You may have heard the S&P 500 Index (S&P) is having another banner year, with a total return of 26%, year to date. Sounds great. But look a bit closer and, per David Kostin at Goldman Sachs, you’ll see over 33% of the S&P’s gains in 2021 have come from 5 very large companies (based on market capitalization) – Apple Inc. (NASD:AAPL), Microsoft Corp. (NASD:MSFT), NVIDIA Corp. (NYSE:NVDA), Tesla Inc. (NASD:TSLA) and Alphabet (NASD:GOOGL). Since April 2021, they have provided 51% of the S&P’s gain. This is great if you have invested in these 5 companies. However, when a handful of companies are providing the bulk of the S&P gains, known as a narrow market, this is not a good sign since there is a lower volume of overall trading occurring. Investors that are trading, are trading in the bigger, better-known companies causing these companies to rise and giving the impression all is well with the Index and markets when it really is not. When the market narrows Investors should be prepared for increased volatility in the months ahead, especially if one or more of the big 5 and other well-known companies stumbles. As a long-term investor, I see this volatility as a buying opportunity since the share price of most companies I am interested in have dropped, some considerably. Assuming nothing has changed fundamentally with these companies, this is an opportunity to either add shares of existing companies or make an initial investment in other companies while their shares are on ‘sale.’ So, let us see how the big 5 drove the markets this past week and the impact they had on each of the portfolios.
Weekly Market Review
Monday: What the market giveth, the market taketh away. Last Friday investors moved back into travel stocks, sending the S&P to a record high. Today, more worries about the Covid-19 variant, Omicron, and how quickly it was spreading caused investors to flee those same travel stocks. The other issue this week is what will the US Federal Reserve when they meet later this week about interest rates. Will interest rates remain the same or will they go up? Uncertainty caused by both issues caused the four major North American Indexes – Toronto Stock Exchange Composite Index (TSX), S&P 500 (S&P), Dow Jones Industrial Average (DJIA) and Nasdaq Composite Index (Nasdaq) – to pullback.
Tuesday: The US Labor Department’ producer price index (PPI) jumped to 9.6% for the last twelve months through November, thanks to supply chain challenges. It was the PPI’s largest gain since 2010. With the US Federal Reserve Board meeting Wednesday this likely means interest rates will rise sooner rather than later. The double whammy of the spectre of rising inflation leading to higher interest rates, and ongoing concerns about Covid-19’s fast spreading Omicron variant continues to play the Grinch to the market’s Santa Rally. All four of the Indexes fell with the TSX stretching its losing streak to 5 days. In another ominous sign, some of the biggest companies on the Nasdaq Exchange (Apple, Alphabet, Microsoft, and others) all fell today. Its not a good sign when the big boys fall.
Wednesday: As expected, the US Federal Reserve (Fed) indicated it would start raising interest rates in early 2022, removing the uncertainty that had been haunting the markets. Once the Fed announced they would exit policies enacted at the start of the pandemic, all four markets rose and ended the day in positive territory. Technology stocks were the big winners on the day, lifting the technology heavy Nasdaq and S&P the most, followed by the DJIA with the TSX bringing up the rear. In Canada, inflation remained at 4.7% in November, an 18 year high, thanks to ongoing supply chain issues.
Thursday: Wednesday’s rise was short lived with all four Indexes down on Thursday as the realization of increasing interest rates sunk in with investors. Higher interest rates are good for banks but not so good for companies with high levels of debt, like technology growth companies. Consequently, the technology heavy Nasdaq, and to a lesser extent the S&P, took it on the chin while the DJIA ended the day barely in negative territory. In Canada, the TSX marginally declined on losses in the technology sector offset by gains in mining stocks.
Friday: Fears of Omicron and what, if any, restrictions will be introduced and how those restrictions will impact the economy continued to weigh on all four Indexes. They each were down for the day as well as finishing the week in negative territory. In addition to Omicron fears, technology Investors were still contemplating the US Federal Reserve signaling higher interest rates were coming in 2022. The ‘big 5’ (Apple, Microsoft, Nvidia, Tesla and Alphabet) were all down for the day and the week, dragging the S&P and Nasdaq down. Hopefully the 2-day rally at the beginning of the previous week was not the extent of the 2021 Santa Rally.
Weekly Portfolio Review
With all four of the Indexes on the losing side for the week it was a surprise to see Portfolio 2 squeak out a gain for the week. Of the three portfolios it’s probably the most balanced so despite a down week for Microsoft and an essentially flat week for MongoDB (NASD:MDB) and its other technology stocks, the other sectors were able to carry the portfolio for the week. Portfolio 2 is a good example of the benefits of a diversified portfolio. On the other hand, Portfolio 3 is heavily into the technology sector, in particular Shopify, so with the tech heavy Nasdaq down the most of the four Indexes it makes sense Portfolio 3 is down the most of the portfolios. Portfolio 1 has approximately 33% of its companies in the technology sector but it also has diversification across eight other sectors which did not suffer as much as the technology sector.
Hopefully, with certainty of upcoming interest rate hikes in 2022, the markets will end the year with a Santa Claus Rally. However, the shadow of the Omicron virus looms in the background. Will Omicron play Grinch to the Portfolios Whoville?
Companies on the Radar
With the markets continuing to downward trend, I have been sitting on the sidelines waiting for a bottom to form. I would like to see a broad and sustained rally (3 – 5 days) before re-entering the markets. During the week I took a quick look at a few companies and three that impressed me the most were:
During the upcoming weeks I plan to take a closer look at these companies to be ready for when the markets bottom out. I am also going to take look at existing holdings to see if it would be better to invest in these companies that have proven themselves and continue to have strong growth potential.
