Summer 22


As Labour Day approaches, holidays wind down, and the back-to-school preparations begin, summer is quickly drawing to a close. With the past couple summers being marred by the pandemic, either through increased isolation or restrictions on travel, 2022 has seen a relative return to normal – as evidenced by the very noticeable uptick in foot traffic around our office building and the number of tourists returning to the city. Suffice it to say it's been nice to see the city (and its residents) get their groove back. Here’s hoping it continues.

If there has been one constant in our communications this year, it has been their focus on the market downturn and the variables driving it. You may have noticed a lull in these communications over the last couple of months. In this case, you’d be right to assume no news is good news. Aside from this last week, the summer months have largely been positive for equity markets despite continued interest rate hikes and worsening economic data. So what gives? For one, both Canada and the US saw some respite in inflationary pressures during the month of July:


Whether investor enthusiasm and the subsequent market rally have gotten ahead of themselves remains to be seen, but a softer inflation reading certainly aligns with many of the data points we have been tracking in recent months. In parallel with this possible trend reversal, the current quarterly earnings period for many public companies has also been reasonable. Despite inflation, slowing economic conditions and investors selling stocks anticipating the worst, corporate sales and profits have largely proved “better than bad” – a welcome relief.

So what now? As we move into autumn, investor eyes will remain focused on the inflation trend, the reaction of policymakers and the effects both continue to have on the economy. The signals we’re observing point to a continued cooling trend in both inflation and economic output. If this persists, we’d expect aggressive policy action to moderate and reflect those realities. If this occurs, the market overhang of the last seven months may begin to ease as investors price in a new disinflationary trend and looser financial conditions. However, given that real-world data is messy and investors tend to act with both emotion and bias, we expect market volatility to remain elevated until these broad macro trends are clarified

As always, we invite you to reach out should you wish to discuss your portfolio, current market conditions, or update your financial projections.

- Jack

Five things - good and bad - affecting investors this summer

It is important to remember that in a dynamic market environment, neither the good nor the bad will last forever. Therefore, when confronted with challenging times, we believe it is crucial to keep a balanced perspective to see the signal through the noise. For the second time in recent months, we wanted to draw attention to the writings of Peter Hodson of 5i Research for exactly this purpose - as his recent article does well to highlight five lessor talked about items worthy of investor attention.

I recently visited a friend’s cottage, which had no phone, cell coverage or Wi-Fi. I was completely off the grid for several days, likely for the first time since I hiked in the Yukon in 2001 (it was the Yukon Gold Rush Trail, so it was still sort of market related if you like gold).

There were tons of news releases and market events to review after coming back, which led me to come up with these five summertime off-the-grid and back-on thoughts for your consideration.

1.) Dividend increases are pouring in

At 5i Research, I am responsible for tweeting out dividend changes at Canadian companies. We also post a weekly blog with all the updates. I could barely tweet out all the recent dividend changes fast enough after missing just four trading days. Freehold Royalties Ltd., Enerplus Corp., OpenText Corp. and First Majestic Silver Corp. all raised their dividends, and Canadian Natural Resources Ltd. declared a special dividend.

We continue to see lots of dividend increases as companies seem to be more confident than investors (note, Magellan Aerospace Corp. lowered its dividend, so it is not all peachy). Companies have recovered from the pandemic, improved their balance sheets and keep raising payments to investors. Dividends, over time, have proven to be more important to investors’ long-term performance than capital gains. As you read all the doom-and-gloom headlines, keep in mind that companies are giving away cash, and more of it. This might help you sleep better at night on the down days.

2.) Corporate buyers are way more confident than individuals

Corporate merger activity is extremely hot right now, which is fairly unusual in mid-summer. Why are investment bankers busy? That’s easy: valuations have adjusted so much that corporate buyers see great deals. A company can take over another company at a 50-per-cent premium and still get the company at a cheaper valuation than it was last year.

