Ticker Take: a weekly newsletter on investing.

A recap of the week.

As always…you’ll pro picks of the week at the bottom of the newsletter.

6 reasons to sell Nvidia 

Veteran investor Ross Healy joined me this week with a compelling bear thesis on Nvidia.  Healy, Chairman of Strategic Analysis Corporation and a Portfolio Manager with MacNicol & Associates Asset Management, is ok with being unpopular, if it helps get his point across. 

He thinks Nvidia could suffer a similar fate to a company such as Nortel, which he predicted would fall before it did more than two decades ago.  

He has a 6 reason explanation behind why he sold all his Nvidia stock.  I’ve outlined his view below…

Reason 1: by all standard measures, whether it is price/book, price/sales, or price/earnings ratio, the shares are valued at an extreme. Nvidia is not an investment; it is now a gamble.

Reason 2: a number of competitors (Broadcom e.g.) are now producing much cheaper chips, and therefore appealing to the much broader market. Nvidia may be the Cadillac of chips, but most companies are content with driving Volkswagens.

Reason 3: the high end market is may be stalling out and having some issues. Both Alphabet and Microsoft are reducing staff at their data centers, cutting hundreds of jobs.

Reason 4: According to Sequoia Capital, actual AI business (not chip sales, but business related to the actual employment of the chips) is minuscule. From the $50 billion in chip sales, they are able to identify only about $3 billion in incremental revenues. The ROI on those chips is awfully small.

Reason 5: the semiconductor business is very cyclical with huge demand swings historically.

Reason 6: his own proprietary valuation measures indicate that the critical valuation limit (peak) has been reached.

Again, these 6 reasons are from Healy.  There are still plenty of Nvidia bulls out there. Rosenblatt Securities boosted its target price this week to $200 and overall, 89% of the 72 analysts who cover the company have a buy rating.

But Healy is warning there could be “downside risks in the realm of 80% or so when all the excitement has died down. “And that may be optimistic,” he says.

A Tale of Two Markets

On a related theme…

At a time when we’re constantly talking about record highs for the U.S. stock market, it’s worth pointing out that the mood of the market is split.  On the one hand, you’ve got a go-go attitude around tech stocks and the AI leaders – so much so that some can’t help but ask if we’ve moved beyond the bull and straight into a bubble conversation.  However, when you look beyond tech, you might say there’s been market malaise.

Here’s a great stat from Bloomberg Intelligence – more than half of the S&P 500 stocks have declined in the past three months, despite the index rallying about 5 percent. Over that period, the top ten companies have returned about 14 percent on average, with all but Berkshire Hathaway in the green.  The other 490 stocks are down as a group by about 0.2%.  Bloomberg notes that is the fourth largest difference in trailing 3-month returns between the top 10 and the rest of the S&P since 2020.

For Wells Fargo strategist Scott Wren, the math should lead to a simple conclusion.

Rebalance your portfolio.  Trim exposure to S&P sectors like tech and communications services, which represent the big gains for the index this year.  

Skip stocks in nosebleed territory and instead, focus on industrials, materials, energy and health care.

All things being created equal…

Mike O’Rourke, Chief Market Strategist, JonesTrading has his own simple conclusion —  if the S&P 500 seems too concentrated in a few big tech names, buy the S&P 500 equal weight index, which is trading more around its historic valuation.

Go for defensive growth 

Another option comes from Jonathan Hirtle, Executive Chairman of Hirtle Callaghan & Co, who joined me again this week to make the case for what he calls defensive growth stocks.  There are examples in areas such as staples and non-cyclical tech that he likes. They would include Visa, Mastercard, Moodys, S&P, FICO and Waste Management. He describes them as businesses with more annuity-like revenue streams that enable them to be more resilient.

Look to Japan…

On the subject of diversification, I spoke to Carol Schleif, chief investment officer at BMO Family Office this week, who is making the case for investing in Japan.

As you may know, the Nikkei has been one of the better performing markets this year.

One of the reasons Schleif remains bullish is that the push within Japan to encourage companies to find ways to increase their low book values is expected to continue.

She also notes that with a younger generation seeing salary increases for the first time in years, the dynamics of the economy are changing.

Great savers could morph into solid spenders, giving companies pricing power.

So the combination of economic trends and shareholder friendly companies is keeping her focused on Japan for diversification.

Stocks that may benefit from higher insurance prices?