Portfolio Update
Portfolio 1
Portfolio 1 for the week ended December 17, 2021: DOWN 
Of the ‘big 5’ mentioned in the opening of this post, Portfolio 1 holds both Apple, Nvidia and Tesla shares. While Apple flirted with all time highs the previous week, it joined Tesla and Nvidia as they continued their respective downward drifts. With three of the most popular stocks in the S&P falling its not surprising that the majority of companies in this portfolio also ended the week in the red.
During their third quarter presentation, Rivian (NASD:RIVN) reported production challenges brought on by supply chain issues caused to miss their 2021 production goal. As a result, the stock opened below the USD $100 barrier for the first time since the company went public in November. I knew it couldn’t stay over $100 per share but hopefully it won’t stay below $100 for long. I was pleased to see Rivian has picked some coverage by analysts. The research section of the TD WebBroker site shows it is covered by 14 analysts with a 12-month price target range from USD $94 – USD $170, and an average of USD $134.
On a positive note, Datadog (NASD:DDOG) will be added to the Nasdaq 100 Index on Dec. 20, 2021. All ETFs and Mutual Funds that track the Nasdaq 100 Index must purchase Datadog stocks to maintain the same composition as the Index.
Activity
No significant activity to report this week.
Dividends
Dividends Received this week for the following companies:
Companies followed by DRIP (Dividend Re-Investment Plan) indicate additional shares were purchased with the dividend. Any cash leftover was added to the cash balance.
Canadian $
Automotive Properties Real Estate Investment Trust (TSX:APR.UN) DRIP
Yellow Pages Ltd (TSX:Y)
US $
BSR Real Estate Investment Trust (TSX:HOM.U)
Skyworks Solutions Inc (NASDAQ:SWKS)
Home Depot Inc (NYSE:HD)
Quarterly Reports
Enwave Corporation
All currency listed in CAD dollars
Selected highlights from their fourth quarter 2021 financial results on December 15, 2021
Fourth quarter highlights (expressed in ‘000s):
- Consolidated revenue of $6,906 compared to $7,351 in Q3 2021 and $10,784 in Q4 2020
- Gross margin was 34% compared to 20% for Q4 2020, a major increase due to the confirmation of their higher margin REV™ machine sales during the period.
Rivian Automotive Inc
All currency listed in USD dollars
Selected highlights from their third quarter 2021 financial results on December 16, 2021
- Net loss of $1.2 billion compared to a net loss of $288 million in the same period last year.
- Free cash flow was negative $1.1 billion.
- 48,000 pre orders of the R1 truck at the end of the third quarter. As of December 15, 2021 approximately 71,000 pre orders.
- Will start construction of a second manufacturing plant in Georgia in summer 2022. This facility will have the capacity to produce 400,000 vehicles annually when it comes online in 2024.
Portfolio 2
Portfolio 2 comments or the week ended December 17, 2021: UP 
Of the ‘big 5’ mentioned in the opening, Portfolio 2 contains one of the big technology stocks – Microsoft. Although Microsoft was down for the week, the other technology companies in the portfolio managed to hang hold their ground for the week. Thanks to analysts raising the share price targets for MongoDB, the stock had a strong Friday to bring it back to the price level where it started the week. Meanwhile, Fortis (TSX:FTS), a utility company gained ground. Most of the nontechnology stocks either held their ground or were up enough for the week to offset the losses of the technology stocks. It was a good reminder of the reason to be diversified across different sectors.
Activity
No significant activity to report this week.
Dividends
Dividends Received this week for the following companies:
Companies followed by DRIP (Dividend Re-Investment Plan) indicate additional shares were purchased with the dividend. Any cash leftover was added to the cash balance.
Canadian $
Alimentation Couche-Tard Inc (TSX:ATD)
iA Financial Corporation Inc (TSX:IAG)
US $
No US$ dividends this past week.
Quarterly Reports
No quarterly reports this week.
Portfolio 3
Portfolio 3 comments for the week ended December 17, 2021: DOWN
Like Portfolio 2, Portfolio 3 contains one of the big technology stocks – Microsoft. The three companies that had been driving Portfolio 3 – Microsoft, Shopify (TSX:SHOP) and Cloudflare (NYSE:NET) – all saw their respective share prices fall. Leading cybersecurity company Cloudflare started the week strong but on Tuesday fell almost 10%, on fears of higher interest rates, before bouncing up and down for the rest of the week. Shopify is the largest holding in Portfolio 3 so when it has a down week, its usually not a good week for Portfolio 3 and this was no exception.
Crypto update: Ethereum bought at CAD $6,137.23 per coin. On December 17, it was trading at CAD $5,015.40. Timing was terrible but unlike last time, I will hold onto the .028 of an Ethereum coin rather than lock in a loss.
Activity
No activity to report
Dividends
Dividends Received this week for the following companies:
Companies followed by DRIP (Dividend Re-Investment Plan) indicate additional shares were purchased with the dividend. Any cash leftover was added to the cash balance.
No dividends this past week.
Quarterly Reports
Enghouse System Ltd.
All currency listed in CAD dollars
Selected highlights from their fourth quarter 2021 financial results on December 16, 2021
For the year ended October 31, 2021
- Revenue for the year was $ 467.2 million, compared to revenue of $ 503.8 million in the prior year when Enghouse recognized a huge surge in revenue from the onset of the COVID-19 pandemic.
- Net income for the year was $92.8 million compared to $98.6 million for 2020.
For the fourth quarter ended October 31, 2021:
- Revenue for the fourth quarter was $ 113.1 million, a decrease of $7.8 million or 6.5%, compared to revenue of $ 120.9 million in the same period in 2020. This decrease was a result of customers right sizing their hosted services requirements, and losses attributed to foreign exchange.
- Net income for the fourth quarter was $30.2 million compared to $29.4 million for the same period in 2020.