September’s Volatilty
We believe it’s a buying opportunity
Written by CEO & CIO, Bruce Murray, CFA.
September started off as a very volatile month. Markets closed lower every day in the first week of the month, with the S&P 500 displaying its worst first week of September performance since 1953, only to bounce back (surging 4%) and recover almost all of its lost ground for its best weekly performance of the year the following week.
September is frequently a tough month psychologically as market participants face the prospects of returning to work and paying off holiday bills and mourn the soon to arrive shorter days and inclement weather. This year, AI stocks added to the angst when they experienced a hangover following the release of their latest quarterly earnings, which was not surprising given the substantial amount of speculative buying in front of the earnings releases and the fact that expectations were high. Markets are also facing a slowing economy engineered by central banks to quell inflation stimulated by government overspending to relieve pandemic shutdowns. Employment data released in the first week of the month was disappointing. On top of this, the unwinding of the Japanese carry trade (Google it), where money was borrowed in Japan and reinvested elsewhere (S&P 500), likely contributed significantly to the recent market weakness.
However, I would like to present the opportunistic side of the story.
Firstly, inflation, the boogeyman of the last two years, is now in the desired 2% range. The implementation of lower administered interest rates is underway in many western countries and will be joined by the USA later this month, with the FOMC meeting scheduled for September17 & 18. Lower interest rates will stimulate business activity and increase consumer’s income and hence confidence. Higher dividend paying stocks have generally been rising this summer, as the interest rates have started to fall in Canada and overseas. I expect this trend to pick up as the United States joins in the rate cutting and lower rates flow through to the markets over the next year or so.
At TMWG, we believe Artificial Intelligence (AI) is a powerful trend and that the leading players have a bright future. The recent sell-off took some of the froth out of these stocks, putting some of them into very reasonable pricing. Nvidia, the poster child of the AI hardware build, is selling at a lofty 36X 2025 earnings, but in its most recent quarter, both revenue and profit were double the level of a year ago. With customers still saying they can’t get enough Nvidia chips to build the data warehouses needed, growth will continue. We recently added to Broadcom, which has a wider product base than Nvidia but is also a major beneficiary of the AI boom and is selling at a more reasonable 22x 2025 earnings, with revenue growth of 47% in its recently reported July quarter.
The long-term expected winners of AI: Microsoft, Meta and Alphabet sell at 2025 multiples ranging from 24.5 X for Microsoft to 20.7X for Meta and 17.2X for Alphabet. We believe these multiples are very reasonable given the long growth tail of AI as it penetrates many markets over the next decade. In summary, we believe the AI beneficiaries are now reasonably priced. We used the announcement of anti-trust violations against Apple’s Google division to add to our position in Alphabet in September.
The Chart below verifies the growing role of Artificial Intelligence as more companies cite it as a key part of the future.
Turning to the rest of the market, many stocks are continuing to sell at bargain prices. Industrials are particularly cheap, due to fear of a recession. Linamar, one of the larger holdings in our Global Equity Growth Fund, has grown its revenue 67% over the last 3 years, but the stock sells for 20% less than it did at that time even though its earnings are over 50% higher today. It now sells at 5.9x this year’s earnings. In my opinion, Linamar should trade closer to $100. CIBC recently published LNR’s asset value at $145 share. Major Drilling, the world’s largest contract mineral exploration drilling company, is profitable with no debt. We believe the company is on the verge of major growth as strong pricing for gold and copper encourage renewed exploration in an environment in which mineable resources have been in decline for over a decade.
This Focus Stock is written by CEO & CIO, Bruce Murray, CFA. The purpose of this is to provide insight into our portfolio construction and how our research shapes our investment decisions. As always, we welcome any feedback or questions you may have on these monthly commentaries. |