Ticker Take: a weekly newsletter on investing.
A recap of the week.
“Nothing has changed”
Well, that was a week! After a massive selloff to kick things off, the S&P 500 ended the 5-day stretch right about where it began. We spoke with Brian Belski of BMO Capital Markets early in the week, before the rebound had been crystallized and he was already taking the declines in stride.
“It’s normal for markets to correct,” Belski told us. He noted that because the market had done so well, investors were starting to buy stocks just because they were going up — which, he says, is not healthy. However, he felt that the sharp reversal represented people being way to “overreactive.” Couple that with August often being a volatile period and Belski continues to be bullish.
“Nothing has changed,” he said. He sees new all-time highs for the U.S. and Canadian stock markets before the end of the year — although he would not be surprised to see more turbulence between now and then.
His advice to investors on which sectors to own? “Own a bit of everything,” he suggested.
Stock market drawdowns are normal
Building off Brian Belski’s comments, the S&P 500 – from its mid July peak to its lows this past week – had declined roughly 8.5%, which is pretty close to an official correction.
When you look at the S&P between 1928 and 2023 – which is close to 100 years worth of data – double digit percentage drawdowns are quite common. The average during a given year, from the peak to the low, is more than 16%. in fact, when you put all the years together, there is a majority of calendar years where the peak to trough declines were 10% or more. And yet, it is also true that a majority of those years cited since 1928 – nearly 60% in fact – ended the year overall with a gain of 10% or more.
Stat of the week: “buy the dip”
Staying on a similarly encouraging theme… after the big selloff early in the week, a note from Goldman Sachs analysts got passed around Wall Street trading desks. Goldman’s team highlighted that since 1980, the S&P 500 has generated an average return of 6% in the three months that followed a 5% drop from recent highs — with Goldman’s analysis finding that overall performance in that period was positive 84% of the time.
So which tech stocks are the pros buying?
One of the challenges investors may face on the subject of jumping back in… is that valuations in one of the most popular sectors — tech — are not looking much “cheaper.” Bloomberg Intelligence published data this week noting that TMT (tech, media and telecom) stocks in the U.S. are trading at forward price to earnings ratios of around 24 times, which fairly close to the pandemic era highs and not too far off the 26 times level we saw earlier this year.
So what names are solid picks if stocks aren’t exactly trading at bargain levels?
Our good friend David Nelson of Belpointe Asset Management offered a couple of ideas.
Nelson likes Meta. While the company’s spending on AI is enormous (and go even higher), he argues Meta is already seeing the benefits of that spending. In his opinion, the company will be able to better target consumers and capture more ad dollars, which he says will help support both the top and bottom line.
He also likes Netflix, nothing you basically have two choices when investing in names tied to media — you can buy companies trying to be the next Netflix…or you can buy Netflix. He notes everyone trying to mimc the Netflix model has struggled to get the same traction.
Brianne Gardner from Velocity Investment Partners at Raymond James has added to positions in Amazon during selloffs. She likes Microsoft and Alphabet too, as well as Meta like Nelson.
What’s going to happen with media companies?
It was another wild week in the media sector, with both Warner Brothers Discovery and Paramount Global announcing multi-billion dollar write-offs, tied to their television assets.
Longtime industry analyst Laura Martin was kind enough to speak with me and, as always, laid it out straight.
Martin, who covers the industry for Needham & Company, explained that consumers are abandoning linear television and that’s hurting the value of these legacy businesses.
And the sting is especially strong when cable players lose sports rights, as we saw with TNT losing the NBA rights to Amazon.
Fees the media companies generate from distributors are impacted by such changes because cable providers aren’t going to pay the same subscriber fees if audiences are watching less.
Meanwhile, the need to spend massive amounts of money to build rival streaming offerings to Netflix and Amazon Prime further cut into the industry’s profits.
So, what happens from here?
“Capitalism has a hard time funding shrinking businesses, so they need to consolidate,” Martin told me.
But while she sees consolidation as an inevitability, Martin also highlighted the hurdles.
The reason, in her opinion, we haven’t seen more deals is because the current administration in Washington — and leadership of the regulatory bodies overseeing the industry — has said no to M&A.
Bottom line, in her view — if Trump takes the White House, Martin expects to see four years of rapid consolidation within the industry. And she’s confident Silicon Valley’s top players would be willing buyers of legacy media assets.
“They all have traffic, but they need engagement length,” she said.
If the Democrats stay in charge, she expects companies will have no choice but to just keep shrinking, to re-align their cost structures.
What do interest rate cuts mean for stocks?
