Market Call: Stan Wong's outlook on North American Large Caps and ETFs

Key Concepts

• Market Volatility and Government Shutdown: Concerns about the US government shutdown impacting data releases and market sentiment.
• Earnings and Liquidity Support: Equity markets remain supported by strong earnings, ample liquidity, and seasonal trends.
• AI Bubble Concerns: Discussion on whether the current AI and technology market is experiencing a bubble, with a comparison to the dot-com era.
• Monetary Policy and Interest Rates: Expectations of potential interest rate cuts by the US Federal Reserve.
• Company-Specific Analysis: Detailed reviews of individual stocks and ETFs, including their performance, valuation, and outlook.
• Sectoral Trends: Insights into various sectors like luxury goods, travel, precious metals, aerospace & defense, REITs, waste management, technology, and healthcare.
• Investment Strategies: Discussion on dividend investing, diversification, and identifying defensive stocks.
• Past Picks and New Top Picks: Review of previous investment recommendations and introduction of new potential investments.

Market Overview and Economic Concerns

The North American markets experienced a downturn, following a recent high. A primary concern highlighted is the potential impact of the US government shutdown on the release of crucial economic data, particularly labor inflation data. However, Stan Wong of Scotia Wealth Management suggests that the positives for the market outweigh the negatives.

Key Points:

• Market Support: Equity markets are supported by three main factors:
  1. Earnings: Q3 earnings season saw 80% of S&P 500 constituents beating expectations. Projections for 2026 indicate a ~13% earnings growth rate.
  2. Liquidity: A record $7.5 trillion in money market assets is available in the United States ("dry powder").
  3. Seasonal Trends: The fourth quarter is historically the best quarter for markets.
• Investor Concerns: Despite positive fundamentals, investors are concerned about:
  • Market Momentum: The rapid market ascent since April/May, leading to questions of whether the market has moved "too far, too fast."
  • AI Bubble: Potential for a bubble in the AI and technology space, though Wong considers this premature, noting the different conditions compared to 1999-2000.
  • Midterm Elections: Potential for volatility associated with upcoming midterm elections.
• Canadian Economy: Acknowledgment of softness in the Canadian economy expected for the next couple of quarters.
• Monetary Policy: Strong case for a 25 basis point cut by the US Federal Reserve in December, with futures markets indicating a 60-70% chance.

Individual Stock and ETF Analysis

The discussion then shifts to specific investment inquiries from callers and emails, providing detailed analysis of various companies and exchange-traded funds (ETFs).

Pinterest (PINS)

• Analysis: Pinterest has shown a flat, sideways trading channel since mid-2022, with its price below the 200-day moving average. Valuations are not a concern, trading at ~14 times forward earnings with 10-15% growth.
• Key Issues:
  • Weak holiday sales forecast by management.
  • Slowdown in North America.
  • Focus on international markets with weaker margins.
  • Falling advertising prices.
• Recommendation: Not a preferred name; not owned in the portfolio. Investors looking in the communication/technology space should look elsewhere.

LVMH (LVMUY)

• Analysis: LVMH, a luxury goods group, has seen some recovery. The fashion unit has performed better, contributing to the stock's rise. Technically, the price has moved above the 200-day moving average, but the average itself is still trending lower or flat.
• Key Issues:
  • "Wait and see" game with the Chinese economy, which has not bounced back as quickly as expected post-COVID.
  • Mid-tier players like Tapestry (Coach, Kate Spade) have performed better than LVMH and Kering (Gucci).
• Recommendation: Not currently owned. Would reconsider adding back to the portfolio long-term. Advised to wait to purchase a new position.

Expedia (EXPE)

• Analysis: Expedia is a holding in the portfolio, offering good value with a PEG ratio of ~15-16 times forward earnings and a 20-21% growth rate. The stock price is performing well and the chart looks attractive, though it is currently overbought.
• Key Drivers:
  • Increased full-year outlook.
  • Continued growth in global travel, especially leisure, spurred by remote work opportunities.
  • Demographically favorable long-term outlook.
• Action Taken: A small portion of profits was taken due to the stock becoming a significant part of the portfolio and being overbought.
• Recommendation: Liked long-term.

iShares Silver ETF (SVR)

• Analysis: Silver has outperformed gold year-to-date (Silver up 83%, Gold up 60%). The ratio of gold to silver prices is considered overextended, suggesting potential for silver prices to do well if it reverts to the mean.
• Recommendation: Continue to hold. Advised to have silver as a small percentage of the portfolio (e.g., 5%) due to its tendency for long periods of poor performance.

US Aerospace and Defense ETF (XRTX / XRED in Toronto)

• Analysis: The ETF holds major aerospace and defense companies like General Electric, RTX, Boeing, and L3Harris. The sector is gaining more attention globally, contributing to the ETF's strong performance (up ~45% year-to-date, 36% over 12 months). The chart shows an ascending channel of higher highs and higher lows. The RSI is around 42, indicating it's not overbought.
• Key Issues: The space is considered narrow, more of an industry than a sector.
• Recommendation: A position can be added, but caution is advised regarding allocation to this specific area. Not owned in the portfolio.

