In the Gravitas note of exactly two weeks ago I stated "Just because the Magnificent 7 is taking a breather does not mean the rest of the market is broken. This is likely a normal pullback. The market should rebound in the coming days." So far it looks like my advice to stay the course has paid off. It certainly took some nerve, but I just did not see any pending doom in the broader markets. To clarify, this was not a prediction or future telling. I was prepared to act to protect portfolios in the event I was wrong. But I just didn't see it. So, we held the line. Has the recent storm passed? Possibly. Either way, our safety-first strategy remains in place. The folks at DataTrek provided some informative context in a note earlier this week. They said, "The difference between a Growth Scare and a recession always comes down to a specific catalyst. There have been 7 recessions in the last 50 years, and each one has an identifiable cause that is almost always unrelated to Fed monetary policy".

1973–1974: Oil prices go from $1/barrel to $4/barrel after the Saudi embargo on western countries in the wake of the 1973 Yom Kippur war.

1980: Oil prices double after the 1979 Iranian Revolution.

1981-1982: The only recession in the last half century caused by Fed policy, with Chair Volcker purposely causing an economic contraction to bring down inflation.

1990-1991: Oil prices double after Iraq’s invasion of Kuwait and the global economic uncertainty created by Gulf War I.

2001: The dot com Bubble of the late 1990s starts to burst in 2020 and keeps deflating in 2021, causing a negative wealth effect and reducing business investment.

2007-2009: Global Financial Crisis creates the Great Recession.

2020: Pandemic Crisis.

They go on to say, "Markets were right to worry that the outsized move in the yen might unsettle the global financial system, but last week’s dramatic moves are also a function of how wary investors are of any unforeseen event just now. Their caution is understandable and will not likely lessen very much in the coming weeks. Nonetheless, we are very much in the “glass half full” camp when it comes to the economy and equities. Growth Scares are a regular feature of mid-cycle, up-trending stock markets. Barring a genuine shock, stocks should find their footing in Q4." I agree.

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

Portfolio Notes

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

(+) Alibaba (BABA-US) shares dipped after earnings missed expectations despite cloud acceleration. The company continues to face headwinds in its core e-commerce business amid rising competition and a cautious Chinese consumer. Since taking over the reins, CEO Eddie Wu has been trying to get Alibaba’s core China e-commerce business back on a stable footing. The e-commerce giant has been grappling with a cautious Chinese consumer, along with increased competition from rivals such as JD.com and Temu owner PDD. Investors are keeping a close eye on Alibaba’s cloud computing division, which is seen as a future growth driver for the company. Alibaba said quarterly revenue from the cloud group hit 26.5 billion yuan, up 6% year-on-year in the fastest growth rate since the June quarter of 2022. Owned in Opportunity Portfolio.

(-) Constellation Software (CSU-T) reported a second quarter top-line beat vs consensus, however, EBITDA was a miss as margins came in well below expectations. This was largely the result of Lumine’s integration of the Nokia acquisition. RBCCM notes that large acquisitions like Nokia can take several quarters for margins to stabilize. Excluding this integration, CSU’s margins were just short of RBCCM’s estimate. Organic growth was healthy at +3%, in-line with RBCCM and above the . On the all-important deployment of capital, CSU posted its 4th highest quarter ever, but it was below RBCCM’s expectations. Keep in mind, with CSU’s focus on larger acquisitions, deployment rates will be more variable than in the past. Overall, these results do not take away from our positive stance on the company. Owned in Core Portfolio.

(+) Deere (DE-US) The manufacturer of agricultural machinery rose after topping Wall Street’s fiscal third-quarter estimates, posting earnings of $6.29 per share on $11.39 billion in revenue. That surpassed the $5.63 per share on $10.84 in revenue expected. Owned in US Portfolio.

(+) Ferrari (RACE-US) Given macroeconomic uncertainty in both the autos and the luxury-retail space, Ferrari seems to be a great place to hide and remains in RBC's Global Top Ideas list. It is intentionally underexposed to China, benefits from a strong order-book and personalization, and its EV push should generate both pricing and volume growth for many years to come. More than 40% of Ferrari owners already have at least one Ferrari and customers are largely in the growing UHNW (ultra-high net worth) and millionaire segment, similar to high-end luxury products. Furthermore, like some luxury brands, Ferrari has pricing power and loyalty, especially given the aura of exclusivity that it has garnered among its customers. Owned in Opportunity Portfolio.

(+) Hydro One Limited (H-T) This was another clean quarter by H with earnings coming in a penny ahead of street expectations. No change to the underlying base rate, still expected to compound by 6% per annum through 2027. As a result, this is supportive of the company’s mid-single digit dividend growth rate. Overall, we view H as a high-quality transmission and distribution company. Shares yield 2.68%. Owned in Cash Flow Portfolio.

