In Part 1 of our Year in Review, we went over some possible lessons learnt in 2022. From figuring out your risk tolerance to maintaining strict portfolio allocations, these lessons will definitely stick with you after a large drawdown in 2022.
We were fortunate enough here in Canada to not have nearly as large of a drawdown in our large and mid-cap stocks. Although we didn’t see the meteoric rise US equities did during the pandemic, the landing has been somewhat softer, with the TSX being down only 8% on the year.
Make no mistake about it though, Canadian small cap stocks got absolutely hammered in the risk-off environment in 2022. It was not all roses for the Canadian markets.
What produced strong results in 2022? Primarily companies with real assets. Profitable, cash-flow positive companies with large economic moats. The type of criteria that is reserved for a particular list here at Stocktrades Premium that has outperformed every major North American Index every year we’ve released it. That being our Foundational Stocks.
Of note, all of the performances mentioned inside of this piece are as of December 22nd 2022.
Lets kick Part 2 off with a peek at the performance of our Canadian Foundational Stocks
Our Canadian Foundational Stocks outperformed every major North American index for the third consecutive year. At the time of writing, an equal-weight portfolio of our Canadian Foundational Stocks has lost 1%, while the TSX has lost around 8.8%. When we compare our Canadian Foundational stocks to the US markets, they outperformed the S&P 500 by 18% and the NASDAQ by a whopping 32%.
Most of the Foundational Stocks were what we would call “middle of the pack,” having typical years in a market drawdown, ranging from returns of 8% to losses of 5%. However, 4 companies separated themselves from the rest – 2 facing heavy losses and 2 facing significant gains.
First, the gains. Alimentation Couche-Tard (ATD) and Loblaws (L) both posted returns of over 18%. The business models of both companies were unphased by the market drawdown for different reasons in particular.
For one, we can expect a company like Loblaw to remain generally unimpacted amid a recession, and we’ve stated time and time again we feel it has a considerable advantage versus other publicly traded grocers here in Canada due to its “discount factor.”
In addition, the company was, and still is, the victim of political posturing by the NDP, primarily revolving around a conspiracy of price gouging, which has been largely disproved. So the fact it returned 20%+ on the year despite this is impressive.
Couche-Tard benefitted from a re-opening of the economy and has posted strong, double-digit growth in revenue in 2022, along with high single-digit earnings growth. Although the company is technically a consumer cyclical stock, we view it as more of a defensive holding. We can expect fuel, tobacco, lottery, and quick-service food sales to stay relatively stable even during a recession.
Considering the circumstances, we’re not all that surprised that these were the two best performers on the year.
Now let’s look at the worst, Brookfield Renewables (BEP.UN) and Granite REIT (GRT.UN).
Since the significant rise in price of renewable energy companies in 2020, Brookfield Renewables has been on a multi-year slide. It’s been the worst Foundational Stock by a substantial margin in the last few years.
This is due to a combination of things. For one, the general sentiment towards renewable companies. The adoption of renewable generation methods is expected to take much longer than anticipated, along with the fact that these companies are highly sensitive to interest rates. This isn’t unique to Brookfield. We’ve witnessed many utility companies, including blue-chip Foundational Stock Fortis, take a hit on rising rates.
However, in the company’s most recent quarterly filing the dividend made up around 80% of funds from operations, and expectations for high single digit/low double digit overall growth are still in place. We aren’t concerned about Brookfield over the long-term, and despite multiple years of subpar performance it will remain a Foundational Stock.
For Granite, interest rates hit the company hard. With 2022 losses of nearly 30%, rapid increases to policy rates put pressure on property values. Considering this company is an industrial REIT, there is likely some fear priced in here in terms of an economic slowdown as well.
Overall, two large winners and two large losers on the year somewhat offset. The Canadian Foundational stocks once again proved why they make up the bulk of Mat and I’s portfolios.
US Foundational Stocks
The timing of our inaugural year of US Foundational Stocks could not have been worse. We announced them heading into one of the most significant market drawdowns in US stocks since the Financial Crisis. However, the list still outperformed the S&P 500 by a couple percentage points.
Overall, it lost 17%, while the S&P lost 19.1%. 2022 favored value/defensive options. This is exactly why we saw the TSX and Dow Jones perform much better than the S&P and NASDAQ.
There was extensive volatility on the US Foundational List, much more than on the Canadian Foundational list. And this is surprising, as the companies on the US Foundational List are some of the largest companies in the United States, with some of the largest economic moats in North America.