You may have noticed in some of the recent U.S. inflation reports that higher insurance costs have been one of the standout inflationary forces.  In the most recent CPI report, for example, vehicle insurance rates had risen more than 20 percent in the past year.  Meanwhile, a report from S&P Global noted home insurance rates across the U.S. jumped an average of 11.3% last year.

We wondered if, despite this inflation frustration for consumers, there was an opportunity for investors.

We spoke with Cathy Seifert, Vice President of Research at CFRA who said she has a few names in the broader insurance group that she likes: Chubb, Travelers and AIG.  She also likes Manulife.

On companies that are best positioned for tech, she flagged Progressive, which in her view really has its act together when it comes to AI.

Making the case for Hasbro 

I interviewed Hasbro’s CEO Chris Cocks this week about the state of the business.  Cocks is a self described “long time nerd,” who grew up playing Dungeons & Dragons at age 10 and Magic: The Gathering in college.  His early career took him into tech and companies such as Microsoft.  His way into Hasbro was through its gaming subsidiary.

“We had a lot of luck building that business and I got bumped upstairs.”

Since taking the top job roughly two years ago, Cocks has been making the case for a more focused Hasbro, with a “fewer, bigger, better” stable of profitable brands, while working with partners to leverage the portfolio.  

A big part of that that is diving deeper into digital.  That includes with AI. 

Cocks sees an opportunity to booth use artificial intelligence tools to improve productivity at the company, but also use it as an R&D tool when it comes their toy strategy.

However they use the technology, he sees Hasbro focusing on being “anchored in play.”

Interestingly, he’s also driving that home through a new management exercise.

“We are building a board game that we are going to teach all our senior executives how to be a general manager.  We’re praticing what we preach.  We gamify everything.”

Hasbro’s shares have trended lower since Cocks was first named CEO in early 2022, but it is a well known stock on Wall Street.  More than 70% of the analysts who cover the company have a buy rating, with an average 12 month target of around $72.

Pixar Profits Help Disney 

Pixar’s Inside Out 2 has been enjoying a big run at the box office.

It’s a big win for Disney boss Bob Iger, who has made fixing studio performance a big priority in his return engagement as CEO. 

Some film releases have been delayed as far out as 2031 to ensure better quality.

Pixar itself was very much in need of a comeback.

Lackluster performance for films such as Elemental and Lightyear had ratcheted up the pressure for a hit.

Disney shares have pulled back recently, but the stock is still one of the better performing Dow names in the past 6 months.

Which tech stocks does Wall Street think will rise in the next 12 months?

Take this with a grain of salt…

But after the run-up we’ve seen, I figured I would share the current Wall Street sentiment around tech names that have gained ground this year.

A very simple pulse check can come from looking at the average, 12-month target price among the analysts who cover each stock.

Currently, Apple, Nvidia, Qualcomm, Netflix and Palantir are trading above the average analyst target price.  

As for stocks that, based on the 1-year forecasts, analysts on average think have some room to still climb, they include Uber, CrowdStrike, Super Micro, Meta, Microsoft, DoorDash, Coinbase, Amazon, Spotify, Broadcom and Alphabet.

In some cases, the upside is very marginal. 

And ultimately, this is a very superficial form of analysis.  But we’ll keep you posted on notable changes.

Pet care Profits Go Digital 

Let's talk a bit about the pet care business, where some of the biggest growth is coming online. In the United States, pet retailing giants such as Petco and Petsmart have been upping their game in e-commerce.  And for good reason – an increasing number of pet owners are opting to buy all their pet stuff online.  Aside from the convenience factor, the reality is that two names in particular have been putting pressure on the more traditional players to beef up online – Amazon and Chewy.

According to Bloomberg Intelligence, those two companies make up about 70 percent of the e-commerce market for pet product sales in the U.S., with Chewy – a digital native which has the most downloaded app in the sector – leading with a 36 percent stake.  By comparison, brick and mortar names like Petco and Petsmart, as well as Walmart and Target, each appear to have less than 10 percent market share.

The breakdown on dominance is important because this market is rising fast.  According to Bloomberg, online sales in this area are poised to grow an average of 10 percent for the next few years.  And all in, their analysts estimate this area could see growth of more than 85 percent between now and 2030.

For Chewy, that continued growth may help its margins expand, since the company can use that lead to fuel its expansion into other higher margin areas, such as insurance and vet services.  Its shares are recommended by a majority of the analysts who cover the company on Wall Street.  Petco, by comparison, does not have a majority of buy ratings.

Meanwhile, in Canada, Pet Valu is a well liked stock itself.  More than 90 percent of the analysts who cover the company recommend buying it.

