Quote of the week
“If you believe in the bull market — which we do — than Goldman Sachs is one of the best ways to play it.”
Jay Hatfield, Infrastructure Capital Advisors.
Find Jay’s stock picks and many more at the bottom of this newsletter.
Keep Calm and Carry On
Investors have hit the pause button, as they navigate a whole host of negative headlines.
Alec Young, Chief Investment Strategist, MapSignals, is largely ignoring them.
“Try to stay calm. The headlines can be curve balls,” he told me in an interview this week.
Take geopolitical uncertainty, for example.
Young and his team reviewed S&P 500 performance going back to 1940.
They found that six months after geopolitical worries hit stocks, the stock market rebounds, on average, by 6%. And twelve months later? It’s up 12%.
“The data clearly shows that markets price it in fairly quickly and the initial negative gives way to positive performance,” Young said.
Of course, markets have been closely watching the U.S. inflation picture — we’ll get the Federal Reserve’s preferred gauge of that (PCE) this week.
Sticky inflation is one of the reasons why the Fed has not been in a hurry to cut interest rates.
But again, Young would argue that storyline has been priced in.
“Unless you think inflation is going to skyrocket, there’s really nothing to worry about it,” he said.
Young, who believes in the reflation trade, says he’d been a buyer of industrials, materials, energy and financials on any near term weakness. He’d also be a buyer of big tech stocks on any extended pullbacks.
What’s next for Bitcoin?
The crypto world was buzzing this week about the Bitcoin halving.
In a nutshell, it’s an event every four years that leads to fewer new tokens being issued.
Bitcoin miners — who validate blockchain transactions — receive 50% less of a reward for doing so.
At Bitcoin’s launch in 2009, miners received 50 new coins per block. Post the halving in 2024, that declines to just 3.125 Bitcoin.
In the past, the halving has led to a price spike.
But Bitcoin bull says things are different this year.
“This halving is less important than past ones,” Geoff Kendrick, Head of Digital Assets Research at Standard Chartered told me in an interview.
Kendrick notes the spot Bitcoin ETF boom this year led to enthusiasm that has since died down.
Going forward, though, Kendrick sees the ETF trend continuing to influence Bitcoin, even more so than traditional catalysts such as the having.
“In the U.S. the ETF’s have generated about $12 billion in inflows so far. We believe the market can get to between $50-$100 billion. And that can happen over a 24 month period,” Kendrick said.
His analysis is based on what happened with the price of gold in the years after the gold ETF market was established in 2004.
Kendrick has consistently been calling for Bitcoin to reach $150,000 by the end of this year — and $200,000 by the end of next year.
Additionally, he believes that as more institutional money comes in, there will be fewer dramatic drops.
Again, just one analyst’s opinion. So we’ll see.
How often does gold beat stocks?
Gold is having a big year. The shiny metal is benefiting from a range of factors, including growing demand from central banks, China, India and Costco shoppers!
Against that backdrop, bullion has enjoyed a stronger year than North American stocks broadly.
We were curious about how often gold outperforms on an annual basis, so we looked back at the past 40 years of data. All in, we found 14 years where gold’s performance was better than the S&P 500 (including years where gold simply lost less ground than the stock market). That’s roughly one third of the time.
So while there have been stretches where gold beats stocks, generally speaking — over the past four decades — it’s been more common for the stock market to have a better year than gold.
Which big tech stocks will be the AI winners during earnings season?
Microsoft, Alphabet and Meta are among the company’s reporting results next week.
And investors want to know is how these tech giants are cashing in on their AI bets.
Microsoft’s stock has enjoyed a premium, compared to some of its peers — in part, because it’s seen as one of the best positioned players so far.
As the company deploys generative AI into its cloud products, it can charge additional fees.
While it’s debatable how much search share Bing can gain from AI, the cloud segment growth is likely to keep investors satisfied for now.
Speaking of search, Google-parent Alphabet has been trading at a lower multiple than Microsoft.
Part of that is based on investor fears that the company’s lucrative search business is in danger of being disrupted by AI.
