Ticker Take: a weekly newsletter on investing.

A recap of the week

May 26, 2024

The billionaire CEO who likes buying his own company stock.

Shares of MSCI Inc have come off their highs.

CEO Henry Fernandez, who has run the company for 20 years, has been buying on the dip.

That’s a good sign to Barry Schwartz of Baskin Wealth Management.

He too has been buying, noting the information technology company — which offers data and ratings to institutional investors — has more than 90% recurring revenue and solid pricing power.

You can see Schwartz’s other stock picks at the bottom of this newsletter, along with all the other stock picks from the pros this week.

Businesses with big profit margins

Nvidia flexed its profit muscle again in the latest quarter.

The company’s gross profit margins clocked in at more than 78 percent.

We were curious about how those margins compare to the rest of the so-called magnificent seven stocks. As it turns out, Nvidia is near the top of the list.

The company is outpacing Apple, Amazon, Alphabet and Microsoft in the profit margin department. Only Meta posted higher margins in its latest quarter, at nearly 82 percent.

Here’s the gross profit margin breakdown…

Meta: 81.8%

Nvidia: 78.4%

Microsoft: 70.1%

Alphabet: 58.3%

Amazon: 49.3%

Apple: 46.6%

Tesla: 17.4%

Meanwhile, this whole exercise also made us curious about which other tech companies out there have eye popping gross margins. So we looked at companies within the S&P 500 and the TSX and limited our search to businesses that reported gross margins north of 80 percent as of their latest quarter.

Some of the stocks that filtered through include Adobe, Canada’s Constellation Software and video game maker EA. We tried to focus primarily on names that are recommended by a majority of the analysts who track them. Here is the full list:

Neurocrine Biosciences, U-Haul, Autodesk, Hilton, Constellation Software, United Therapeutics, Adobe, Sarepta, Expedia, Cadence Design Systems, Interpublic, Vertex Pharma, Verisign, UiPath, Alnylam Pharma, Regeneron, Wingstop, Nutanix, Hubspot
Paycom Software, Astrazeneca, Atlassian, PG&E, Datadog, Meta, PTC Inc, Bentley Systems, Palantir, Dynatrace, MSCI, Eli Lilly, Biomarin Pharma, Tourmaline Oil, Gen Digital, ServiceNow, Fair Isaac, Electronic Arts, Synopsys, Nvidia, Sempra, SBA Communications, NextEra Energy, CoStar Group, Roblox, Zscaler, Airbnb, Merck, Cloudflare, Fortinet, Samsara, Edison International, Crowdstrike, Pinterest, Descartes Systems, Edwards Lifesciences, Workday, Zoom, Biogen, Gilead Sciences, Salesforce

Reviewing the Nvidia comparisons to Cisco

Of course, Nvidia’s continued climb has once again sparked comparisons to Cisco during the dot com bubble.

However, veteran tech investor Dan Niles very quickly poured cold water on that notion.

He noted in our conversation that, from a valuation perspective, Nvidia's forward PE is 15% below its average for the past 5 years.

It's trading at around 35 times its forward twelve month PE, compared to more than 135 times for Cisco during the tech bubble, with Nvidia's revenue growth easily outpacing Cisco during the two comparable periods. In his words, “this is nowhere near a bubble for Nvidia's stock.”

Holy Hokas!

While there was lots of focus this week on Nvidia's stock clearing $1,000 for the first time, shares of Deckers Outdoor also successfully breached that mark.

The company, which is known for its UGG and Teva brands, also owns Hoka.

Deckers made an early bet on Hoka, acquiring the shoe business roughly a decade ago, when annual sales were roughly $3 million.

In the past year, sales topped $1.8 billion.

And since the acquisition, Decker’s stock has risen by more than 2,000%.

This year, it’s up about 50%, easily outpacing Nike, which has seen its stock slump in part because of competition from Deckers and On Holdings.

How long do bull markets last?

We spoke this week with Carson Group Chief Market Strategist Ryan Detrick, who noted that the S&P 500 bottomed out in October of 2022. That means the current S&P bull market stands at about 19 months.

While that might seem long, it’s actually much shorter than the average bull market since World War II. Detrick looked back at a dozen bull markets since then and found that the average length is more than 60 months, or roughly 5 years. Detrick also notes this bull market is up about 48 percent from its 2022 lows, whereas the average return two years off a bear market low is 58 percent. Detrick sees more gains for stocks driven by better than expected earnings and encouraging signs on the fight against inflation.

Length of S&P 500 bull markets since WWII

1949: 86 months

1957: 50 months

1962: 44 months

1966: 26 months

1970: 32 months

1974: 74 months

1982: 60 months

1987: 31 months

1990: 114 months

2002: 60 months

2009: 131 months

2020: 21 months

2022: 19 months

Average: 61 months (5 years)

Source: Ryan Detrick, Carson Group

Don't discount the bond market opportunity.

I had a good chat this week with Ed Clissold, Chief U.S. Strategist at Ned Davis Research Group.

He typically talks stocks, but he notes the world has transitioned from “TINA” (there is no alternative to equities) to “TARA” (there are reasonable alternatives to equities).

Clissold’s research found that the percentage of S&P 500 stocks with dividend yields above the 10- year Treasury yield has fallen from a record high of 78.2% in March 2020 to 9.1% as of April 30. The last time the percentage was this low was September 2007, eerily just days before the S&P 500 peaked ahead of the financial crisis.

For income-seeking investors especially, he says bond market represents a more-than-reasonable alternative.

Stocks benefiting from fiscal stimulus

Byrden Teich of Avenue Investment Management shared an interesting macro stat, driving his micro investment call on a couple of stocks.

