Brett Girard on BNN-Bloomberg’s Market Call – Mar 29, 2021

Brett Girard on BNN-Bloomberg’s Market Call – Mar 29,  2021

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MARKET OUTLOOK:

In the past year, the Central Bank balance sheets of the U.S. Federal Reserve, European Central Bank, Bank of Japan, and the People’s Bank of China have expanded by over 50 per cent from ~$20T to ~$31T. Although these actions prevented global collapse, they were not without unintended consequences, including significant inflation in financial assets.

As the economic recovery continues, there is uncertainty around the persistence of financial asset inflation and the implications of inflation expanding beyond financial assets into broader consumption.

In this uncertainty, we advise investors to look through revenue growth to consider unit economics and free cash flow contribution. Companies strong in these attributes, especially those with a clean balance sheet, can be nimble in a changing macroeconomic environment and reward holders with rising dividends. 

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TOP PICKS:

Analog Devices (ADI NASD) – Last purchased on March 23, 2021 at US$151.02 

Analog Devices is the world’s largest manufacturer of analog integrated circuits, very small components that play a role in everything from wearable devices to self-driving cars to wireless communication of 5G networks. Their industrial segment will be front and centre over the next five years and the global robot installed base is expected to increase by about 60 per cent. Financially, Analog Devices has consistently maintained a 33 per cent operating free cash flow margin and tripled the dividend over the last 10 years.

Stryker (SYK NYSE) – Last purchased on March 23, 2021 at US$231.87 

Stryker is still trading around pre-pandemic levels and is expected to grow sales by 19 per cent this year, leveling off to 8-10 per cent going forward. It is growing recurring revenue with the Mako Robot Technology which improves surgeon accuracy and durability of joint replacements. Stryker has also successfully shored up their device offerings with the integration of Wright Medical, a leader in shoulder, ankle, and foot implants and procedures.

Brookfield Asset Management (BAM/A TSX) – Last purchased on March 23, 2021 at $56.38

Brookfield Asset Management is also still trading around pre-pandemic levels. Size and skill allows this company to position itself as the buyer of choice for cash-strapped governments and out of favour businesses. Fee baring capital continues to increase, as do their investment offerings, including a recently launched ESG directive.

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Brett Girard, chief financial officer and portfolio manager at Liberty International Investment 

Always Think like a Business owner

Always Think like a Business Owner

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At Baskin Wealth Management we never stop learning. We always strive to improve our investment approach and to learn from our mistakes as well as the mistakes of others. However, in our lifelong pursuit to become better investors, we strictly adhere to one important rule: Always think like a business owner.

In investing, the temptation to think short-term can be overwhelming:

“That stock keeps going up, maybe we should buy some?”

“That stock has done so well, maybe we should sell it and take our profits?”

“That stock has been a dog! Let’s sell it. You can always buy it back cheaper.”

Any of those actions might turn out well in the short-term. We can only know for sure in hindsight. However, if we always think like a business owner, we stop concerning ourselves with the short-term. Instead, we think of the big picture and focus on what really matters over the long-term.

Acting as long-term investors is what works best for us and our temperament. When you think like a business owner, you tend to gravitate toward businesses that have superior economics and which are run by management teams that have an excellent track record of creating value. Especially during uncertain times, we believe that owning quality businesses will provide the best protection for our clients’ portfolios. A great investor who we admire, Terry Smith, once said “high quality businesses have nothing to recover from”. If we look at some of the best performing stocks in our portfolio during 2020 (Apple, Amazon, Microsoft, Constellation Software, FirstService and Blackrock to name a few), their businesses performed well before and during the pandemic. We also expect these businesses to continue to improve going forward.

Apple was our best performing stock in 2020. Its price went up a staggering 80% last year. Did its business improve by 80% in 2020? No. And we certainly do not expect its share price to go up again by 80% in 2021. A non-business owner may be tempted to sell Apple’s stock because of its terrific gains (“Why not take the profits and move on?”). But we think like business owners. A business owner thinks about what will happen to the business going forward, not just what the business has done in the past. We expect Apple’s earnings to increase by double digits over the next few years. Even though its stock has already had a tremendous run, we still think the business is reasonably valued for its potential growth and we are buying even more shares for new clients.

