Dear Friends,
It’s ironic. Since the onset of the twin pandemics that plague us, many of you, and the public generally, have sought reassurance that your life savings were not going to be wiped out in some end-of-the-world-as-we-know-it scenario. I have responded in my philosophical way that pandemics – both the viral and the political kinds – come and go, and that in the end they will have no bearing on your net worth.
Perhaps I have made these remarks too blithely sometimes, but so far, with regard to both the Trumpian pandemic and COVID-19, I have been more right than wrong on the financial impact.
However, and this is a big however, I take much less comfort from the ongoing social consequences of COVID-19. I have to admit to underplaying them. The cruelty of loved ones dying in complete isolation in nursing homes and intensive care has been beyond measure. I didn’t see that coming.
The cabin fever effect – the inability to physically see and touch and hug and kiss and play – has taken an enormous toll on our collective psyches. ZOOM and its analogues, have been marvellous stop-gaps, but in the end, they just don’t cut it. Most of us crave human company, up close and personal.
All to say, my heart and sympathies go out, especially to those like my sister Susie, and so many others, who are immuno-compromised or have other conditions that preclude even masked visitations, even now as things are gradually opening up. I miss Susie!
So that’s my humble admission of hubris. I downplayed the virus and I was wrong. While always an optimist, I have no predictions on when it is going to be behind us. What I can say with a fair degree of confidence, is that society is going to have to rearrange itself after this pandemic.
For starters, we can only hope that in future the workers we deem to be“essential” will be compensated accordingly. To be worried about the dividends in our portfolios when the cleaners, and migrant farm workers, and grocery store clerks and shelf-stockers, and meat packing plant workers, and PSWs and nurses and emergency service workers have been risking their lives every day and dying for us in droves, is beyond any level of social acceptance.
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I came back to Kingston by accident early in the summer of 2005. My mother was unexpectedly in hospital and I came to help care for her. I spent many long days at her bedside. Prior to heading to the hospital each morning, I would rise early and take my dog Max down to the lake for a walk along a beautiful stretch of shoreline starting at the former Rockwood Insane Asylum buildings. On the second or third morning of this new routine we espied some bathing caps quite far out in the lake.“Those look like serious swimmers,” I said to Max. Max agreed. As an ardent swimmer, I was intrigued.
The next morning on our walk we happened to come across what looked to be the same swimmers as they were emerging from the lake at the beach behind Rockwood. They were a group of four women and I couldn’t resist approaching them.
“Hello, I’m Chris West. I think I’ve seen you swimming far out, and this is Max. Max hates the water, but I’m a life-long swimmer. How far do you go?”
Susan, Francine, Peggy and Sue very graciously introduced themselves and explained that for several years they had been meeting at this point every morning at seven o’clock for a swim that lasted about 45 minutes or so. They told me they loved this ritual and did it from as soon as the water was tolerable in June until Thanksgiving.
“That’s amazing!” I said.“I’m visiting from Montreal, but I grew up in Kingston and my parents started every summer’s day with a swim at Richardson Beach. I salute you. Bravo!”
“Well why don’t you join us?” rejoindered Tall Susan (as opposed to Little Sue). I couldn’t believe my good fortune.
“You mean it?”
“Absolutely,” said Tall Susan. We’re here every morning at seven. See you tomorrow!”
And that was the beginning of a beautiful friendship and my salvation in a summer that my Mom did not survive. Fifteen years later, as pictured above, the Mermaids as they are now known are more numerous in number, but we still swim every morning. More than ever, as we grind through the pandemic, this sisterhood is my salvation.
I wish the same kind of human connection for all of you. In whatever form it takes, it is the most precious and important thing, and will carry us through the uncertainty that lies ahead.
CW
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CLASS OF 2020 YEAR-END REPORT CARD
Positive returns in tough year!
Given the mayhem precipitated by the COVID-19 lockdowns around the world, and incompetent leadership south of the border, the Headmaster is very relieved that the Class of 2020 made it to the June 30th finish line in positive terrain.
The Class average for the July 1, 2019 to June 30, 2020 period came in at a 2.8% gain, versus -5.2% for the TSX; 5.3% for the S&P 500; and -2.9% for the Dow.“Once again,” said the Headmaster,“we bested the average of our benchmarks. I can’t ask more of the Class than that.”