But if Alphabet can show reasonable strength in its search and YouTube businesses, that could dispel some of Wall Street’s worries.
Meta, meanwhile, has been a standout digital ad stock because of its success in applying generative AI to its stack.
With big audiences through Facebook and Instagram, layering in more chat bot functionality can help drive engagement, enabling the company to show more ads.
Speaking of Amazon, there is a general view that the company is trailing in the deployment of generative AI.
Like the other companies I mentioned, they’ve been a big buyer of Nvidia’s graphics processing units (GPUs), which are key to training AI software.
But for now, Microsoft has a larger allocation of Nvidia’s GPUs that everyone wants.
So Amazon — whose stock valuation is driven by Amazon Web Services — is less likely to enjoy the same lift to its cloud business.
Amazon has notably been building chips to supplement its Nvidia supply, as are others.
That will be an important story to watch!
Will fund managers give up their Nvidia advantage?
Nvidia’s stock has dropped from its all-time highs, prompting questions about whether the AI darling’s record run up has come to an end.
One consideration will be whether the fund managers who have benefited from Nvidia’s decide it’s time to cash in.
In the first quarter, large cap growth fund managers that had more exposure to Nvidia than others enjoyed better performance, outperforming the broader growth index.
And note in the past 5 years, very few growth managers have managed to outperform because they’ve had to maintain high levels of exposure to other big tech stocks (making their portfolio composition look rather generic). Once you factor in their fees, which eat into investor gains, that further raises the bar for outperformance.
So fund managers who got their timing right on Nvidia have soared above the crowd.
Keep an eye on their next moves!
Stocks that check lots of boxes.
We wanted to zero in on a group of stocks that score well on multiple metrics, making them what Bloomberg intelligence describes as “multi factor stars.” The analysts looked at stocks that tend to stand out when you look at how profitable the businesses are and whether the stocks offer good value. But in addition, it measures whether they have good momentum indicators, as well as low volatility. We further screened the list to only include companies whose stocks get a buy recommendation from the majority of analysts who cover them. Here are the stocks that made our list:
Iron Mountain
Marathon Petroleum
Pulte Group
Cencora
Entergy
Amerprise Financial
Omnicom Group
CDW
American Express
Colgate-Palmolive
Home Depot
Motorola Solutions
HCA Healthcare
Hartford Financial
Ferguson PLC
Valero Energy
Fiserv
TJX
Walmart
McKesson
Apollo Global
Stellantis
DTE Energy
Qualcomm
Costco
Notable value stocks, based on profit growth
We wanted to focus on what might be considered value names, based on the popular metric known as the PEG ratio. It measures a company’s price to earnings ratio, compared to its earnings growth. Fans of this metric note it can be helpful way to measure if a stock price seems fair - or even low - compared to expected future earnings.
Wall Street commonly picks PEG ratios below 1 as a good rule of thumb. So we screened in North America for some names that standout. We made a point of sticking with stocks that have a majority of buy ratings from the analysts who cover them. In the Canadian market, the names that made our list include:
TFI, Quebecor, Hudbay Minerals, GFL, Nutrien, Franco-Nevada and Teck Resources.
Meanwhile, we did the same analysis for the S&P 500. Again, the stocks had to have a majority of buy ratings. We also upped the market cap minimum to $50 billion, just to stick with a smaller group of bigger names. And here they are:
Nvidia, Uber, Super Micro, NXP Semiconductors, Schlumberger, Progressive, Metlife, Citigroup, Target, Deere, Phillips 66, Exxon Mobil, and Valero Energy.