For example, the Inc. takeover we will discuss further down was at a 42-per-cent premium to the market price at the time of the deal. But the so-called premium price is still 39 per cent lower than where the stock was nine months ago. We also noted the recent proposed takeover of Recipe Unlimited Corp. at a 58-per-cent premium. The deal even at that premium is below the stock’s 52-week high, and notable in that it is the second time Swiss Chalet’s parent company could be privatized. Investors were only affording a 10x multiple on the company prior to the bid, and the bid price per share would barely cover the price of a quarter-chicken dinner meal.

3.) As usual, fear is a greater driver than greed
We always find it unusual, and sometimes depressing that a company can miss earnings estimates by two cents and plunge 30 per cent, but its shares only go up five per cent when it beats earnings by two cents. Yes, every situation is different, but this also reflects a bear market. Investors assume the worst when a company misses, and assume earnings are peaking when a company beats.

As usual, fear makes stocks move more than greed. It is human psychology, but it sure is annoying as an investor. Maybe the earnings beat simply means business is good and getting better. Maybe the miss means that is the trough of earnings and things can only get better from here. Unfortunately, very few investors think like this.

4.)Stocks can still go up when there is a war

Many investors are worried about war these days, and rightly so, with Ukraine invaded and Taiwan under threat. But without commenting on the tragedy of war itself, from an investor standpoint, war does not always mean a market decline.

The market went up over the course of both the Second World War and the Vietnam War. In the former, there were three years of declines on the Dow Jones (1939, 1940 and 1941), but the market was much higher by the end of 1945 than it was in 1939. In the Vietnam conflict, the returns were less robust on an annualized basis, but the Dow Jones Index was still higher at the end of the war than at the start of the war.

Now, things are certainly different now, but our general point is that investors often fear the worst, and the worst does not always occur. Stock prices have a good way of adjusting for uncertainty.

5.) Amazon continues to think years ahead

I came back to see news that Amazon has announced the acquisition of iRobot Corp. for US$1.7 billion. At first glance, this looked likely a completely inconsequential deal. A huge company just adding another cool product to its lineup, a robot vacuum company in this case. The acquisition cost represents 0.1 per cent of Amazon’s market cap, about three per cent of annual cash flow and uses about 2.5 per cent of current cash. Why bother? iRobot is not going to make any impact on Amazon’s sales or cash flow. Or is it?

On second glance, the deal looks far more interesting. Think about it: iRobot products send a robot vacuum cleaner all over your house. It knows the square footage of your home (which can reflect your wealth and income). It knows whether it keeps bumping into children’s toys or dogs. Its usage can even help it determine if you are away or at home. All of this is data, and Amazon is the king of data.

Maybe (hah, probably), the little robots will skew Amazon’s ads and product offerings that are tailored specifically to you in your news feed. Combined with its other home products, Amazon is going to know an awful lot about its customers once its little robots are roaming your house daily.

- Peter Hodson, CFA, is founder and head of Research at 5i Research Inc.

Diversion: Summer of Space

Space and the Space industry have long been an area of fascination for many of us. The last decade has seen a resurgence in interest in the space industry – lead in large part by record amounts of private investment. By the end of 2021, the global space economy was estimated to be worth a whopping $469 billion, and many predict that number to rise significantly over the next decade as plummeting launch costs spur development of key infrastructure for new space-based industries - from mining and tourism to manufacturing, and more.

Despite many exciting developments on the horizon, the successful launch and rollout of the James Webb Space Telescope (“JWST”) this summer has already made quite the splash. The result of decades of work by thousands of scientists and engineers and billions of dollars investment, the Hubble successor is now fully operational and ready to probe the far reaches of the cosmos. Needless to say, the first and subsequent images captured by JWST haven’t disappointed as detailed in the video below:

‚ÄčClick Here For Video


Equally as ambitious as those efforts to get the JWST off the ground are NASA’s current plans to return humans to the moon for the first time since the Apollo missions. The ambitious Artemis Program plans to launch a series of missions with the intent of not just visiting, but establishing a permanent lunar presence - both in orbit and on the Moon’s surface (with Canada lending a helping hand). As the first unmanned test flight approaches (August the 29th), we look forward to a successful launch in hopes of more to come.