Gordon Reid, president and CEO, Goodreid Investment Counsel

FOCUS: U.S. equities

MARKET OUTLOOK:

Financial markets were on a strong run from the financial crisis of 2008, with short disruptions along the way. While North American economies and corporate performance were impressive, the markets had been particularly strong because of an upward adjustment in valuations. Accommodative central bankers created an era of “free” money (remember negative interest rates?) which enhanced the attractiveness of equities and provided a boost in confidence. The result was a historically high valuation premium. The underpinnings of that premium have dissipated. Higher interest rates, worrisome inflation, recessionary fears, and heightened geopolitical concerns have led us into a bear market.

As the air comes out of stock prices during tough economic times and a bear market, there are necessary casualties. Investors who followed a strong and disciplined philosophy, of owning quality companies with stock prices tethered to company performance, will be the beneficiaries of a new economic cycle and bull market.

Bear markets, such as the one we are now in, last an average of nine months, with those associated with recession lasting longer, at 19 months vs. those without an economic recession at six months. The key point is that they are not terminal events. They are a part of a cycle. By the time a recession is officially declared, bear markets are often over. This is because markets are forward indicators pricing future cash flows, not the past or present.

While we at Goodreid do not claim to have a crystal ball and cannot predict the date or level of the bottom of this bear market, we are confident that we are well into it. Necessary market damage has been inflicted. The gambling cohort has largely capitulated. The selling feels overdone and is at historic levels. Investor negativity is at extreme levels, a reliable contrary indicator.

Negative investment returns during bear markets must be expected and accepted. That said, we follow our strong disciplines of owning quality companies with above-average earnings growth prospects and compelling valuations. This allows us to add relative value regardless of the environment. Certainly, Goodreid’s performance during this bear market has relinquished a portion of last year’s gain, but it’s better than the return of most professional managers, and just one step in the investment journey. We must remember that stock market volatility is a function, not a flaw of investing. To create a fair performance perspective multiple cycles must be considered. The result is decidedly favourable. 

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TOP PICKS:

Apple (AAPL NASD)

Latest Purchase June 2022 at $138

AAPL is dealing with many of the issues of our day, but the COVID-related shutdown in China is perhaps the most noteworthy. But Apple has always shown resilience and any better than anticipated news will likely propel the stock price. In the meantime, the company is taking advantage of the environment by buying back large amounts of its stock; $27B worth in the March quarter alone.

Booking Holdings (BKNG NASD)

Latest Purchase June 2022 at $1829

Travel is back and Booking Holdings is poised to pick up where it left off in 2019 before the pandemic disrupted everyone’s travel plans. As the 21st century answer to travel agents, this behemoth will deliver $15B in revenue and EPS of close to $100/share in 2022. Look for a rapid ramp up to $150/share plus by mid-decade.

FedEx (FDX NYSE)

Latest Purchase June 2022 at $239

FedEx has a new CEO after founder Fred Smith stepped aside after 51 years. In addition, an activist group has taken a stake in the company and with it three board seats. They are prodding current management to be more proactive in the management of this undervalued jewel.

PAST PICKS: July 14, 2021

 Amazon (AMZN NASD)

• Then: $3681.686
• Now: $112.65 (20-for-1 stock split June 6th)
• Return: -39%
• Total Return: -39%

Hexcel (HXL NYSE)

• Then: $58.20
• Now: $53.97
• Return: -7%
• Total Return: -7%

Nasdaq (NDAQ NASD)

• Then: $178.08
• Now: $159.08
• Return: -9%
• Total Return: -9%

Total Return Average: -18%