The markets took a turn for the worst this week and overall, we’ve witnessed all major North American indexes lose 3.5%~ over the last month. In fact, with the recent pullback the markets have been relatively flat over the last 3 months.
For the most part, a flat market over this timeframe is nothing out of the ordinary. However, considering the torrent pace of the markets over the last few years, it definitely seems out of the ordinary.
The selloff in high valuation, high growth tech stocks was the most pronounced as we witnessed some significant collapses from companies south of the border. A prime example of this is Docusign (DOCU) which fell over 42% on earnings.
The company beat earnings expectations, but reduced its fourth quarter guidance by what seems like a minuscule 1.7% when you consider the fact it lost 42% on the day.
We’ll get to our overall thoughts on the market, what we’re doing about it and more a little later in this e-mail. First we want to speak on a few Premium stocks that reported earnings.
Toronto Dominion Bank (TD)
TD Bank delivered strong Q4 results in which it beat on the top and bottom lines. All things considered, TD Bank had one of the best quarters of the Big Six banks.
It remains the best capitalized with a CET1 Ratio of 15.2% and in our opinion, remains one of the best banks to own. Despite a run-up in price, it remains one of the best valued and as everyone was expecting, announced a 12.6% raise to the dividend.
You can read our updated report of TD Bank here
The Bank of Montreal (BMO)
BMO also delivered a strong fourth quarter. While revenue missed slightly, earnings topped expectations. The biggest news however, was the massive 25.5% raise to the dividend which trounced the raise announced by most of the Big Six banks.
Even with the raise, BMO’s payout ratio is only 41.43% on a forward basis, which is at the low end of its targeted payout ratio. BMO has been the best performing bank not only in 2021 but in the post-pandemic era, and while the valuation gap has closed, it still remains an excellent stock, and my (Dan) largest holding.
You can read our updated report of BMO here
Calian (CGY)
We spoke on Calian last Sunday. However, the full report is updated, which you can read here.
It’s steady as it goes for this company. It posted strong earnings, but in the midst of a mini-correction, it’s facing some pressure.
BRP Inc (DOO)
Finally, BRP delivered an impressive Q3 despite the significant supply chain issues. Earnings of $1.48 per share beat by $0.22 and revenue of $1.59B beat by $210 million.
On the flip side, it saw YoY declines across revenue, EPS and adjusted EBITDA thanks in large part to supply chain issues. On the bright side, revenues have increased by 28% through the first nine months of the year which met guidance for 25-30% growth. It also raised the low end of adjusted EBITDA and EPS guidance and lowered revenue guidance.
While it will remain under pressure due to the global supply chain issues, it has performed admirably all things considered. It just re-iterates our position that DOO has a strong management team, and is a stock that I (Dan) will be looking to add to when the volatility subsides.
You can read our updated report of BRP Inc here
Our thoughts on the current market environment
For quite some time, valuation didn’t seem to matter. This was more pronounced south of the border, as many negative earning, high growth companies are seeing their share prices collapse.
In a year that most major indexes are up anywhere from 15-23%, Cathy Wood’s ARKK ETF, which is comprised of most of these companies, has plummeted 21%.
Did these stocks get ahead of themselves? Absolutely. But as we’ve mentioned before, the market is a pendulum, often swinging from extreme optimism to extreme pessimism. Right now, we certainly look to be in a state of extreme pessimism.
During these extreme states, it’s often best to do nothing at all. Selling into weakness and panic rarely turns out to be a wise choice in the long term, and attempting to time the bottom and “buy the dip” during times of high volatility can also be mentally taxing. We’re witnessing this right now with Bull List stock Lightspeed Commerce (LSPD).
Although our Dividend Bull List and Foundational Stock Lists are unlikely to see this type of volatility, if you’re investing in pure growth options, prices can deviate by significant margins from whatever seems to be “reasonable”, and they can do it quickly.
