Last week I commented on how chill 2024 had been in the markets. That changed this week! But I do not believe this was a peak. While US equities may whip around more than usual over the next few months, they still tend to peak in Q4 and end the year up double digits. The table below shows the number of times (and percent of the total) that the S&P peaked for the year in each month back to 1980, and the average total annual return during those years. The S&P has peaked for the year 70% of the time in Q4 over the last 5 decades. In fact, US equities usually post annual gains, doing so 82% of the time from 1980 -2023. (36 out of 44 years). The S&P has much higher odds of peaking in the final quarter of this year rather than this month (70% versus 2%). Although we had a very volatile week, the S&P is still up 14.4% and history says there’s still more room to run should it not top out until Q4. US equities will likely experience incremental volatility through October due to seasonal trends and the US presidential election, but we remain bullish through year end.

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

Portfolio Notes

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

(-) Alphabet (GOOGL-US) Google posted results that handily beat analyst exceptions on both revenue and profits. Disappointingly, the stock dropped. The only letdown in Google's results was that YouTube's revenue grew slightly slower than expected, by 13% instead of 16%. YouTube has spent 17 months as the top US video streaming service. Interestingly, sports streaming hours grew 30% over the last year. When you think of the platform, sport isn't the first thing that comes to mind, but Google is investing in sporting content to keep more customers coming back. They grew revenue by 13% for the year, at widening profit margins, so earnings per share shot up 31%. Google is the cheapest of all the mega-cap tech companies, trading on a forward price to earnings ratio of just 23. Owned in Core, ESG+ and US Portfolios.

(-) Canadian National Rail (CNR-T) Q2 earnings fell 5% short of expectations as increased costs and operational challenges offset a 7% rise in volumes. Cost overruns, unplanned corridor maintenance, and labor rules impacted the company's performance. Throughout the first half of 2024, CNR remained confident that improving economic conditions and progress on company-specific growth opportunities would drive volumes and earnings growth. However, CNR lowered its 2024 guidance to mid to high single-digit growth vs. its previous guidance for a 10% YoY gain. The potential labor disruption and overcapacity in the trucking market are pressuring volumes and rates even as CNR's western network efficiency is starting to normalize. Owned in Core and ESG+.

(+) Chipotle (CMG-US) The fast-casual restaurant’s earnings and revenue both topped estimates, with same-store sales rising 11.10% YoY vs. expectations of 9.20%. Net sales rose 18.20%, while restaurant traffic increased 8.70% despite social media backlash over the company’s inconsistent portion sizes. Notably, restaurant transactions grew across every income level, bucking the weakening trends that McDonald’s, PepsiCo, etc. have seen in their business. As a result, management is pushing forward with its expansion plans, anticipating 285 to 315 new restaurant openings this year. It also reiterated its outlook that sales will grow by a mid-to-high single-digit percentage for the full fiscal year. Owned in US Portfolio.

(+) Couche-Tard (ATD-US) is buying back 8M shares or $700 million worth of its own shares from Quebec pension plan the Caisse. The convenience store chain says it will buy back 8.7 million of its own shares from the Caisse for $80.50 apiece, a roughly three per cent discount to what the shares closed at on Monday. The two sides made a similar deal this time last year, and when this one is completed, Caisse will retain a stake of about 32 million shares in Couche-Tard. That’s about 3.5 per cent of the company. Owned in Core, and ESG+ Portfolios.

(+) First Quantum Minerals (FM-T) Canada’s First Quantum Minerals Ltd. has reached an agreement with Jiangxi Copper Co. Ltd. that significantly curbs the power of its major China-based investor and makes Jiangxi Copper far less likely to act as a mergers and acquisitions kingmaker. The company has an 18.5-per-cent stake in First Quantum. The shareholder rights agreement with Jiangxi Copper could provide opportunities for partnership on future projects and we believe they would be a logical acquirer of an interest in FM's Zambian operations, which could be a positive catalyst later this year. In Panama, selling the concentrate, re-starting the power plant and any negotiations with the government could also provide a tailwind. Owned in Core Portfolio.

(-) Louis Vuitton (LVMUY-US) LVMH led a sell-off in global luxury stocks after the industry bellwether reported slower than expected sales from shoppers reining in spending on champagne and handbags. Shares in the world’s biggest luxury group closed down marking a decline this year of 8.8 per cent. Other luxury stocks also declined as investors worried about demand from Chinese consumers and the outlook for a sector that is slowing down after several years of record growth. Revenues at LVMH, the world’s biggest luxury company and owner of Louis Vuitton, Dior and Tiffany, grew 1 per cent on an organic basis to €20.98bn in the three months to June — a slower pace than in the first quarter and below consensus expectations for a 3 per cent rise. Owned in Core Portfolio.

(+) RTX (RTX-US) RTX reported a solid beat and raise quarter driven by better-than-expected revenues and earnings and the company raised 2024 EPS guidance for both top and bottom line. As was the case in Q1, RTX continued to deliver solid organic growth in its aviation businesses, with 10% and 19% organic growth at Collins and Pratt, respectively, while revenue growth at Raytheon came in a bit light at 4%. However, solid profitability in the quarter. We were also encouraged to see that the company remains on track with its fleet management plan to remediate manufacturing defects on the GTF engines. RTX remains a powerhouse in the aerospace & defense industry, where it maintains stable growth and healthy margins leveraging its established expertise, mission-critical product portfolio, and deeply entrenched customer relationships. With the shares currently trading at a NTM P/E multiple of 18x, a slight premium to its 10-year average of 17x, we continue to recommend the shares and would be buyers at current levels. Owned in Core, Cash Flow, US and Opportunity Portfolios.

