Are you a buyer or a seller?

Good day,

I made reference in my last diary entry that I would write something a bit more personal and a bit less about the markets. I will have to take that back especially after seeing the 1508-point swing in the Dow index yesterday. Quite the interesting couple weeks we are seeing as of late (and the past couple months, couple years…) when it comes to market activity.

There is a lot of concern out there and the reasons are legitimate. I recommend you put the recent market action into context and think like a business owner (which you are – you own shares in businesses) and less like a market participant.

A question comes to mind if you feel that you need to do something – are you a buyer or a seller?

I’ve assembled some points and would like to know about how you would answer the above question with only that one piece of information. My answer follows each.

1)  The TSX is currently trading at a discount to its historical average earnings multiple range by about 25%. Based on current earnings, this seems like a good sale. Earnings can go down, of course.

I’d be a buyer.

2)  We look at all stocks in our models at their current share price compared to intrinsic (or fair) value. A year ago, average share price was 108% of intrinsic value; today it is 85%. This includes Canadian and US models. In other words, the average stock we own for you is at a 15% discount to intrinsic value.

I’d be a buyer.

3) Canadian bank stocks usually trade at 12 – 13 times earnings. The average now is about 10-time earnings. Anytime in the past that banks are at this level, you will do quite well 1, 3, 5 years out. Yields are above 4% as well.

I’d be a buyer.

4) Dividend growth in our model names is about 83% the past 5 years. Almost a double over this time frame - and this includes 2020 where many companies were not permitted to raise dividends. This is about 16.5 % per year which is not a bad inflation hedge. This same trend exists going back 10, 20 years.

I’d be a buyer.

5) The commodity stocks that we own for you are currently at mid-single digit multiples and have dividend yields above 5-year bonds.

I’d be a buyer.

6) Rates are going up aggressively because economic data is good. Economic data could decline from this point (consensus is that it will). Market declines generally precede bad news and then recover when bad news actually hits the headlines. In the past, markets are down a lot more in the year before a recession and up in the year a recession actually occurs. The S&P 500 is off 25% from its all-time high.

I’d be a buyer. I’m not a fortune teller but it seems like this market – especially the US – has already priced in a lot of bad news.

I’ll stop there for now. I think you get my point. What if you are already invested and not adding money to portfolio? Well, the above should reinforce why you would not want to aggressively be selling at this point. I have some comfort in knowing how our models have done in the past when the markets have been poor. The risk measures we look at – downside capture (the market is down, and we are down less), beta (comparing portfolio volatility to market), Sharpe ratio (how much risk are you taking to get a certain rate or return) – are all very strong.

Here’s another point:

“I got a newsletter in my email / saw someone on BNN / talked to my neighbor and they said the market will be down 35% next year and there will be a bad recession and I should stock up on firewood and canned food. How do you plan to deal with that?”

I’d be a seller. Kidding. No one knows what will happen next year. Most prognosticators according to those that track their ‘predictions’ say that they are wrong more often than they are correct. What is interesting is those that are the most extreme, especially to the downside, seem to get the most attention. Read the book “Clash of the Financial Pundits” for further validation on how these supposed experts are often wrong. It also seems that the most negative seem to get the most attention at certain times even though their historical track record at calling these things is abysmal.

If you want to chat with us to confirm that we have a plan to deal with the current malaise and are acting on it, please call anytime.

J. Todd Kennedy, CIM, FCSI

Senior Portfolio Manager

613-566-4582

toddkennedy.ca