Patience + Quality = Success
It is a great feeling to see your stocks go up and to see your portfolio reach all-time highs. But after two consecutive good years for our clients, 2021 so far has been flat. The start may have been slow, but the outlook remains positive.
Many investors and economists are excited about the next few years for the global economy. One strategist we follow anticipates that 2021 will be the best year for the U.S. economy in over 35 years (https://www.barrons.com/articles/s-p-500-can-keep-rising-credit-suisse-says-thank-earnings-51614109642).
Almost every commodity you can name (oil, copper, lumber etc.) has seen big price movements in anticipation of demand for capital goods. Canada is a major exporter of these inputs, and many expect our economy to grow significantly stronger as a result. This probably explains why the Canadian dollar reached 80 cents last week, its highest price against the U.S. dollar since 2018.
We have almost wrapped up earnings season for the quarter ending December 31, 2020, and the companies we have invested in for our clients have reported very good results almost without exception. In seems likely that corporate America will have a V-shaped recovery in revenue, earnings, and profit margins (http://blog.yardeni.com/2021/02/s-500-earnings-v-shaped-recovery.html). Most of our portfolio companies are on track to report record earnings in 2021 and beyond. So why does it look like stocks are going nowhere and why are we reading so much negative commentary?
It is possible that a lot of the good news that we expect to see in the economy, as well in company results going forward, is already priced into the stock market. Stock markets look forward, not backwards, and the anticipated strong recovery this summer started making stocks move up as long ago as last fall. In addition, as the economy begins to roar back, it is possible that interest rates will continue to climb, which can make stocks seem less attractive versus the safety of bonds and GIC’s.
Don’t get us wrong. We are extremely bullish on the underlying fundamentals of the companies in our portfolios. From top to bottom, we see many years of growing earnings, share buybacks, increasing dividends and healing balance sheets. The companies most hurt by COVID, like Live Nation, Visa, and Vail Resorts, should see tremendous rebounds, as pent-up consumer demand for experiences and travel should return later this year. The companies that benefitted most by COVID, like Amazon, Apple, and Netflix, should continue to have many years of great growth ahead— the pandemic lockdowns and precautions brought these companies millions of new customers seemingly overnight, and the new habits formed by staying at home will stick. Some of our companies, like Costco and Domino’s Pizza, will indeed see slower growth going forward as consumers emerge from lockdowns. That said, Costco and Domino’s Pizza also won new customers in 2020 and both are on pace to add many more stores over the coming years.
The risk of rising interest rates bears watching, but at the moment the return on most fixed income securities is still negative after accounting for fees, taxes and inflation. If interest rates continue to rise, we are well prepared. Most of the bonds in the Baskin Fixed Income Pool will come due over the next two or three years, giving us ample opportunity to buy new bonds with higher interest rates as our old bonds mature. Also, we have allocated a portion of the portfolio to securities that will benefit directly from rising interest rates, such as floating rate debt and preferred shares.
As always, we cannot predict what will happen with the stock market in the short-term but we are certain that most of your companies are in much better shape today than they were last year at this time. We maintain that patient investors who hold high quality securities will be well rewarded over the long-term. That has always been true in the past, and there is no reason to believe that the future will be any different.
Barry Schwartz, Chief Investment Officer