Home Depot vs Lowe’s 

If we do start to see a reversal in interest rates and homes hold on to a reasonable amount of value, there is a growing expectation that the renovation market will see a nice spending lift.  Keep in mind we saw a lot of spending pulled forward during the pandemic, so it has taken awhile to return to growth.

One of the biggest questions surround where the most growth will be.

Within the industry, there is a constant discussion around the DIY opportunity, compared to professional contractors.

Home Depot has the edge with the professionals, who make up about 50% of sales.

For Lowe’s, it’s around 25%.

Bloomberg Intelligence (BI) notes that’s a big improvement from around 18% in 2018.

Going forward, BI expects Home Depot to look to serving even bigger projects and becoming a single source materials provider.

They believe Lowe’s will focus on smaller contractors.

As for the stocks, Home Depot has typically traded a premium to Lowe’s.

It’s a more liked stock on Wall Street, however, because of the premium, there is an average view that Lowe’s shares could outperform Home Depot over the next 12 months.

Good opportunities in real estate?

I spoke this week with Matt Kornack, a real estate equity analyst at National Bank.  He’s been surprised the stocks have not performed better, given the improvement in interest rate outlook across the curve.

Here are some real estate names he likes in Canada.

Apartment REITs: Killam, CAPREIT

Industrial REITs: Dream Industrial 

Retail REITs: First Capital 

Office REITs: Allied 

Bullish view on National Bank 

Quebec-based National Bank recently acquired Canadian Western Bank, in a deal that continues a consolidation theme in Canada.  Recall Royal Bank recently purchased HSBC Canada’s assets.

Barry Schwartz of Baskin Wealth Management says both Royal and National have been the highest quality operators in Canada’s bank sector, going back two decades.

In his view, the acquisition of Canadian Western Bank solves an issue that National is too regional.

The market responded to the deal by selling National shares, but Schwartz believes this will be a win long term and he’s recommending investors buy National’s stock.

Cheap stocks with stable earnings

When the market is at all time highs, it’s common for investors to seek out value.  And so Bloomberg’s equity strategy team has compiled a list of stocks that would screen as being both relatively cheap, but also with stable earnings. 

Now, starting with the valuations being relatively cheap…the analysis is based on the current earnings yields for these companies – which measures a company’s earnings per share divided by its current stock price.  Bloomberg screened for names with earnings yields that are outpacing the average corporate credit yield right now.  But since they were using a metric based around earnings, they also screened for earnings stability.  

To do that, they sought out stocks with low forward earnings dispersion.  Now, they found well over 100 names that fit the bill, so we took things a step further and looked at all of the stocks they flagged and screened for just the ones that have a majority of buy ratings from wall street analysts.

Against that backdrop, our list ended up with 32 names that Wall Street loves for being relatively cheap with stable earnings.  Here they are:

 Comcast

AT&T

Elevance Health

Cigna

Schlumberger

Truist Financial

Bank of New York Mellon 

PG&E

Centene

Baker Hughes

ON Semiconductor

Xcel Energy

VICI Properties

Halliburton 

Edison International

Fifth Third Bancorp

Entergy

Eversource Energy

WR Berkley

Huntington Bancshares

Labcorp Holdings

Textron

Citizens Financial

Fox Corp

Jabil

AES Corp

Lamb Weston

LKQ Corp

Bath & Body Works

Tapestry

BorgWarner

Globe Life

Money flows to dividend ETF’s rising

Now that the Bank of Canada has cut interest rates, higher yielding assets are expected to become more attractive.

Flows into dividend ETFs have been weak, but Bloomberg’s ETF Analyst Athanasios Psarofagis sees that changing.

Two he’s watching closely are the BMO Canadian Dividend ETF (ZDV) and the iShares Core MSCI Quality Dividend Index ETF.

Big Dividends vs Big Dividend Yields

We get a lot of inquiries about dividend stocks.  Typically, the metrics that help screen for solid dividend payers include measuring the dividend yield.  

But we also were curious about companies that flat out dish out notable chunks of cash over the course of the year.  And so we looked at stocks within the S&P 500, Nasdaq 100 and TSX that over the course of the year have been paying out – or are on track to pay out – more than 10 dollars worth of annual dividends.  Now, even though there are a ton of companies that come close to meeting that market (with quarterly payouts between one and two dollars a share), payouts that crank past 3 bucks per share are rare.  They include:

BlackRock, Public Storage, Essex Property, Equinix, Goldman Sachs, Broadcom, Fairfax Financial and Lockheed Martin.

