Market Overview
Here we are again – volatility is creeping back into the markets. In April, the markets rebounded in a big way and the headlines were mostly positive. In the first couple of weeks in May, confidence in the market rebound is starting to waver.
If anything, this market crash is going to make us all much more comfortable with price swings moving forward.
Why is bullish sentiment beginning to erode? We are now halfway through earnings season and the results have been wildly all over the map. If there is one consistent message heard on all conference calls and throughout quarterly press releases, it’s that the future remains uncertain.
Most companies are withdrawing short and long-term guidance as management teams work diligently to understand the new normal. Even those who kept guidance or who have performed well thus far are leaving investors with a cautious tone.
The bottom line is this – no one can predict the future. All we as investors can do is stay on top of what is happening and keep to the known issues. What do we know?
- This quarter’s results were only slightly impacted by the COVID-19 pandemic. Investors only received a glimpse of the potential impacts.
- Next quarter’s results will bear the full brunt of pandemic.
- Companies are conserving cash, and dividends across all industries are at risk of either being cut or suspended.
- In North America, we are seeing a slow and measured return to normal.
- COVID-19 is still present in our communities and there is no vaccine.
- Economies are sliding into recession – case in point Germany is now officially in a recession.
In these times, it is quite difficult for investors. Our message to investors hasn’t wavered and we remain consistent in our approach. Look for good value, stick to industries that are defensive in nature and above all else, average into your positions. So long as volatility remains, this is the approach we are taking.
Whereas our Bull List outperformed in a big way in April, it is trailing to start in May as volatility has returned. Since we are dealing with growth stocks – this is par for the course. The Bull list tends to outperform in an uptrend and underperform when stocks struggle. Look no further than this April, where our Bull list posted returns of over 25% compared to the TSX’s 10.50%.
The best performer this month is Constellation Software (TSX:CSU). Riding the tech momentum and strong quarterly results – CSU is up 9.10% in May. For those who have been with us for a while, we are firm believers that CSU management is best in class.
The worst performer of the month is Air Canada (TSX:AC) and its not even close. We recently updated our report on AC, but quarterly results weren’t pretty. As a result, the stock of Canada’s largest airline took a nose dive (pun intended), losing 27.7% of its value.
This is not a company we would be chasing now, but if we owned it – we would not run out and sell it at a loss either. It will require a great deal of patience as the airline industry will take a long-while to recover from this pandemic.
Admittedly, the timing of our inclusion of Air Canada on our Bull list could not have been worse. It was added weeks before the pandemic hit, and the rest is history. We quickly moved to neutral on the company in mid-March and our views haven’t changed.
In such times of volatility – it is a good reminder to be well diversified.
Over the next couple of weeks – Canada’s Big Banks are going to be reporting. Outside of the Financial Crisis, we believe these will be the most closely watched set of earnings reports of the decade. They are largely considered the bellwethers of the Canadian economy. Strong results may be the tide the lifts all stocks in its wake. Unfortunately, the opposite is also true.
With low oil prices and the pandemic, how will Canada’s banks fare? Are their 100+-year streaks of uninterrupted dividends in jeopardy?
Circle the week of May 25th on your calendars – all the Big Five report that week.
If you haven’t guessed it by now, you probably already know what our June 1st newsletter will entail.
Lets move on to another topic, and an industry we want to lightly cover this release.
Canadian telecom stocks – one of Canada’s strongest industries
During times like this, the key question is how can you become even more comfortable in the markets, knowing that your portfolio is made up of strong stocks that can withstand significant market swings.
Well for one, our Foundational Picks are a good start. These 10 picks contain some of the largest companies in the country, able to withstand even the harshest economies.
We are primarily growth investors here at Stocktrades, seeking out better than average returns from stocks with strong growth prospects. But to reduce volatility, our portfolio’s still contain a large allocation towards these stocks.
Today, we wanted to speak on a single industry in the country that seems relatively unaffected by COVID-19, and has been bringing investors reliable capital & dividend appreciation for years.
That is the Canadian telecom sector.
In terms of economic moats, Canadian telecom companies have one of the most significant in the country.
You could argue railroads, or Enbridge’s dominance in the pipeline industry are more prevalent, but all three industries are rock solid nonetheless. It is no surprise that both Canadian Natural Rail, Telus and Enbridge are 3 of our foundational stocks.
To say it is nearly impossible to take market share away from the Big 3 Telus, Bell and Rogers is relatively accurate, at least thus far. Shaw Communications (SJR-B) has been trying for some time now, and although they have had success, it is somewhat limited. The Big 3 still own a 91% share of the market.
In Shaw’s most recent quarter, the company added 121,154 gross wireless activations. To put this into perspective, Rogers, BCE and Telus added 257,000, 282,412, 265,000 gross activations respectively. On top of this, churn rates (the rate at which subscribers go to different companies) is extremely low. In fact, this last quarter BCE was the only one of the Big 3 that had a churn rate above 1%.
In an industry where more than 99 of 100 customers are sticking with their current provider, it’s extremely hard to grab market share. Especially considering the industry is extremely capital intensive, and new infrastructure developments are enough to scare most competition away before they even get started.
To add to one of the most difficult barriers to entry in the country, telecom companies get away with what would be viewed in many Canadians eyes, murder.
Canadians pay some of the highest cell phone bills in the developed world, and plans in the United States that would cost anywhere from $30-$45 are often $100+ here. This is extremely frustrating as a consumer, yet rewarding as an investor.
The result is a highly profitable business, one that can generate profits regardless of the economic conditions and pay a lucrative dividend.
Profits may continue to grow in the current environment
Because of COVID-19, interest rates have been slashed at rapid speeds.
Like we mentioned above, telecom companies require significant amounts of capital to expand infrastructure, and more often than not they have to borrow. Case in point, Telus has nearly $14.5 billion in property, plant and equipment and $17.884 billion of long term debt on the balance sheet.
It’s safe to say that even a quarter point swing in interest rates can have a significant effect on bottom lines.
Price cuts? Yes, but no
Some Canadian investors (not many) have turned bearish on the sector, citing the government is finally willing to step in to decrease payments.
The first strike was a few years ago, with the CRTC making it mandatory for cell phone “unlocking” fees to be free. In 2017, cell phone companies made over $40 million charging customers to break the chains on their current device and head elsewhere.
The second strike however is one we feel won’t have as much impact as investors are thinking.
The Liberal government announced that in 2 years, Canadian telecom companies will be required to cut cell phone bills by 25%. Canadians rejoiced, until they read the fine print.
Telecom companies are required to reduce cell phone plans by 25% if they fall into the 2-6 GB of data range. At this point in time, you’ve got to do a whole lot of digging on the company’s website to even find a plan in this range. With the enormous growth of data services and data usage, how many of these plans will exist two years from now when they’re required to cut?
A valiant effort, but one that seems to simply fill an election promise.
All in all, it’s hard not to be bullish on the industry, and moving forward we feel more pure-play telecom companies like Telus have the potential to outperform. If you’d like to learn more about Telus and our outlook, just have a look at our foundational picks.