North American REITs

• Analysis:
  • US REITs: Focus on storage and logistics, and data centers is recommended due to growing demand. ProLogis is mentioned as an example.
  • Canadian REITs: Caution advised, especially in the retail REIT space (e.g., Riocan), due to softness in the Canadian economy, negative GDP in Q2, and the cumulative impact of inflation on consumers.
• Recommendation: Look south of the border for REITs. Stay away from Canadian retail REITs at this stage.

Waste Management (WM)

• Analysis: Waste Management is considered a defensive stock with reliable earnings and revenue. The stock has fallen below the 200-day moving average but is showing signs of bouncing off the $200 support level. It offers a reliable earnings growth rate of ~10% but trades at a forward P/E of ~25 times, which is not cheap. The industry has limited competition.
• Recommendation: Liked for its place in a portfolio, though not as exciting as growth stocks.

Oracle (ORCL)

• Analysis: Oracle's stock surged in September/October due to strong cloud contract wins but is now reverting to the 200-day moving average. The Relative Strength Index (RSI) is oversold at 26%.
• Recommendation: Advised to hold, not sell at weakness. The tech market is experiencing some trouble this week. Expected earnings growth of 15-18% with a forward P/E of ~30 times, considered not expensive.

Past Picks Review (November 7, 2024)

Stan Wong reviewed his past picks from just over a year ago.

Caterpillar (CAT)

• Performance: 41% upside return, 42% total return.
• Reason for Holding (Past): Wanted exposure to a cyclical industrial name.
• Reason for Selling: Took profits as the stock became a bit expensive based on historical averages and peer group (trading at 28 times forward earnings with ~11% growth).
• Current Observation: Performing well partly due to data center expansion needs, but considered a bit pricey.

Netflix (NFLX)

• Performance: 45% upside return, 45% total return.
• Analysis: Continues to impress with 25%+ earnings growth, trading at ~35 times forward earnings (good PEG ratio). Over 300 million global subscribers. Original content, live events (wrestling, sports) are driving engagement and subscriber growth. Considered the clear leader in streaming compared to competitors like Disney+.
• Recommendation: Still holding.

iShares Core S&P MidCap ETF (XMHQ)

• Performance: Minimal upside return (~0%), under 1% total return.
• Analysis: Represents the S&P 400 Mid Cap Index. Cheaper than S&P 500 large-cap names. Historically, mid-caps tend to perform better over long periods, but attention has been on mega-caps recently. Mid-caps are more leveraged to US economic growth. Expense ratio is low (5 basis points).
• Recommendation: Still holding. Emphasized the importance of diversification away from mega-caps.

ETF Comparisons and Recommendations

Canadian ETFs: VTI vs. XIC

• VTI (Vanguard FTSE Global All Cap ex Canada Index ETF):
  • Description: Basket of high dividend-paying Canadian stocks.
  • Key Feature: Heavily weighted in Canadian banks (~46%).
  • Dividend Yield: ~3.3% (underlying ~4%, minus management fees).
  • Performance: Performed very well (~25% in the last year).
  • Consideration: Depends on the investor's outlook on Canadian banks.
• XIC (iShares Core S&P/TSX Capped Composite Index ETF):
  • Description: Represents the TSX Index, more diversified across sectors.
  • Key Feature: Lower weighting in banks (~21%).
  • Dividend Yield: ~2.3%.
  • Consideration: Better for investors seeking diversification rather than solely yield.
• Recommendation: Depends on investor preference: VTI for yield and bank exposure, XIC for broader diversification.

US Dividend ETFs

• iShares Core High Dividend ETF (HTV):
  • Holdings: ExxonMobil, Johnson & Johnson, AbbVie, Procter & Gamble, Merck.
  • Strategy: Steady dividend-paying strategy.
  • Dividend Yield: ~3%.
  • Note: Not necessarily growth-oriented due to the absence of mega-cap tech names.
• Vanguard Dividend Appreciation ETF (VIG):
  • Strategy: Focuses on companies with a history of increasing their dividends.
  • Performance: Performed slightly better than HTV recently.
  • Note: Holds companies that have been appreciating their dividends over time.

Sector-Specific Insights and Recommendations

Canadian Natural Resources (CNQ)

• Analysis: Stuck in a tight trading range, with the 200-day moving average trending slightly lower. Sideways movement since 2022. Offers a good dividend yield (~5%), which is not considered at risk.
• Outlook: Neutral on the energy space. No major capital appreciation expected in the next 12-18 months.
• Recommendation: Appropriate for yield-seeking investors, but not for significant capital appreciation.

US Dividend ETF (Michael's Question)

• Recommendation: iShares Core High Dividend ETF (HTV) or Vanguard Dividend Appreciation ETF (VIG).