Unfortunately, not all our investments performed as well as Apple did in 2020. American Tower is one example. American Tower owns over 180,000 cell towers worldwide and it makes money by renting out space on its towers to telecom companies like Verizon and AT&T.  After reaching an all-time high of $269 a share in late July of 2020, American Tower’s stock dropped by almost 20% by the end of the year. This stock had a disappointing return for our clients in 2020 and for many clients we paid what now appears to be too high a price for the shares.  Fundamentally, American Tower had a great year in 2020. It increased its dividend by 20%, it signed a new long-term deal with a major client, and it continued building and buying more towers around the world. In fact, we believe American Tower’s business has become more valuable as a result of the pandemic; it should be a prime beneficiary of the growing demand for mobile and cellular data. We think the eventual global adoption of 5G will require telecom companies to put more equipment on cell towers which will allow American Tower to increase its rental revenues.

A short-term investor may be tempted to say something like, “That stock has been a dog! Let’s sell it. You can always buy it back cheaper.” However, instead of looking in the rearview mirror, a business owner sees a very bright future for American Tower, and the recent under-performance of its stock is an opportunity to buy more shares of a high-quality business.

Stock markets give us the ability to buy and sell shares of companies very easily and on short notice and one can be tempted to take a short-term view. Business owners know that real value is built over time, sometimes years and sometimes decades.

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Barry Schwartz, January 12th, 2021, 

Baskin Wealth Management

Source

https://baskinwealth.com/blog/always-think-like-a-business-owner/

You get what you pay up for

You get what you pay up for

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How many times have you gone with the cheaper product or service, only to regret it later? In other words…You get what you pay up for.  Don’t feel bad, we all make this mistake. The other day, I was looking for a charge cord for my Apple AirPods, and instead of paying $40 to buy the quality product from Apple, I bought a cheaper knock-off from Amazon for a quarter of the price. Not surprisingly, I threw the crappy knock-off cord into the garbage a few days later.

Needless to say, “you get what you pay up for” also applies to investing. We have rarely regretted paying a higher valuation for a quality investment. That said, in today’s market, quality investments look expensive. Companies in our portfolio, like Apple, Microsoft, Costco, Constellation Software, Visa and Moody’s trade at high valuations. So many investors say they would love to own these companies but only at cheaper prices. I’ve got news for them: Quality companies should trade at expensive multiples. If you own a share of a great business that routinely grows its revenues and earnings year after year, then for the most part, its shares should also trade at higher values.

It is rare to buy quality on the cheap. Generally speaking, the prices of many quality companies’ stocks fell with the rest of the market in late February and March of this year, but like tennis balls, many of these companies bounced right back. For example, in March, Microsoft’s stock price fell 20%, but then investors realized that Microsoft would be a big winner in the work-from-home trend, and it recovered promptly by month end.

There is no official description of a quality company, but in our opinion, quality companies tend to have most of the following characteristics:

Recurring revenues

Competitive advantages that create a strong moat around its business

Scalable business with long runway of growth

A product or service that people can’t live without

Pricing power

An asset-light business model

High returns on equity and capital

Ability to reinvest the capital it earns at high rates

Strong balance sheets

Management that thinks long-term

Most publicly traded companies are average businesses at best. It is near impossible for an average business to become a quality business. With an average business, the best you can hope for is that you buy it at a really cheap valuation and wait for the stock to rise to an average valuation. To take advantage, you must sell this investment and go out and find another cheap business. Replicating this process over and over is difficult. With a quality company, you can afford to buy the stock at a high valuation if you have a longer time horizon. If you are right about the quality of the business, then over time, you will be rewarded for your patience. For example, we starting buying shares of Visa for our clients in 2013/2014 at around $40 USD per share (split adjusted). At that time, Visa’s share price looked expensive, but we had to believe that the company would continue to grow its revenues and earnings at an above-average pace. To us, Visa was a quality investment that we had to make. It checked almost all the boxes on our quality checklist. Today its stock is trading at around $200 a share, up five times from our original investment before dividends received. Visa’s stock did well over the years as the company delivered double-digit revenue growth almost each year and grew its earnings per share almost 300% over our holding period. We are still adding to our Visa position today. You can argue that I am cherry picking with this example, but our clients have been well rewarded with patient investments over the years in Apple, Google, Moody’s, Microsoft and Waste Connections, to name a few.

If you find one of those companies, our advice is to hold tight. There are probably fewer than 60 terrific quality companies right now trading on North American and European exchanges, but if you are lucky to pick one of these winners, your returns could be incredible. Since we can’t know which quality company will deliver outsized returns, we hold a basket of them, but ultimately the only way to generate outsized returns from stocks is to let your winners run and trim back when your holdings get too large in the portfolio.

In uncertain times, we take comfort in owning quality businesses and we believe we will get what we pay up for.

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By Barry Schwartz|, October 23rd, 2020

Baskin Wealth Management

Source

https://baskinwealth.com/blog/you-get-what-you-pay-up-for/