(+) Home Depot (HD-T) reported overall mixed Q2 results this morning. Despite a beat on both revenues and EPS, the beat was aided by what was likely a stronger than expected contribution from the recently completed SRS acquisition. While we continue to like HD for its dominant position in the attractive home improvement retail industry and its more urban footprint provides it exposure to the more profitable “prosumer” market, it is ultimately not immune to a weakening consumer which will likely remain an overhang in the near term. Owned in Core, ESG+, Cash Flow and US Portfolios.

(+) Netflix (NFLX-US) Across Internet earnings the past few weeks, higher capex spending and the softening consumer have been two major themes. However, JP Morgan believes NFLX has relatively less exposure on each of these fronts compared to Internet mega-caps. NFLX will still spend $17B on cash content this year, but it is not tied to heavy AI spending. NFLX increased its 2024 operating margin outlook to 26% & management expects further leverage in each of the next few years. In terms of macro and the consumer, while NFLX is certainly not immune, we believe the service represents compelling value, even with ongoing price increases. And we generally view subscription services like NFLX (and SPOT) as being more resilient during periods of macro pressure. A third (less relevant) theme where NFLX has a bit more exposure is increased choppiness in the digital ad market. To be fair, NFLX’s ad revenue is still small as Advertising MAUs push toward a mere $50M. We like how NFLX is positioned as it targets 500M+ global CTV households, & we believe the company controls its destiny more than most in our coverage universe. Owned in Core and ESG+ Portfolios.

(+) Roper (ROP-US) announced a relatively large strategic bolt-on, acquiring Transact Campus for $1.5 bil, net of $100 mil in tax benefits. The deal nicely complements its legacy CBORD business, more than doubling Roper’s Card Systems/Integrated Security Solutions footprint. CBORD is the leading provider of software that connects credentials, foodservice, and commerce across higher education, healthcare, senior living, and business campuses. At 14x 2025E EBITDA, the multiple is below some of Roper’s more recent software deals. EBITDA margins of 32% are dilutive to Roper’s +40%, but the organic growth rate is nicely accretive to Roper. Overall, we are positive on the deal and like seeing Roper engage in strategic large bolt-ons. M&A firepower remains at +$2.5 billion. Owned in Core, ESG+, and US Portfolios.

(++) Starbucks (SBUX-US) shares soared this week. Starbucks has appointed Brian Niccol, from Chipotle to take over the reins at Starbucks. He will replace Laxman Narasimhan who’s been in charge for the last 16 months. Niccol officially takes over on September 9th. Things were not going well at Starbucks after they cut their guidance for the second time this year. The problem Starbucks faces is tougher competition in China. Howard Schultz, the founder and guiding light of Starbucks, was publicly critical of Narasimhan. Owned in Core, ESG+ and US Portfolios.

Company of the Week: John Deere

JOHN DEERE FACT BOOK

 

Weekend Reading

Charts for the beach 2024 Because there is unprecedented use of the word “unprecedented,” RBA thought it appropriate to expand their annual Charts for the Beach from 5 charts to 10 charts and tables this year. So, probably best to stay under the beach umbrella as you read their unprecedented extended edition. RICHARD BERNSTEIN ADVISORS

The New Starbucks CEO has a sweet pay package. Brian Niccol is set to receive one of the highest compensation packages for a CEO of a publicly traded company — and he can work remotely and has a private driver. READ THE DETAILS

“Death of a Salesforce”: Why AI Will Transform the Next Generation of Sales Tech In sales tech, it’s easy to assume incumbents like Salesforce and Hubspot have the edge. First, they are embedded as “systems of record,” so sales leaders are loath to rip them out and replace them. Second, these incumbents (and their well-entrenched peers) are not sitting out the AI revolution; conscious of protecting their competitive moats, they are rapidly adding AI features to stay relevant. Andreessen Horowitz

The playing field: Everyone is talent and everything is IP Sport is entertainment. It is a large untapped field of intellectual property, from national teams to clubs to individual players to content of the games. THE SOCIOLOGY OF BUSINESS

Around the World in 22 Days: Why the ‘Air Cruise’ Is Luxury Travel’s Hottest Trend Canny luxury operators, spotting a freshly primed market, swung into action by offering a memorable turnkey vacation—the air cruise—to charter newbies. But while its popularity has increased as of late, the concept itself isn’t new. ROBB REPORT

5 powerful advancements in nuclear power Though many people associate nuclear power with accidents, nuclear waste, and radioactivity, experts contend that it is one of the safer and more environmentally friendly forms of power per kilowatt of energy produced. As science and technology advance, engineers are finding new ways to make nuclear energy safer, cleaner, more reliable, and more accessible. THE COOL DOWN

Mind-blowing insider data from Spotify Who’s using Spotify? How do they use the platform? What are they listening to? Which genres are most popular? Rick Beato has some interesting stats, including some stuff about The Weeknd and how many listens rock bands are getting, which is just insane. RICK BEATO

Bare trusts exempted from 2024 filing requirement Department of Finance proposals would also reduce the number of people who must file a bare trust return, starting in 2025. INVESTMENT EXECUTIVE