Market Outlook and Caution

• Bull Market Age: The current bull market is 37 months old, with the average being 67 months.
• Constructive Outlook: Still constructive on the markets due to falling interest rates, high liquidity, projected S&P 500 growth (13%), inflation under control, and steady US unemployment.
• Near-Term: Markets may be oversold in the very near term given the move since April.
• Strategy: Avoid holding too much cash for extended periods to not miss out on potential gains.

Shopify (SHOP)

• Analysis: Performed well since mid-2022 with higher highs and lows, and an upward trending 200-day moving average. However, valuation is a concern, trading at 91 times forward earnings with a 30% growth rate (a 3x PEG ratio).
• Key Issues:
  • Margin pressures from increased transaction losses.
  • Exposure to small and medium-sized businesses (SMBs) with higher failure rates.
  • Competition from Amazon, Salesforce, and Adobe.
• Recommendation: Not owned. Considered a bit pricey.

Healthcare ETF

• Recommendation: iShares U.S. Healthcare ETF (XUH) or its Canadian equivalent.
• Analysis: Broad-based ETF covering major large-cap healthcare names (Eli Lilly, Johnson & Johnson, AbbVie, UnitedHealth). Offers defensive characteristics with growth potential. Includes pharma, healthcare products, services, and insurers.
• Considerations: Government pricing regulations in the US can cause volatility.

Maple Leaf Foods (MFI)

• Analysis: A volatile name for a consumer staple. Trades at 15 times forward earnings with historical earnings growth of 6-7%. Stock fell due to missing targets in the consumer packaged products segment. Has shown a very sideways trading pattern over the last five years.
• Key Issues: Rising input costs causing margin compression.
• Recommendation: Not owned. Careful approach to consumer staples, particularly food products.

Airbnb (ABNB)

• Analysis: Trading at 25 times P/E for 10-12% growth. The stock has been flat since mid-2022, with the 200-day moving average trending lower.
• Key Issues:
  • Stalled growth in supply (home offerings) compared to expectations.
  • Regulatory risks in various cities (taxes, regulations).
  • Increased cancellations due to "buy now, pay later" platforms.
• Recommendation: Prefers Expedia (EXPE) or Booking.com due to broader diversification (Expedia owns VRBO, a competitor to Airbnb, and includes airlines, hotels).

Alphabet (GOOG)

• Analysis: A long-term holding, with positions trimmed as maximum weighting was reached. A giant in the search engine space, with AI picking up. Trades at 26 times P/E for ~16% growth, considered a fair PEG ratio. YouTube is performing extremely well, and the company aims to envelop the consumer with multiple services.
• Recommendation: Continues to like the name and expects long-term performance.

Meta Platforms (META)

• Analysis: Sold off recently due to concerns about CAPEX spending. Trades at 20 times P/E for ~15% growth, considered a good valuation for a mega-cap tech name. Being swept up in concerns about AI bubbles. Below the 200-day moving average, but has recovered from similar situations before. RSI is at 26%, indicating oversold.
• Recommendation: Long-term performer. The current dip might be a reasonable entry point for a long-term hold.

Stan Wong's New Top Picks

Eli Lilly (LLY)

• Analysis: A resilient global pharma leader, innovating in diabetes, obesity, oncology, and neuroscience. Strong pipeline and expanding global presence. Expected revenue of $76 billion in 2026, with ~20% earnings growth. Momentum in metabolic and oncology spaces, with blockbuster diabetes and weight loss drugs transforming growth. A pricing agreement with the US administration provides expanded Medicare access, broadening patient reach and supporting long-term demand.
• Current Status: Stock has doubled.
• Recommendation: Owns the name. Would wait for some softness or calm down before adding to the position as it is a bit overbought. Long-term secular tailwinds include aging demographics, rising healthcare spending, and advances in biotechnology.

Goldman Sachs (GS)

• Analysis: A global powerhouse in financial services, leading in investment banking, trading, asset management, and wealth management. Shifting focus from consumer to higher-margin asset management and wealth management. Oversees $3.5 trillion in client assets. Expected revenue of $62 billion in 2026, with ~15% earnings growth. Benefits from a recovery in capital markets, increasing investment banking volumes, and renewed equity/debt issuance. Lower interest rates and increased risk appetite are supportive. Potential policy tailwinds include deregulation and lower corporate taxes. Offers a 2% dividend yield and steady share buybacks.
• Recommendation: Likes leaders in industries.

Taiwan Semiconductor Manufacturing Company (TSM)

• Analysis: The backbone of the chip and AI industry, the world's leading chip foundry company with ~70% global market share. Major customers include Apple, NVIDIA, AMD, and Qualcomm. Strong growth forecasts (~30% earnings growth, $150 billion revenue in 2026). Leadership in 3nm production, progressing towards 2nm. Strong structural demand for chips across EVs, data centers, and AI.
• Comparison to 2000: Not the same as the dot-com bubble; current environment has real demand, cash flow, and ROE. PE levels are lower than in 2000 with growth expectations.
• Competition: Few direct competitors; market share has grown from 50% to 70%. Expanding fabrication plants in the US, Japan, and Eurozone enhance supply chain security.
• Recommendation: Strong long-term secular growth potential.