Standout stocks over a decade
We received an inquiry about standout stocks from the past decade. So we compiled a list of names that have enjoyed tremendous price appreciation over the past 10 years. We focused on stocks that continue to be recommended by a majority of the analysts who cover them — the idea being that on the street, there’s a view these names could continue to trend higher. In Canada, we looked at TSX stocks. In the U.S. we focused on Wilshire 5000 stocks. And globally, we based our review on Bloomberg’s developed markets index. Here are the findings:
Canadian stock 10 year returns:
Constellation Software: +1,319%
Ivanhoe Mines: +940%
goeasy: +834%
TFI +796%
Descartes Systems: +739%
U.S. stock 10 year returns:
Nvidia: +18,851%
AMD: +5,977%
Super Micro: +5,566%
Broadcom: +2,155%
Cadence Design Systems: +1,950%
Global stock 10 year returns:
Evolution AB: +8,050%
Argenx: +3,919%
ASM International: +1,995%
Advantest: +1,905%
Mercadolibre: +1,509%
Time it takes them to generate $1 billion in sales?
With earnings season here, there will be a lot of focus on whether financial results are better or worse than expected. That analysis sometimes skips over how machine-like big companies can be when it comes to operating their businesses. For example, here’s how long it takes some of the biggest companies to generate $1 billion in revenue:
Walmart: 12 hours
Amazon: 13 hours
Apple: 18 hours
Alphabet: 1 day
Microsoft: 1 day
Costco: 2 days
JP Morgan: 2 days
Meta: 2 days
Ford: 2 days
Home Depot: 3 days
Exxon Mobil: 3 days
AT&T: 3 days
FedEx: 4 days
UPS: 4 days
Disney: 4 days
P&G: 4 days
Tesla: 4 days
Boeing: 4 days
Nvidia: 4 days
Caterpillar: 5 days
IBM: 5 days
American Express: 6 days
Nike: 7 days
Coca-Cola: 8 days
Uber: 9 days
Starbucks: 10 days
Salesforce: 10 days
Netflix: 10 days
Visa: 11 days
Mcdonald’s: 14 days
Spotify: 23 days
Airbnb: 41 days
The power of positive thinking
I had a great chat this week with Eric Migicovsky, who just sold his latest business for a reported $125 million. You might recall that roughly a decade ago, Migicovsky made a splash with his smartwatch startup, Pebble. It quickly became one of the most talked about products in Silicon Valley. Like any startup journey, there were bumps along the way and Pebble’s assets were eventually sold to Fitbit.
But for Migicovsky, the drive to build continued.
Four years ago, the University of Waterloo grad co-founded Beeper – a universal chat app, which took on Apple’s i-message dominance.
He told me he started Beeper because of a “personal problem.”
“I looked down at my phone and I saw a folder full of chat apps,” he recalled. “And each app did the exact same thing, except I had a few contacts on each app. I wanted one single app that I could use to chat with anyone that I knew.”
That business has now been acquired by Automattic, an open-source software company which owns Word Press and Tumblr.
In our conversation, Migicovsky noted some of the hurdles he faced with Pebble helped prepare him for success with Pebble.
He also highlighted the power of positive thinking in Silicon Valley.
“There is an idea here that anything can happen — anything is possible,” he told me in our interview.
“You talk to someone at a cafe or you meet someone on a train and they tell you this wild idea for a startup. Your first inclination is to think of all the reasons why it’s not possible — and it is true that inevitability, most startups do fail. But people often forget that in Silicon Valley.”
“Instead of immediately thinking of all the negative possibilities, they think about the positive case. They think, what if this person sitting across from me is actually right. And that suspension of disbelief helps fuel these early stage companies because too often, it’s easy to get into your own head and think of negative reasons. But if you can suspend your disbelief for just a few minutes, it’s possible you could kick start something unbelievable.”
Stock picks of the week:
Jay Hatfield, Infrastructure Capital Advisors: Goldman Sachs, Morgan Stanley, Jefferies, Boston Properties, Kilroy.
Chris Blumas, Raymond James Investment Counsel: CGI, Yum China, Brookfield Infrastructure
JJ Kinahan, IG North America: General Electric, Newmont Mining, Meta
Diana Avigdor, Barometer Capital Management: General Dynamics, JP Morgan Chase, Canadian Natural Resources
David Cox, Financially INsync (Raymond James): Coinbase, Intact Financial
Brian Belski, BMO Capital Markets: Allied Properties REIT, BCE, Birchcliff Energy