He continued:“One must note, however, that the Class results were far from even. Were it not for the outstanding contributions of Apple and Microsoft, with returns of 84.3% and 51.9% respectively, the Class would have been underwater.”
“At the other extreme, cyclical classmates like Nutrien (fertilizers and farm supplies) and CCL (consumer labels and packaging) were particularly vulnerable to the COVID slowdown and their performances of -37% and -31.6% respectively reflect how they were whipsawed.”
“Overall, though, the diversity and the quality of the Class of 2020 shone through, as I would have hoped.”
Here are the sector by sector results.
Financials - C
Canadian bank stalwarts TD, RBC and BNS were seriously whacked by both COVID and the collapse in the energy sector, with an average return of -17.6%. “The market’s concerns about the banks’ rising impaired loans and falling profits are perfectly reasonable,” says the Headmaster. “But I have confidence in this trio. With their strong balance sheets and prudent management, they will prevail. Promoted.”
“The bright spark in Financials was the US asset manager, BlackRock, who turned in a terrific 15.9% return and actually managed to grow their assets under management to well above $7 trillion. None of their competition came close to this performance. Hats off to CEO Larry Fink and co. Promoted.”
Resources - D
As noted above, it was tough sledding for the sole contributor in this category, Nutrien. Adds the Headmaster:“With major potash buyers China and India holding back, and US farmers shrinking from the market in a COVID frame of mind, it was inevitable that Nutrien would take a hit.”
“However, management is extremely disciplined and when demand drops, cuts production rather than chasing volume at lower prices. This tactic has paid off handsomely in the past and will do so in the future. Promoted.”
Energy - B minus
Quelle surprise, green energy firm Algonquin (wind and solar farms) bested the oil and gas pipeline giant, Enbridge, with returns respectively of 10.5% and minus 12.7%. The Headmaster comments:“Each proved its worth in a time of crisis with positive cash flows supporting generous dividends. I have no doubt this pair will continue to rebound nicely in the COVID recovery. Promoted.”
Infrastructure - B
Brookfield Infrastructure invests in long-duration assets around the world, including port terminals, cell phone towers, gas transmission systems, toll roads and data centres. Together with parent Brookfield Asset Management, the company has advantageous access to capital and the smarts to deploy it wisely.
As the Headmaster sees it:“Economic downturns are when Brookfield excels. Just wait until truly distressed companies start to cry‘Uncle!’. Brookfield will be there with cheque book and sharp pencil at the ready. Promoted.”
Retail - B plus
Montrealers Alimentation Couche Tard (convenience store and fuel sales around the world) and Metro, the grocer, once again proved the worth of their pedigrees. With respective returns of 3.3% and 13.9%, they easily beat the market.
Each of these classmates was in the“essential services” category and nimble in taking measures to protect their workers and serve their customers safely.
“Metro actually managed to increase both revenues and profits,” adds the Headmaster,“benefiting from the pandemic stocking-up phenomenon. Couche Tard, of course, experienced a major drop in fuel sales as car travel came to a near halt, but still cranked out a gain in profits. Bravo to both! Promoted.”
Industry - C minus
The three class members in this category, CNR, John Deere and CCL, are in classically cyclical businesses. And in classical fashion they were buffeted by the COVID winds.
As mentioned above, CCL proved to be particularly vulnerable, but post the end of term has shown promising shoots of renewed growth. John Deere hunkered down admirably and suffered only a 5.1% drop. Blue chip performer CNR, sustaining hits to both revenues and profits, managed nonetheless to convince the market that the worst is behind it. It’s share price neither fell nor rose.
Says the Headmaster: “We knew this trio was in for a rough ride. I am pleased with how well they have done collectively and see them as poised for nice gains in the Class of 2021. Promoted.”
Healthcare - A
Biotech giant Amgen and healthcare conglomerate Johnson and Johnson (pharmaceuticals, medical devices and personal care) chalked up a scintillating average gain of 14%.
Says the Headmaster,“I have been trying to tell anyone who would listen for the past couple of years that the healthcare sector was undervalued and unjustifiably unloved in the markets.”
“Yes, of course, the hunt for a COVID vaccine has given a lift to many healthcare stocks, and JNJ has benefited somewhat in this regard, but the true story here is that every soundly constructed portfolio needs a healthy dose of stocks like these that are virtually recession-proof. When they are trading at bargain valuations, back up the truck! Promoted”
Footnote: Just after the year-end, the Headmaster added another global pharma player to the Class of 2021, Merck & Co.