(+) ServiceNow (NOW-US) delivered a beat and raise quarter last night. The earnings beat was driven by slightly higher than consensus revenue and a solid beat on profitability driven by operating leverage. Despite concerns in the market regarding a slowdown in demand during the quarter given a number of high-profile misses amongst enterprise software companies, ServiceNow delivered a solid beat on billings and management spoke confidently of demand on the conference call as the company continues to drive strong new logo growth as well as higher average deal sizes from cross selling. Management also slightly raised its revenue and operating margin guidance for the FY. NOW is well positioned to see faster gains vs peers given it is integrating Gen AI into its core offering. It trades at 49x NTM P/E, below its 5-year average of 68x. We would continue to own the stock and be buyers at the current level for long-term growth-oriented investors. Owned in US and Opportunity Portfolios.

(+) Spotify (SPOT-US) posted a record quarterly profit, driven by its cost-cutting measures and product price increases. Additionally, the number of Spotify subscribers rose to 246 million, topping expectations. CEO Daniel Elk said, “It really comes down to the number of subscription offerings we have now. We’re moving from one-size-fits-all to have something for everyone.” This shows the company’s efforts to diversify its product offerings are paying off. Profits rose 45% YoY while revenues rose 20% YoY, though analysts noted the company missed its monthly active users (MAUs) target by 5 million. However, directionally, things remain in good shape, and gross profit margins improved sequentially from 27.60% to 29.20%. Owned in Opportunity Portfolio.

(-) Tesla (TSLA-US) Stock in the electric vehicle company sank about 9% after second-quarter earnings were weaker-than-expected. Tesla’s revenue of $25.5 billion came in above Wall Street estimates, which forecast $24.77 billion, respectively. Owned in ESG+ Portfolio.

(-) Verizon Communications (VZ-US) Despite the largely in-line P&L metrics, the shares are down as the company delivered weaker than expected subscriber growth in its consumer business where wireless postpaid sub growth of 72,000 fell short of 298,000 consensus. We continue to like VZ for its stable utility-like business, expect will continue to deliver modest growth and healthy margins. We like its attractive dividend yield of 6.4% and very low beta profile. VZ is up 10.4% YTD, underperforming the S&P 500. The stock remains attractively valued at a forward P/E 8.9x compared to its 10-year NTM P/E average of 11.1x. We would continue to own the stock and be buyers for income-oriented investors at the current levels. Owned in Cash Flow Portfolio.

(-) Visa (V-US) reported Q3F24 results that met consensus expectations. However, both revenues and profitability both came in slightly below consensus, led by a deceleration in volume growth. While concerns regarding a slowdown in consumer spending may continue to weigh on shares in the near term, longer-term, we continue to like card networks given they operate in an effectively duopolistic market (V and MA control ~90% of all credit card transaction volumes globally), possess robust balance sheets, strong FCF generation and benefit from the ongoing secular shift towards digital payments. Owned in Core, ESG+, Cash Flow and US Portfolios.

(++) Viking Therapeutics (VKTX-US) Shares rocketed after the drug developer revealed that it will move its experimental obesity treatment, VK2735, into a phase 3 clinical trial. The drug led to a 15% reduction in body weight after 13 weeks of treatment. An oral version of this drug will begin phase 2 trials in the fourth quarter. Owned in Opportunity Portfolio.

Company Of the Week: Spotify

2024 Q2 SHAREHOLDER DECK

 

Weekend Reading

With AI, jets and police squadrons, Paris is securing the Olympics — and worrying critics. The games face unprecedented security challenges. The city has repeatedly suffered deadly extremist attacks and international tensions are high because of the wars in Ukraine and Gaza. A Games-time force of up to 45,000 police and gendarmes is also backed up by a 10,000-strong contingent of soldiers that has set up the largest military camp in Paris since World War II. AP NEWS

The AI summer Hundreds of millions of people have tried ChatGPT, but most of them haven’t been back. Every big company has done a pilot, but far fewer are in deployment. Some of this is just a matter of time. But LLMs might also be a trap: they look like products and they look magic, but they aren’t. Maybe we have to go through the slow, boring hunt for product-market fit after all. BENEDICT EVANS

The Folly of Certainty The subject of this Howard Marks memo: not whether Biden will continue campaigning or drop out – or whether he’ll win if he continues – but rather how anyone can be without doubt. It’ll be another of my “shortie” memos given the uncertain shelf life of the Biden candidacy. HOWARD MARKS

Highest Profit US Companies 1994-2023 This chart shows the 20 highest profit US public companies from 1994 through 2023. You can pause and move to any year between 1994 and 2023. AMERICAN BUSINESS HISTORY CENTER

‘Join or Die’ Review: Come Together This documentary about the work of Robert Putnam, who wrote “Bowling Alone,” argues that Americans can save democracy by becoming joiners. TRAILER

Maxims for Thinking Analytically by Dan Levy Don’t take refuge in complexity. Getting lost in the complexity of a problem avoids thinking about the core of the problem. NOVEL INVESTOR

‘Anywhere but Canada’: How a tax ruling could hobble pro teams north of the border Strictly from the point of view of trying to lure players to Canadian teams, the optics of Canada’s tax authorities targeting professional athlete contracts isn’t great. THE HUB NYT

Aston Martin’s Bond experience The House of Q is now open in London Aston Martin’s Bond experience The House of Q is now open in Burlington Arcade. Commemorating sixty years since the Aston Martin DB5’s debut in Goldfinger, the 007 activation in Mayfair runs until 4 August. 007