Before we start with the content, we’ll bring to your attention again that we’ve added a quote feature to our screeners! Our growth is complete, and the dividend should be complete by the end of the weekend. Tickers in our screeners are now clickable, which will open up a quote in a new window that will giving you up to date information on the stock.
This was a feature that was requested extensively by members, so we decided to implement it. View the growth screener here, and check in later to view the dividend screener.
Market Overview
Although markets closed with a whimper, April was a strong rebound month. The S&P/TSX Composite Index gained 10.48% in the month and year to date, the Index has now lost only 13.38% of its value.
As has been a consistent trend, the Bull List outperforms when markets are in rally mode. In April, our Bull List jumped by 26.39% on average and is now inline with the Index with average losses of 13.49% year to date. As we’ve mentioned before, growth stocks typically underperform extensively in a crash and bear markets, primarily because of their lack of dividends and higher valuations.
So for our Bull list, one that is made up primarily of growth stocks, to be on par with the TSX right now is a strong achievement.
Jumping off lows, Park Lawn (TSX:PLC) and Lightspeed (TSX:LSPD) both jumped by 30%+ in April.
Other standouts included TFI International (TSX:TFII), Aecon Group (TSX:ARE) and Air Canada (TSX:AC) all gained more than 20%.
The Dividend Bull List is also recovering. In April, stocks averaged gains of 14.24% led by a big rebound from Exchange Income Corp (TSX:EIF) as it gained 67.49% this month.
On the flip side, the list continues to trail the TSX as financials are not benefiting from a rebound. As the Dividend Bull List was just introduced, it remains highly concentrated in financials. Over time, we expect this to even out.
Quarterly earnings are starting to roll in and we’ve already seen strong showings from TFII and ARE. It is important to remember however, that these earnings are not reflective of the full COVID-19 impacts. It will take another full quarter to fully understand the financial impacts COVID-19 mitigation efforts are having on Financials.
While the rebound has been welcomed, cracks are beginning to show. The economy has taken longer to re-open, and there is still no clear path for a return to normalcy. Until this happens, expect continued volatility. In such an environment, it is always best to average into positions.
Another highlight of our Bull list, after the 7 day waiting period required for recommendations, Dan Kent took a long position in Kirkland Lake, our most recent addition.
*Mat Litalien is long LSPD, TFII and ARE. Daniel Kent is long LSPD, PLC and TFII
Tech continues to outperform
Leaving aside the past few months, the last bull run lasted nearly a decade. It was a record streak, but one that was highly concentrated south of the border. Between January 1, 2010 and December 31, 2019 the S&P 500 gained 189.70%, an 11.22% compound annual growth rate.
In contrast, the S&P/TSX Composite Index only gained 45.27% for a CAGR of 3.81% over the same period.
So why the underperformance?
One of the main reasons is the lack of tech exposure. Over the past decade, the tech industry has been one of the fastest growing with FAANG stocks leading the way. Technology accounts for approximately 25% of the Index south of the border, whereas Tech accounts for only 3-5% of the S&P/TSX Composite Index. Who are the FAANG?
- Apple
- Amazon
- Netflix
Historically, there has been a significant lack of technology options for TSX investors. It is however a situation that is slowly changing. Led by Canada’s own FAANG quintet, the DOCKS, the TSX Index is starting to become home to some rock-solid technology options. Who are the DOCKS? They are arguably Canada’s top technology companies:
- Descartes (DSG)
- Open Text (OTEX)
- Constellation Software (CSU)
- Kinaxis (KXS)
- Shopify (SHOP)
Not surprisingly, each of these stocks has more than doubled the TSX over the past decade. Of those, there has been none better than former Bull List standout Shopify. The stock has returned 2,740% since it IPO’ed in 2015.
Tech has not only outperformed over the past decade; it is outperforming again this year. In our connected world, technology is an essential service and the COVID-19 induced crisis has led to a rapid shift to cloud-based services.
Year to date, the S&P/Technology Index is up 12.96%, far outpacing the 13.27% loss posted by the broader TSX Index. Shopify and Kinaxis are leading the way with gains of 72% and 42% respectively.
Our top picks for the tech industry today?
As of today, Constellation Software remains a staple on our Bull list. Arguably, there is no better management team.
The company has consistently delivered outsized returns as it has become one of the industry’s best consolidators.
The company keeps its secrets closely guarded and is one of the reasons retail investors tend to shy away from the company. That and its high share price. We believe this is one of Canada’s premier technology companies.
Shifting focus, LightSpeed POS (TSX:LSPD) is one of Canada’s newest tech companies. The company debuted in early 2019 and it closed the year up 90%. Before COVID-19 hit, Lightspeed was one of the best performing stocks on the TSX Index in 2020.
Unfortunately, COVID-19 mitigation efforts hit Lightspeed at the heart of its market – small and medium business (SMB) restaurants and retailers. Outside of tourism and travel, no other industries have been as impacted.
The company already guided to outperformance this quarter. This means investors will have to wait a full quarter before getting a feel for the full impact of the shutdowns.
On the bright side, the company is taking steps to work with customers as they navigate the crisis. Likewise, it has a pretty significant war chest with over $200 million in cash and $25 million in available credit.
Once economies rebound, we believe Lightspeed is well positioned to outperform over the long term. If interested, we recommend averaging into the company at these prices.
Other technology companies on our radar included Dividend Aristocrats Open Text (TSX:OTEX) and Tecsys (TSX:TCS), and REAL Matters (TSX:REAL). Of course, we always have an eye on Shopify. The company is highly volatile, and it is a buy-the-dip candidate whenever it loses 20% or more – which it does several times a year.
All investors should have exposure to technology. It is time to think about technology in a different way. Are we ready to declare it a defensive sector? Not quite, but there is no denying it is acting as such during this crisis.
*Mat Litalien is long SHOP, LSPD and OTEX. Daniel Kent is long LSPD.
Will We See Another Dip?
This has been a question we’ve been privately asked on the Q and A along with numerous times via e-mail. And the answer to the question, as frustrating as it is, is we simply don’t know.
Now, we can all make predictions. But one of our favorite sayings here at Stocktrades is when you try and time the market, you’re either wrong or you got lucky.
There is one thing for certain however, we do expect turbulence.
The markets have reacted somewhat positively to earnings thus far, but as we mentioned above the reality is most are reporting from December to March, which do not include full COVID-19 headwinds.
If we do see another correction in the markets, everything we’ve said prior rings true. If you need some insight during the inevitable turbulent times ahead, head back to our premium content and read our state of the market pieces. And if we do see extreme swings again, we’ll be sure to update you more often than our typical 2 times a month.
In times like this, stock prices rarely reflect the true value of the underlying business. It’s exactly why we brought Park Lawn to your attention in early April, and the stock had a 30%+ run. We’ll continue to do the same as we move forward.
