Although it’s the new year, it’s feeling a lot more like Bill Murray’s 90’s hit movie “Groundhog Day,” where he realizes he’s reliving the same day over and over. We’re not all waking up in Punxsutawny, but I’m sure the recent headlines of COVID cases surging have us feeling some level of Déjà vu. Despite this, I continue to be constructive on those companies that will reemerge winners in a post pandemic world. As we tip-toe back to normalcy, I’m reminded of this Alphonse Karr quote: “the more things change, the more they stay the same.”
This popular play ground game is the perfect depiction for last year’s stock markets. Every time we looked to have COVID behind us, we got caught in our tracks and sent back to the starting line. Instead of “Red Light”, it was “Delta” and “Omicron”. Replacing “Green Light” was “Vaccine” and “Oral Antivirals”. The constant back and forth has left fundamental investors shaking their heads as they try to make sense of what I would describe as a very “Bipolar” market environment. In response, investors spent the year pulling into what I call the “Old Faithful” stocks of Microsoft, Google and Apple. Which helped propel the major indexes to another record year.Most investment firms are predicting that 2022 will be a modestly positive year for markets, but with the caveat of increased volatility due to hawkish actions by the Fed. I do agree with the pundits, that overall indexes will see muted returns compared to last year. The reason being the work horses that drove last year’s gains which also make up the largest percentages of the indexes, will in my opinion have trouble keeping that level of momentum. With that said, I believe 2022 is going to be a fantastic year for many of those lagging stocks that couldn’t shake the barrage of shutdowns, labor shortages, input costs and supply chain issues. For these companies hiding in plain sight, “what doesn’t kill you makes you stronger” and for those investors that can see the forest through the trees, it’s going to be rewarding year!
A funny thing started to happen near the end of last year, investors started to question valuations again. It had started with the SPAC destruction earlier in the year, but now “rational” thought seemed to creep its way into many of the NADAQ’s high flyers. Terms like Price to Sales (P/S) and Total Addressable Market (TAM) once digestible, now gave investors a bad taste in their mouths. All this to say, the risk appetite going into 2022 isn’t as voracious. The culprit clearly is the change in tone from Fed Chairman Powell as investors consider an environment with less stimulus and higher rates. Let this be a warning, don’t be the last one drinking from the punch bowl while everyone’s already left the party. If you haven’t done so already, I’d strongly suggest dialing down the octane-filled high flying growth portion of your portfolio.
Every Canadian investment manager loves stealing this quote from the “Great One”. Why do we do it? Because it’s the perfect analogy of how investors should think. Also, as Canadians, we love Gretzky! Every month I do my best to incorporate the premises of this quote into my market views. Here’s a few of the main themes to consider when perfecting where markets will be headed in the year ahead. Although, many of these themes I’ve written about in greater depth in prior newsletters. Most ring even truer today than when I first wrote about them.
Energy should continue its rebound and outperform
Inflation should moderate and be less of a concern
Bonds will continue to disappoint – Favor Cash over Bonds
Consumer and Economy should remain strong
Reopening & Travel stocks should outperform
China is “Investable” bouncing from the bottom
Biotech/Pharma will be an M&A (mergers/ acquisitions) playground
Rising interest rates are not the end of the bull market
We all need tech in our portfolios, it has been and will continue to be the backbone of innovation. For investors worried about frothy valuations within the sector, it might be time to revisit some names from the past that are attempting to transition back to their glory days. The relevance hits closer to home since I unfortunately just celebrated my 40th birthday. Remember when names like Intel, IBM and Oracle were the darlings of Wall Street? If so you’re either fully grey or starting to become a little salt and pepper like me. But what comes with age? Wisdom…I hope. All three of these companies have made moves to breathe life back into them.
Intel – Early this year outlined a plan to expand its Foundry business, there by boosting domestic semiconductor production a welcomed idea after the supply chain shortages causes by COVID. The project will take years and cost upwards of 20 billion dollars. It’s an ambitious plan, but the company had lacked vision for decades. At approx. 10 P/E and a 2.6% dividend the turnaround could just be starting for this value name.
IBM – Under CEO Arvind Krishna they have refocused on the cloud and artificial intelligence and invested for future growth. The biggest move coming in 2018 with the $33 Billion purchase of Red Hat Inc. There’s been com- parisons to Satya Nadella, the Microsoft CEO who transformed it back into the powerhouse it is today. It’s still early but at 14 P/E and a 4.8% dividend the risk/reward is attractive.
Oracle – It’s the name who’s provided the most recent splash, announcing the $28-billion-dollar acquisition of Cerner. The move expands Oracle’s reach into the healthcare-care industry bolstering cloud-computing and database businesses. Oracles trades at a richer valuation of 18 P/E and a smaller dividend of 1.4%. All three of these companies face the risk of not fully executing on the strategies they’ve laid out. Any eventual turnaround is years in the making with no guarantee. If these transitions are successful, investors will be generously rewarded. Given their low multiples, free cash flow generation and dividends, they should behave more defensively if volatility spikes and we get a pullback in markets.
Happy New Year!
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All the best in 2022!
