Teal Linde, manager, Linde Equity Fund

FOCUS: North American Mid and large-cap stocks 

MARKET OUTLOOK:

Investors continue to face a challenging market. Interest rates remain at their highest level in decades. Hopes for reduced rates are being pushed further out. Aggregate economic growth at home and abroad is stagnant or slowing. Yet despite all the negatives, an inflated sense of bullishness exists that has become prominent, contributing to new market highs, as momentum investing permeates throughout the market. Momentum investing has become particularly popular since last fall as investors have jumped on stocks exhibiting strong price action where buying begets more buying. The iShares USA Momentum Factor ETF (Symbol MTUM) best reflects this mania as speculators piled into anything moving up sharply. Most people probably don’t realize that modestly growing Costco, since last fall, has become a momentum stock – the MTUM and Costco one-year price charts mirror each other closely with both up roughly 30 per cent since Nov. 1. But such a strategy only works until it doesn’t. The recent streak appears to have topped out in March.   

We are also in a market where investors continue to look for and aggressively chase the next big thing. Such a strategy though seldom works out in the end. In 2000, the next big thing was the internet. The internet did become the next big thing, huge in fact, but it took many years to develop. Stocks anticipating the internet’s massive potential skyrocketed in 1999 and 2000, only to come crashing down more than 90 per cent in 2001 and 2002, including Amazon. Over the last dozen years, the same boom-bust pattern has resurfaced with 3D printer stocks (down 95 per cent from their highs), marijuana stocks (industry leader, Canopy Growth, down 97 per cent from its high) and plant-based food stocks (Beyond Meat, down 96 per cent from its high.)

Most recently, the next big thing is AI.  AI will undoubtedly be huge.  But just like the internet in 2000, it will likely take years to develop.

In this challenging market with more traps than opportunities, investors would be wise to prioritize attractive fundamentals, when you can find them.

• Sign up for the Market Call Top Picks newsletter at bnnbloomberg.ca/subscribe
• Listen to the Market Call podcast on iHeart, or wherever you get your podcasts

TOP PICKS:

KINSALE CAPITAL (KNSL NYSE)

Founded fifteen years ago, Kinsale Capital is a property and casualty (P&C) insurance provider in the U.S. focusing exclusively on excess and surplus (E&S) insurance, which is specialty insurance. Kinsale models itself after the two low-cost leaders in personal auto insurance: Progressive and Geico. Over 25 years ago, Progressive and Geico each represented around two per cent of the personal auto insurance market, but with winning low-cost strategies have taken market share from competitors and grown shares to around 14 per cent each as of 2022.  Kinsale wants to do the same with specialty insurance, where it currently has around two per cent market share. Revenues and EPS are each expected to grow at least 18 per cent this year and next.

FIVE BELOW (FIVE NASD)

Five Below is attractive given its strong and differentiated business model, financial strength, and significant long-term growth opportunities, including the potential for 3,500-plus stores versus roughly 1,500 today in 43 states. The company has a value merchandise strategy that drives consistent demand, a new store development payback period of roughly 12 months that has driven self-funded double digit annual increase in store count, and financials that are largely consistent and predictable. On its last earnings announcement, management reduced revenue and EPS guidance one per cent and eight per cent, respectively, compared to consensus estimates. Since the reduction, and hurt further by weakening consumer sentiment, its stock has fallen 31 per cent and appears oversold. 

LINAMAR (LNR TSX)

Linamar is doing well overall largely because its industrial segment, which includes its Skyjack aerial lift business and its agriculture machinery business. The results of its industrial segment is actually masking its much weaker auto parts business which has been basically operating at trough margin levels. But here's the opportunity - its largest industrial business, Skyjack, is expected to continue to perform well this year because its entire industry is still enjoying high backlog levels. Linamar is optimistic about taking market share likely because their manufacturing is domiciled in Canada where they take advantage of the weaker Canadian dollar. Based on its quarterly results announced just last week, where the company reported solid organic growth, strong growth from acquisitions, and attractive margin expansion, its auto parts business appears to have finally turned a corner. Analysts had expected overall margins to be lower than the actual result, and management has raised its margin outlook further.   

PAST PICKS: JUNE 19, 2023

TD BANK (TD TSX)

• Then: $80.87
• Now: $77.97
• Return: -3%
• Total Return: 1%

TC ENERGY (TRP TSX)

• Then: $53.45
• Now: $52.99
• Return: -0.9%
• Total Return: 7%

ARITZIA (ATZ TSX)

• Then: $27.40
• Now: $25.21
• Return: -8%
• Total Return: -8%

Total Return Average: 0%