First, the winners. Lockheed Martin (LMT) and Pepsi (PEP) posted outstanding gains on the year of 42% and 7%, respectively. Considering Lockheed was generally a value play when we added it in January 2022, we’re not surprised by this gain, especially given the conflict in Ukraine/Russia and its focus on military defense.
Pepsi continued to post exceptional results despite rising inflation and fears of a recession. It performed lockstep with Coca-Cola (KO) on the year, with returns within 1.5% of each other. The decision between these two for the Foundational List came down to Pepsi’s more diverse product base, which we feel will help it heading into 2023.
When we look to the losers on the list, there are two clear standouts. Amazon (AMZN) and Disney (DIS).
The large 50%+ drawdown in Amazon is one of the more surprising things we’ve witnessed in 2023. The company benefited from e-commerce growth during the pandemic and is now being hit hard by fears of a deep recession and the slowing of purchases overall.
However, when we look underneath the hood of a company like Amazon, particularly Amazon Web Services, there is a lot to like here. AWS, which now makes up over 16% of Amazon’s total revenue, is growing significantly faster than its retail segment. We’ll discuss AWS in depth during our release of US Foundational Stocks. Still, overall we feel the selloff in Amazon is largely overdone.
As for Disney, cost pressures are taking center stage. While the company’s combined subscriber base of Disney + and Hulu now outrank Netflix, it has come at higher acquisition costs. This is a money-losing operation as the cost for content is rising – the same headwind facing Netflix.
That said, the Parks segment continues to rebound from pandemic lows and is posting solid quarters. The company is also re-assessing its film release schedule as the cinema industry is still struggling. Case in point, Avatar 2 is likely going to lose money.
Despite the challenges, there remains no company on earth with the level of IP that Disney owns, and we still feel strongly about it over the long term.
The Bull Lists
The Growth Bull List had a rough 2022, depending on where you look. Highly speculative options like Lightspeed, Acuity Ads, and Dialogue Health struggled. Significant valuation resets in a quick reversal to a “risk off” market have caused some huge drops in share price, and the more speculative Growth Bull List options have witnessed 75%+ drawdowns.
Even if we look to cash flow-positive companies like Goeasy Ltd, Park Lawn Corporation, and Parkland Fuels, large drawdowns in price due to economic issues and rate increases have left these outstanding companies trading at 30%+ discounts on the year.
But, there were many bright spots on the Growth Bull List as well. Waste Connections is looking to close the year 16% in the green, while TFII International (TFII) and Aritzia (ATZ) additions are up over 32%.
After a horrendous start to the year, Boyd Group Services had arguably the best rally of any stock here at Stocktrades Premium, going from lows in the $120 range to highs of nearly $220.
In terms of additions to the Bull List in 2022, we added Waste Connections, BRP Inc, TFI International, Telus International, and Aritzia. Of those 5 additions, Telus International was the only company that lagged behind the returns of the TSX in 2022. However, we still remain bullish on Telus International overall. We aren’t alone in this either. Telus, the majority owner, has been a significant buyer as of late.
The Dividend Bull List saw lower overall additions than the growth list in 2022. This is primarily due to the difficulty in identifying dividend growth stocks on the TSX that are not hyper-concentrated in the financial sector. This is exactly why we’re going to be expanding the list to US options in 2023.
We added 3 stocks to the list this year in Jamieson Wellness (JWEL), Goeasy Ltd (GSY), and Stella Jones (SJ).
This year, the clear-cut outperformers on the dividend list were Stella Jones, Intact Financial (IFC), and TMX Group (X). The only significant laggard on the Dividend Bull list was technology company OpenText (OTEX).
Considering the large drawdown in tech, this isn’t all that surprising, and OpenText will remain on the list heading into 2023.
2022 was a challenging year for the markets overall, but a strong year for Stocktrades Premium
Out of the 21 Canadian stocks highlighted in 2022, 16 (or 76.1%) are outperforming the TSX Index on a total return basis (meaning dividends included from both the stocks and index).
On the US end, 4 of the 9 Foundational Stocks are outperforming the S&P 500.
As we’ve mentioned repeatedly, however, one year is not enough time to judge the results of an investment. While it is interesting to touch base on these returns, over/underperformance over a 1-year timeframe is irrelevant. Oftentimes, an investment thesis can take half a decade to play out.
As investors with long-term time horizons, we should welcome lower stock prices.
It allows us to accumulate outstanding companies for cheaper prices. We look forward to continuing to provide the best platform in the country for Canadians to utilize to grow their investments in 2023.
The next release you’ll see from us is our 2023 Canadian Foundational Stocks on January 8th.
Have a happy and safe New Year!