Telecom - C
Class veteran Telus slipped in sales and profits in the wake of the COVID lockdown, but not catastrophically. The stock was down over the year a tolerable 5.9%.
“Most importantly,” chimes in the Headmaster,“Telus continues to beat the pants off arch rivals BCE and Rogers in the metrics that really count: customer‘churn’ (the rate at which subscribers are lost and have to be replaced) and customer satisfaction. Promoted.”
Info Tech - A plus
As already alluded to, and as the Headmaster puts it:“Apple and Microsoft, without a scintilla of equivocation, brought home the bacon for the entire Class of 2020. But benchmates Open Text and Visa were no slouches either with gains respectively of 6.6% and 11.3%. Collectively this quartet contributed an average gain of 38.5%!”
The Headmaster continues:“I could bore you to tears with a slew of information about why these companies are prospering, but let’s cut to the chase and zero in on the essentials.”
“Tim Cook, Apple’s CEO is probably the most underappreciated top exec of all time. Anyone who can dance the dance with both Donald J. Blunderbuss Trump and Xi Chairman-for-Life Jinping, and come out of a protracted and ongoing China/US trade war unscathed … nay, not just unscathed but thriving … is doing a heck of a lot of things right.”
“They fault Cook for not being another gadget inventor like Steve Jobs, but that misses the point. His gift has been to grow exponentially the Apple and iPhone eco-system, not just with technical innovation, but also by cultivating an exceedingly loyal customer base. That begets higher profit margins, that beget further investment in the eco-system and building the brand.
“Cook must be doing something right. Under his watch Apple’s market capitalization (the value of all its shares) has grown by over $1 trillion US, dwarfing the growth under Jobs. Promoted.”
“Microsoft under the inspired leadership of Satya Nadella is an explosive growth company. Its cloud business Azure just clocked an increase in revenues of 47% and is now second in the world only to Amazon’s AWS cloud service, but fast gaining. The gaming side of the biz – think Xbox and Minecraft – is hitting it out of the park too, riding a COVID tailwind.”
“And who is one of the leading go-to companies with a collaborative platform for linking personnel working remotely,including video conferencing? None other than Microsoft’s Teams brand, also growing exponentially. Oh yes, and then there is that boring, but oh so profitable legacy software business, increasingly on ‘sticky’ subscription plans. Promoted.”
“Software services player Open Text, the pride of Waterloo, is also riding the cloud computing wave. While not nearly in Microsoft’s league, this is a first-class consolidator in the sector, with a proven record of wise and profitable acquisitions. The market is expecting more of the same. At writing the stock price has just hit a new all-time high. Promoted.”
“Class vet Visa has been and remains my favourite near monopoly. Between them, Visa and competitor MasterCard control some 85% of the global payments business. That is, the infrastructure that connects buyers and sellers and banks whenever they use services like credit cards, debit cards, PayPal, Square, Apple Pay und so weiter.”
“While one can argue that digital payments is a mature industry in North America and Europe, everywhere else it is a burgeoning growth business. End of story. Promoted.”
Entertainment - C minus
The lone spear carrier for the Class in this sector is the formidable Walt Disney Co. Whereas a company like Microsoft seems to have been blessed by the pandemic, with a suite of products and services that could only benefit, the House of Mouse has suffered the opposite effect.
Explains the Headmaster:“Take the cruise line biz … please! It’s kaput until further notice. Take the theme parks. Take the first-run movie release business. Take the Broadway shows. Take ESPN with no live sports to broadcast for three months and only slowly coming back.”
What company could survive so many body blows?“Well, Disney could and it will,” continues the Headmaster.“The fact that it ended the school year only 20.1% down is testament to that.”
“I have supreme confidence that Disney will adjust as it always has and come roaring back. Actually, Mickey Mouse wouldn’t come roaring. He will come back with cheerful but steely determination. A sign of that already is the 60 million paying subscribers that Disney’s streaming service has garnered in less than a year since launching. This is a unique company with incredible brand assets that every child should have in their RESP. Promoted.”
If you would like further information on any of the investing ideas raised in this issue, or a complimentary consultation, please call or email.
CW
