June 2019 Update

The sillier the market’s behaviour, the greater the opportunity for the business-like investor. – Ben Graham

The intelligent investor is a realist who sells to optimists and buys from pessimists. – Ben Graham

Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down. – Warren Buffett

I’m growing more optimistic by the day about the prospects for our Canadian oil and gas stocks, the largest weighting in our Growth Portfolio. The sector has been demolished (a highly technical term) over the last two years, and I’ve taken advantage of low prices by buying our fair share from the pessimists. And then buying more. What the pessimists are missing is that our companies have now demonstrated increasing cashflows over the last year, which is strongly supportive of future gains in stock prices. Several of the companies are earning so much cash over the next two years that they can buyout their entire public market cap and still have cash left over. I expect company buybacks, acquisitions, and perhaps even special cash dividends to be announced in the future. In all my investing experience, I’ve never seen anything so undervalued before.

Beyond their financial statements, over the past two months I’ve noticed the public narrative about Canadian oil and gas companies change for the positive. Misleading rhetoric coming from American-funded special interest groups operating in Canada is being replaced by a new air of cooperation and realism amongst Canadian provinces and our federal government. If Canada is to mitigate the economic effects of the coming recession, support of the Canadian oil and gas industry is imperative. Canada will need all the jobs it can muster to counter a real estate and banking slowdown in our population centres. This suggests to me that energy sector gains will come sooner rather than later, which will be a big help to our Growth Portfolio. A victory here would make for our hardest fought gain yet, but also our most rewarding by far. In my opinion, many of these companies can increase in price by a couple hundred percent, just to get back to “normal” value.

Also coming over the horizon now, and something all investors will need to be realistic about, is increasing inflation. The past ten years has seen low, docile, and benign price inflation, broadly supportive of North American consumer spending habits. However its hard not to notice consumer prices accelerating everywhere over the last several months -- at the gas pumps, grocery stores, retailers, phone and cable bills, education, rent/housing, and all things health care. While government statistics try to “manage down” the perception of these inflationary changes, the real effects are undeniably being felt by consumers. Particularly, middle class wages haven’t kept up with inflation, leaving the backbone of the North American economy in a debt-funded deficit. Inflation is now weighing on economic growth as I had expected several months ago. With the full effects of last year’s central bank hiking still ahead of us, I expect inflation to accelerate even more. On top of that, I would not be surprised to see inflation further accelerate over the next year as central banks now openly discuss coordinated efforts to boost inflation beyond their current 2% target.

To take advantage of this trend and protect our spending power, I’ve increased exposure to inflation-protected businesses, those that are able to raise prices and profit from inflationary times. Companies that sell the basic necessities of life such as grocery stores, telecom, rental housing, basic apparel, natural gas, and auto repair can increases prices, and consumers willingly pay because they must. In step with rising inflation, I also expect commodity prices to increase, which should further help our energy companies.

Recommended reading

Investing is mostly about behaviour management https://www.betterment.com/resources/reduce-stress-investing/

What does the return of inflation imply for value investing (hint: it’s good) https://www.fortunefinancialadvisors.com/blog/how-inflation-makes-the-value-factor-a-sector-bet/

Cordially,

Ben W. Kizemchuk
Portfolio Manager & Investment Advisor
Wellington-Altus Private Wealth