Note Essex is just on the bubble of $10 bucks in annual dividend payments per share, so we gave it a pass.  For what it’s worth, it is not recommended by a majority of analysts on the street, nor is Lockheed.  But all the other companies are rated a buy by a majority of analysts who cover them.  And finally, there is prediction data on all of these names (except for Fairfax), which projects these companies will continue to boost their dividends in the next three years.

All that said, dividend seekers may gravitate towards stocks that have lower per-share prices and better dividend yield metrics, which would allow them to receive higher overall payouts per year because they can acquire more stock.

I included some of those names in one of my videos this week.  Notable dividend payers I flagged were McDonald’s, Best Buy, Chevron, Exxon Mobil, UPS, HP, Kellanova, Hormel Foods, PepsiCo, Johnson & Johnson, Starbucks, Williams Companies, Viatris, Medtronic, Verizon, Home Depot, Wendy’s, Abbvie, JPMorgan, Kinder Morgan, General Mills, Omnicom Group, Ford, Comcast, Amgen, Bristol Myers Squibb, Truist Financial, American Electric Power, IBM, Philip Morris, Comerica, Franklin Resources, Duke Energy, Gilead Sciences and Invesco.

The Okta opportunity?

One tech name that has not seen much buying of its shares this year is cybersecurity player Okta.

I spoke with co-founder and CEO Todd McKinnon, who noted that the higher interest rate environment has made some businesses cautious on spending.

Another challenge is a recent network breach, which bruised the company’s reputation.

“Every month, we block about two billion malicious log-in attempts across our customer base,” McKinnon explained. “And back in October, unfortunately one got through into our customer support system.”

Despite the major setback, McKinnon made it clear he’s ready for battle.

“We’re really committed to fighting that war and defending ourselves and our customers.”

He also had a message on the opportunity for investors.

“One of the things about being a co-founder is it gives you long term perspective.”

“If you think about the years ahead, there’s going to be more innovation. All of that will require more identity and security. We are the leading independent and neutral identify platform in the world.”

For now, Wall Street is mixed on the outlook for Okta.

How big will Google Cloud become?

At the Collision Tech Conference this past week, I moderated a keynote discussion with Will Grannis, Google Cloud’s CTO.  Grannis is a charismatic fellow who makes a strong case for the business.

Google Cloud works with everyone from leading Generative AI startups to big businesses.

If we think of Nvidia as the company building chips for the AI revolution, Google Cloud (which also builds its own chips) is helping businesses to build out their AI capabilities, including developing so-called AI agents that are one of the key tools companies will use to improve interactions with customers.

This is a lucrative business.

Google Cloud generated more than $33 billion in revenue last year.  According to estimates compiled by Bloomberg, the business will generate more than $100 billion in annual revenue within 5 years.

Buy what you know.  But first, know who you are.

I had a great conversation this week with NBA champion Metta World Peace. Since his basketball days, he’s been building his investing game, currently serving as Chairman of Artest Management Group.

He highlighted that some of his earliest investment opportunities came during his playing days, when he was approached by a wide range of companies.

It taught him that while there are always opportunities, those opportunities may not fit your thesis. 

If they don’t, the time you allocate to that opportunity may feel misspent.

“Your time is more valuable than money,” he added.

This, to me, is such an important point.

We often cite Warren Buffett’s “invest in what you know” philosophy.

But it is more important to first understand yourself, so that you can know the investments you’re making align with who you are.

Picks Of The Week

Colin Cieszynski, SIA Wealth Management: Apple, GM, Dollarama

Adam Johnson, Bullseye Brief: DraftKings, Celestica 

Brian Madden, First Avenue Investment: Bombardier, Broadcom, Lennox International

Laura Lau, Brompton Group: Micron, Targa Resources, Hitatchi 

John Zechner, J Zechner Associates: Northland Power, Capital Power, Amazon, Alphabet.

Teal Linde, Linde Equity Fund: Brookfield, Kinsale Capital, Linamar 

Bob Iaccino, Path Trading Partners: Global X Uranium ETF, Accenture, iShares Russell 200 ETF

Greg Nemwan, Newman Group, ScotiaMcLeod:  Amazon, TFI International

Barry Schwartz, Baskin Wealth Management: Couche Tard, Tourmaline, CNQ, CN Rail

Chris Blumas, Raymond James Investment Counsel: Mainstreet Equity, Visa, Fortis