July 2019 Update

If you buy stocks when they are out of favour and unloved, and sell them into strength when other investors recognize their merits, you’ll often go home with handsome gains. – John Neff

To us, ugly stocks were often beautiful. – John Neff

Being out of fashion ultimately enhances opportunities on the other side. – John Neff

This month’s quotes are from legendary investor, and recently departed, John Neff, who left behind one of the top investment track records of all time. How did he do it? Neff spent 31 years buying companies with solid fundamentals at 40-50% discounts to the market, taking advantage of stocks that were misunderstood, overlooked, and outright hated by most investors. This mantra should sound very familiar to clients and readers. When it comes to investing and human nature, it goes to show there’s nothing new under the sun. Tried and tested principles of buying cheap always prevails in time.

On that note, our Income Portfolio is doing well, earning a positive return that’s outperforming the market with low volatility. More people must be picking up on our ideas about slowing economic growth and the appeal of long term yields – I certainly get that sense by reading the newspaper these days. Recall we’re invested quite defensively here, and things will stay that way until data proves otherwise.

Across the equity portfolios our cashflow-growing companies are doing exceptionally well. I’m quite happy with the progress made by these companies over the last 9 months. However, we are still waiting for our value stocks to “pop into gear” before celebrating. Particularly, Canadian energy stocks – the deepest of deep value stocks I’ve ever seen -- keep holding us back while other holdings perform well. In time, these energy stocks will change from net detractors to net providers of investment return, and will do so with fury. Until then, patience.

In general terms, value stocks today remain the cheapest they’ve ever been in history, including the very bottom of the Great Depression. Historically, when investor appetite turns away from expensive glamour towards value, which is presently underway, value stocks become top performers for years to come. Through some periods in history, that strong rekindling of value outperformance has lasted over a decade. As this current rotation from glamour to value makes its way through the markets, I expect our value stock prices to appreciate materially.

Recommended reading

John Neff’s obituary: https://www.wsj.com/articles/john-neff-outperformed-the-stock-market-for-three-decades-11560453159

Value stocks are the cheapest they’ve ever been: https://www.marketwatch.com/story/value-stocks-are-trading-at-the-steepest-discount-in-history-2019-06-06?mod=mw_theo_homepage

Canada’s resource policy is out of step with the world: https://business.financialpost.com/opinion/jack-mintz-only-one-country-is-contemplating-destroying-its-own-resource-sector-canada


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