We’ve talked about this theme many times before, but i thought i would bring back some analysis which is quite helpful in a moment like this. Let’s first establish the fact that we now seem much closer to a Fed rate cut than we’ve been at any point in the cycle so far. With that said, Duncan Lamont of Schroders has done some past work on what happens to U.S. stocks in the 12 month period after the Fed starts cutting rates.
In reviewing 22 rate cutting cycles since 1928, Lamont found that on average, the stock market rose 11% in the year following the first rate cut. That performance easily beat the average 12 month return for government and corporate bonds (and definitely trounced cash). Now… there is a concern in the markets that the fed is late to the party on rate cuts and that recession risks in the U.S. are real. But stock market investors take note -- in 16 of 22 of those rate cutting cycles, the U.S. was either already in a recession when the cuts started or entered one within those 12 months. Returns in those recession scenarios were not as good — an 8% return, on average, compared to 17% in non-recessionary rate cutting cycles. But again, that 8% return beats both bonds and cash.
Why small cap stocks could have bigger returns…
Our friend Alec Young, Chief Investment Strategist at MapSignals, joined me this week for an insightful conversation. He noted that the money flows into small and mid-cap stocks since May have been significant and he expects that will continue for a few reasons. First, they tend to have greater leverage in an environment where interest rates are declining. Secondly, they have an improving earnings outlook. And thirdly, their valuations are reasonable, especially with an improving earnings outlook.
Two stocks in particular that he flagged which have these characteristics are Allison Transmission (ALSN) and Mueller Industries (MLI).
Which bonds could outperform?
I received an inquiry on TikTok about this and I promised to include some commentary in the newsletter. So let me share the opinion of Earl Davis, one of the fixed income gurus at BMO Global Asset Management.
Earl’s general message? It’s time for bonds to shine and you should focus on quality. He sees the growing conversation around rate cuts continuing to make U.S. government debt attractive.
Standout dividend yields on bank stocks?
Bank stocks are a staple in many investor portfolios. And one of the reasons for that is the dividend appeal. For example, over the past decade, there has been a dramatic difference in stock market performance for the banks when you factor in dividends – and calculate the total return. In nearly all cases for the big six Canadian names, the total return for these investments is more than double the actual stock returns because of those dividend payments. And so we wanted to see which Canadian banks are currently sporting standout dividend yields, which measures how much you earn in dividend payouts for every dollar invested in the stock. Here they are…
Scotiabank: 6.7%, BMO: 5.5%, TD Bank: 5.2%, CIBC: 5.2%, National Bank: 3.9%, Royal Bank: 3.8%
So, all of the yields are above 3.5%. The highest yields are currently associated with Scotiabank, BMO and TD. Keep in mind though, that all three of those stocks are down this year and when a stock goes down, the yield goes up.
Sometimes, higher dividend yields can spark fears about dividend sustainability. For what it’s worth, Bloomberg does some analysis on dividend health. And none of the banks have a negative score, which would suggest current payout plans have a reasonable amount of reliability. TD and Scotiabank currently have the least positive scores, but still notably positive. i
It is worth noting that sizeable dividend growth from here is a question mark for the sector. Right now, Bloomberg’s predictive tools do not see meaningful dividend growth for any of the big players over the next 3 years.
Apple’s cash feeds capital return plans
They say cash is king. And in the world of tech, there is one company that tends to stand out.
Apple is sitting on the biggest cash pile in Silicon Valley. As of the latest quarter, the company’s cash and equivalents stood at $153 billion. Here’s how that compares to other players…
Apple: $153 billion
Alphabet: $101 billion
Amazon: $89 billion
Microsoft: $76 billion
Meta: $58 billion
Intel: $35 billion
Tesla: $31 billion
Nvidia: $31 billion
Cisco: $19 billion
IBM: $14 billion
Broadcom: $10 billion
That Apple cash pile dominates, despite the fact that Apple has been committed to return massive amounts of that cash to shareholders. In the quarter that just ended, for example, Apple spent more than $30 billion on buybacks and dividends.
Here’s another amazing stat - since 2012, Apple has returned nearly $900 billion in capital to shareholders. And the company is hardly slowing down. Bloomberg Intelligence sees Apple’s quarterly returns of capital to be in the $30 billion range for the next year to two years, as it estimates the company’s annual free cash to approach $400 billion over the next three years.
Meanwhile, Apple’s credit rating has never been stronger, which gives it flexibility to borrow in the bond market at reasonable rates to achieve some of its capital return goals.
With all that said, even if Warren Buffett’s Berkshire Hathaway is unloading Apple stock, there will be an obvious buyer in the years ahead – that being, the company itself.