The reason the U.S. economy is so resilient, in his opinion, is because of the significant level of fiscal stimulus done in the U.S. over the past 4 years (around 25% of GDP), which continues to serve as a boost to the economy.

Two stocks he owns that have benefited from this push are Emcor (EME) and Encore Wire (WIRE).

They are involved in electrical and mechanical engineering and construction and have been large beneficiaries of the CHIPs Act and the IRA Fiscal Plan. Encore is involved in copper wire manufacturing.

A very bullish call on Ethereum

After the huge success of the spot Bitcoin exchange traded fund launches in the U.S. earlier this year, the crypto market's attention shifted to Ethereum this past week, after the SEC approved exchange applications to list spot ether ETFs.

We spoke once again with Geoff Kendrick, head of crypto research at Standard Chartered Bank to get his take.

If you're a crypto bear, take Kendrick’s view with a grain of salt.

But he sees continued momentum for Ethereum -- in his words, once investors realize it’s the "big tech” of digital assets, as well as fewer pre-ETF alternatives (compared to Bitcoin, where there were already a number of ways to play the cryptocurrency through the stock market, such as MicroStrategy).

As such, he is sticking with his forecast for Ethereum to reach $8,000 by the end of the year and $14,000 by the end of next year.

As for Bitcoin, Kendrick remains incredibly bullish too. He has been calling for the price to end this year at $150,000 and to reach $200,000 next year.

Will the end of a boardroom battle fuel Gildan's stock?

Months of drama came to end this week, when Gildan Activewear’s board and CEO abruptly resigned, conceding defeat to activist investor Browning West. The firm has reinstated co-founder Glenn Chamandy as CEO, who had previously been ousted unexpectedly from his position. Chamandy's return could be a buying opportunity, according to investor Barry Schwartz.

Schwartz, who is with Baskin Wealth Management (I mentioned him earlier in the newsletter), likes to invest in companies run by founders or management that have an owner mentality.

He likes Chamandy’s plan to lower costs, bring in more private label business, buy back stock and tie management compensation to value creation.

If the company can get get back to double digit earnings growth, Schwartz believes the stock could double in the next couple of years.

A strategy for buying Canadian bank stocks

TD Bank kicked off Canadian bank earnings last week, with most of the industry set to report this week.

I caught up with our longtime friend, Ross Healy of Strategic Analysis Corporation. Ross has, for years, lived by a simple strategy when buying Canadian bank stocks — buy the cheapest of the group,

In Healy’s view, banks are pretty homogeneous in terms of their performance and you shouldn’t worry about rotating through to maximize returns.

The last time we spoke, he liked CIBC and Canadian Western Bank. This time around, he was suggesting Scotiabank and TD, which has been under pressure, amid an anti-money laundering probe.

Companies that may boost their dividends at least 20% in the next 3 years

Many investors rely on dividends, so it can be helpful to know which companies are expected to boost investor payouts. Bloomberg has a function which measures the likelihood that a company will raise its dividend. the assessment is based on both track record and comments the company has made about wanting to increase what it pays to shareholders. So, we looked at companies that are expected to increase their dividends by a greater amount than the bulk of firms in the next three years. We put a 20 percent increase as our minimum. We also wanted to limit our list to stocks of companies that are currently recommended by a bulk of the analysts who track them. Based on that analysis, here are the companies that made our list:

PG&E

When will Amazon top Walmart in sales?

When it comes to sales, Walmart has been the dominant revenue name for years – generating more than half a trillion dollars in annual sales for at least a half dozen years. But rival Amazon is fast approaching Walmart’s revenue numbers. And according to analysts polled by Bloomberg, Amazon will surpass Walmart in sales for the first time next year – with an estimated $711 billion in annual revenue, compared to $703 billion, expected for Walmart.

And the math behind this upcoming milestone is fairly simple.

When you look at Amazon’s revenue growth, despite the company now being in its 30th year, the annual percentage increase in sales has routinely been in the double digits. Amazon has the benefit of its fast growing cloud business, AWS, which has also helped the company deliver on the bottom line. By comparison, Walmart – which we compared to Amazon based on calendar years, since it operates on a different fiscal year – hasn’t had a double digit sales increase since 2007. Here's the sales growth breakdown in the past 5 years as an example.

Amazon Walmart

2023: +12% +6%

2022: +9% +7%

2021: +22% +2%

2020: +38% +7%

2019: +21% +2%

Mind you, being so big, t’s impressive how routinely Walmart grows, even at a lesser rate. It hasn’t had a negative year of growth since 2016. And it has been winning over a lot of investors, with its ability to grow its customer base and its online operations.

Currently, analysts are extremely bullish on both Walmart and Amazon’s shares.

Stock Picks of The Week

Allan Boomer, Momentum Advisors: Target, Amazon, Nvidia, Ally Financial

Dan Niles, Niles Investment Management: Meta, Amazon, Nvidia

Barry Schwartz, Baskin Wealth Management: Restaurant Brands, MSCI

David Burrows, Barometer Capital Management: Finning International, Agnico Eagle, Alamos Gold, Kinross Gold, Cameco, Teck Resources, Freeport McMoRan, Goldman Sachs, JP Morgan, Bank of America, Citigroup, TMX Group, Suncor, Canadian Natural Resources, Imperial Oil, Altagas, ARC Resources, Pembina Pipeline, Eli Lilly, Invesco Aerospace & Defense ETF, Howmet Aerospace, Costco, Dollarama, Eaton Corp, Crane Co, Thomson Reuters

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Jon’s Newsletter

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