stantec will benefit, supported by the company's record backlog. Owned in Core Portfolio.

(+) Taiwan Semiconductor (TSM-US) There is AI in Taiwan. The chip maker said that its revenue in April soared 60% on the year with sales to $7.3 billion USD, driven by ongoing demand for artificial intelligence and signs of recovery in consumer electronics. The world’s largest contract chipmaker is projected to boost sales by about a third this quarter, following a 34.3% increase in revenue growth in March, primarily fueled by the relentless demand for AI semiconductors. The global smartphone market, particularly competitive in China, has grown again in the first quarter, potentially increasing orders for TSMC’s core mobile chips. Owned in Cash Flow and Opportunity Portfolios.

(-) Toronto-Dominion Bank (TD-T) TD’s AML challenges have resulted in severe underperformance relative to peers year-to-date and remains a key area of concern amongst investors. As a result, RBCCM is out with a timely note that attempts to quantify the floor price if the worst-case outcome were to materialize. Hypothetically, RBCCM believes this would involve (1) a monetary fine of US$3B, (2) an asset cap of 5-years on its U.S. business, (3) the bank being placed under monitorship which should result in higher expenses, and (4) a change in management/board. With respect to the monetary fine, TD’s capital could drop to ~12.6%, however TD could sell some or all of its Schwab stake to shore up capital if required. In the event of an asset cap and/or monitorship, the U.S. business could potentially stagnate for a few years and investors would likely ascribe a lower multiple to the stock. All-in, RBCCM believes the market is pricing a 27% probability of these events occurring and estimates a floor price of $67 (or 12% downside) if this scenario was to materialize. From our standpoint, we believe existing positions can be held due to the stock’s inexpensive valuation relative to history, but putting new money to work is difficult due to the high degree of uncertainties. As a result, we would remain patient with new money until greater visibility comes to light. Shares yield 5.16%. Owned in Cash Flow Portfolio.

(-) Telus Corporation (T-T) Without a doubt, it’s been a tough operating environment for the telecoms, but Telus reported a decent quarter all things considered. The top line was a bit soft, but more importantly, earnings were slightly ahead of the street. This was supported by stronger-than-expected net adds in both wireless and wireline services. On the flip side, we would note that mobile ARPU declined by ~2%, a reflection of the cheaper wireless plans that have come to market. Looking ahead, the company also reaffirmed its Y/Y EBITDA growth target of ~6.5% (best-in class). Finally, Telus increased its dividend by 3.5%. Overall, Telus put up the best set of results relative to peers in our view. Valuation remains inexpensive relative to history, but the competitive environment remains fierce and bigger picture, there are headwinds in immigration/population growth. Put differently, Telus remains our best idea amongst telecoms, however, we see no urgency in putting money to work in this industry today. Shares yield 6.71%. Owned in Core and Cash Flow.

(+) The Trade Desk (TTD-US) is the largest independent demand side advertising platform (DSP) creating a one-stop-shop for advertisers looking to centrally manage omni-channel campaigns. The Trade Desk is uniquely positioned given its scale and breadth of platform to fill the void left by cookies in the open internet as it continues to be the central cog of the eco-system. Trade Desk proved recent sentiment improvements were warranted with a no-drama quarter delivering a quality beat and raise with strength in profitability. While growth was broad-based across verticals and formats, Connected TV remains a highlight both in the quarter and strategically for the future. We continue to like Trade Desk's strategic positioning to further consolidate new and existing digital ad spend. Owned in Opportunity Portfolio

(+) TransDigm Group (TDG-US) The aerospace and aircraft parts supplier reported Q2 Non-GAAP EPS of $7.99 beats by $0.58. Revenue of $1.92B (+20.8% Y/Y) beats by $40M. EBITDA for the quarter increased 21.4% to $919 million from $757 million for the comparable quarter a year ago. We continue to love this company. Owned in Core, Cash Flow and US Portfolios.

(-) Uber (UBER-US) It's recent turn to profitability took a surprising detour in Q1 as unrealized losses on equity investments and litigation costs dragged EPS lower to ($0.32), badly missing expectations, while its Q2 gross bookings outlook also came up a bit short. The healthy rideshare industry trends drove UBER's Q1 Mobility Gross Bookings higher by 26% (constant currency) to $18.7 billion, but that total was slightly below expectations. During the earnings call, CFO Prashanth Mahendra-Rajah noted that last year, UBER saw stronger demand in Brazil around Carnival and the company didn't see that occur in Q1 this year. There also was a timing-related headwind in Q1 with Easter and Ramadan shifting between quarters. The main takeaway is that UBER's Q1 report was a notable step back from its recent performances, particularly on the bottom-line, where the company slid back into the red. From a demand standpoint, business is still healthy in both Mobility and Delivery, but UBER's more tepid Q2 guidance indicates that the momentum it had coming out of its Q4 earnings report in early February has lost a little steam. Owned in Core, ESG+, US and Opportunity Portfolios.

Weekend Reading

RBC MacroMemo - May 7 – 27, 2024 U.S. economy slows / Insurance inflation / Business cycle / Fed recalibrates / Wage growth in context / Geopolitical risks quantified / China’s third plenum / Productivity & technology / and more RBC

Spring brings sellers out; buyers remain hesitant. Statistical reports for April from local real estate boards showed sharp increases in new listings and inventories in Vancouver, Toronto, and Montreal. RBC

Are You an Investment Historian or a Futurist? Each approach has its advantages—and drawbacks. MORNINGSTAR

The Most Important Skill of the Future is Being ‘Indistractable’ Although distractions aren’t necessarily your fault, they are your responsibility. It’s time to equip yourself to manage your distractions. NIR AND FAR

Kevin Kelly’s 101 Additional Advices Kevin Kelly co-founded Wired Magazine in 1993. He is co-chair of The Long Now Foundation, a membership organization that champions long-term thinking. THE TECHNIUM

 

“I don’t feel that Wimbledon has changed me. I feel, in fact, as if I’ve been let in on a dirty little secret: winning changes nothing. Now that I’ve won a slam, I know something that very few people on earth are permitted to know. A win doesn’t feel as good as a loss feels bad, and the good feeling doesn’t last as long as the bad. Not even close.”

 

- Andre Agassi in Open: An Autobiography