A prime example of this would be Growth Bull List stock Dialogue Health (CARE), one Mat and I both own. This company has undergone 40-50% swings in price in either direction, in timelines of less than a month.
What is driving this sell off?
The market is undergoing what we would call a cocktail of headwinds right now. From the Feds announcing inflation is indeed not transitory to the first case of the Omicron variant in the United States, there is a lot of fear of what’s to come.
These fears, at least in the case of the Omicron variant, have put a significant amount of pressure on crude oil, and as a result the TSX is taking a larger hit than most non-tech indexes.
But, there’s a large amount of speculative fear that is driving this selloff, as we really have no idea how bad the new COVID variant will be, the extent of shutdowns (if any), and what the Feds and Bank of Canada will do in light of rising inflation.
Now is a good time to analyze your appetite for risk and overall portfolio makeup
It’s easy to go overweight on high growth options while the market is in somewhat of a euphoric state.
Although you may have had an initial plan to purchase a 1-2% allocation of a growth stock, when prices are rising all we can see is gains. So, we may say what the heck and boost that allocation to 4-5%. We’ve deviated from our plan, and we’ve deviated from our overall appetite for risk in order to chase gains.
And if you’ve been doing that, you’re likely in a very uncomfortable state right now, as the growth market has not only been relatively flat for the majority of 2021, but has underwent a significant correction over the last few weeks.
This is very likely an eye opener for many new investors, especially those who started post-COVID crash. This type of volatility simply hasn’t existed, but is certainly not out of the ordinary for high growth holdings. In fact, many successful companies have had gut-wrenching drawdowns and volatility on their way to success.
As we’ve mentioned since early January, it’s absolutely critical the majority of your portfolio contains strong, established businesses generating positive cash flow. These are the exact companies that qualify for our Dividend Bull List and Foundational Stocks.
Our strategy for adding to our portfolios at this time
We have received a ton of inquiries as to what we’re buying and what we’re selling during an environment like this.
First, we’ll speak to the selling, and it’s a relatively easy answer. We don’t plan to sell any of our holdings during this correction. I (Dan) will be rebalancing in early 2022. But I feel right now, especially with extensive weakness in the growth market, is not the time to be pivoting capital from the growth portion of my portfolio to my core holdings.
In terms of additions, both of us tend to shy away from purchasing during times of high volatility as well. This may seem counter-intuitive to a long term investing strategy, as it may seem like we’re attempting to time price movements which ultimately shouldn’t matter.
However, it’s actually more of a confirmation in our long term conviction of our holdings than anything. Why? We’re happy to pay a higher price per share once we see somewhat of a trend reversal.
A prime example, I (Dan) plan to add to both my Lightspeed and BRP Inc holdings. But, I’m willing to wait until I see a turnaround in prices and a bit of a recovery in both stocks before I add to my positions.
I’m well aware that waiting for a trend reversal may result in me paying a premium over todays share price. But, I also know that that small premium paid is likely to be irrelevant half a decade or longer from now.
I’ve often referred to the fact that I like to wait until the storm passes, rather than drive right into it.
This certainly isn’t a strategy you need to deploy. It’s one Mat and I use and we’re comfortable doing so. It’s important we align our overall strategy with what sets us up for the best chance at long term success. If volatility bothers you, it is likely best to either avoid purchasing until things settle or average in to reduce the chances of making an emotional mistake.
Overall, try not to worry about fluctuations in the short term
Many investors will have tunnel vision when it comes to the short term returns on their portfolio. These may be over the course of 3 months, 6 months, or even a year.
The reality of it is, over this length of time the market is nothing but a voting machine. The markets are unpredictable, and just because an investment does not turn out to be profitable at these time intervals doesn’t necessarily mean you’ve made a poor decision.
Money is made in the markets over the long term. A poor investment decision could have you sitting in the green over the course of a year, and an outstanding investment could have you deep in the red over the same timeframe. This is especially true in volatile markets like we’ve witnessed over the last two years.
However, over the long term strong companies have, and always will prevail.
