Items that may educate or interest only me ….
Thanks to higher interest rates and slowing revenues, many companies are starting to feel the pinch of inflation. Higher interest rates are causing consumers to cutback, and even target what they purchase. According to Howard Marks, of Oaktree Capital, the combination of inflation and higher interest rates will push many companies into ‘distress.’ “We’re going to reach a point where they consider it hopeless,” Marks said of investors. “And that is when you get the big buys. That is when you get to be a buyer of assets cheap and a maker of loans at high yields with safety.”
I interpret this to mean cheap share prices for good companies. I like the sound of that!
I also like to think I am ready to take advantage of this opportunity rather than one of those investors who throw in the towel and sell their shares low and lock in losses. Time will tell.
Statistics Canada released the October Consumer Price Index (CPI) report this past week. The data showed inflation rose 6.9% since October 2021, the same as September’s rate, coming within analysts’ expected range of 6.8% – 7.4%. Core CPI (CPI less fuel and food) rose 5.3%, year over year, down from September’s 5.4%. Analysts were expecting 6.3%.
The main driver of upward inflation was higher gas prices, and new or renewed mortgages and loans at higher interest rates. I’ve experienced both. Offsetting these two drivers was slower growth in the prices for natural gas and groceries. In a nutshell, there were no surprises in the October CPI data, and it appears the rate of inflation growth in Canada is slowing down. This is good news since it means the Bank of Canada (BoC) can slow down the pace of interest rate increases as well as the size of those increases.
I never paid any attention to inflation or CPI reports before but since I started this blog I see how inflation, as reported in the CPI, has a significant influence on interest rates, which in turn have a major impact on the performance of companies and their share price. As far as the market reacting to CPI data showing the rate of inflation and the corresponding interest rate increases or decreases, the news can spark a brief rally or selloff. For example, the US October CPI came in lower than expected, sparking a mini rally that drove all indexes higher for a few days. The market tries to anticipate the announcement and that is factored into share prices. If the there are no surprises in an CPI report or interest rate change, the market keeps moving along, nothing to see here. A surprise, like last weeks CPI report, can send the market up on a positive surprise, or down on a negative news.
However, it seems to me that just as important, if not more so, is what does the announcement mean going forward. Analysts and investors quickly move past the face value of the statement and try to read between the lines to figure out what it means for future actions by the central banks (the BoC, for example). They listen to and read the announcements and comments from the central banks, trying to read the tea leaves. For example, again using the recent US CPI report, investors are hoping that the better-than-expected CPI number will cause the Fed to lower the amount of the upcoming rate increase.
I have learned that the CPI announcements are important bits of information that can help shine a light on the direction likely headed by those that set monetary policy. If you want to have a clearer idea of where the decision makers are going, keep an eye open for the CPI reports.
Following last week’s CPI report, [link to Nov 11 update] the US Federal Reserve Bank (Fed) sent out mixed messaging. They indicated the time was soon coming for it to lower the size of its interest-rate raises. At least one member of the Fed favored lowering the amount of the next hike to 0.5% as early as their next meeting in early December. However, the Fed also said there is, “additional work to do,” indicating their intent to continue to drive inflation down to their 2% target.
This week, the US Department of Labor released the October US Producer Price Index (PPI), which measures what businesses pay for materials, supplies, and final goods for resale. For October, the PPI climbed 8% on a year over year basis, better than the 8.3% predicted by analysts. That is a slight improvement from September’s 8.4% increase and down significantly from March’s 11.7% increase, the highest since the Department of Labor started keeping track in 2010.
The lower PPI is another sign inflation could be declining and appears to confirm last week’s US CPI number of a lower rate of inflation, suggesting the Fed may have rounded the corner in their battle with inflation. The lower CPI and PPI numbers also provide the Fed an opportunity at their December session to lower the interest rate increase, as they suggested last week. However, this past week the Fed made it clear that the fight with inflation was a long way from over, throwing cold water on investors hopes for a rapid decrease in the cost to borrow money.
Next week there will be plenty of tea leaves for analysts and investors to read as the Fed is expected to release the minutes from their November meetings.
Finally, the US mid term elections ground to a conclusion this week with the Democrats retaining control of the Senate while the Republicans took control of the House of Representatives. With split control of the US Congress, its unlikely there will be any major policy changes for the next two years, including no new, higher or windfall taxes. This is good for businesses.
In wrapping up, inflationary indicators in Canada and the US are heading in the right direction – down. No new taxes on consumers or businesses are expected in the US. I tend to agree with Mr. Marks that 2023 will be a buyer’s market and I hope to be savvy enough to take advantage of opportunities should they present themselves.
Now, with that out of the way, lets take a look back at the week of November 14 – 18. In the words of Daenerys Targaryen, “Let’s begin.”
Weekly Market Review
Monday: I’d hoped last week’s late rally would carry over to this week, but that wishful thinking came to a quick end as all four major North American indexes – the Toronto Stock Exchange Composite Index (TSX), the S&P 500 Index (S&P), the Dow Jones Industrial Average (DJIA), and the Nasdaq Composite Index (Nasdaq) – started the week off with a loss. In Canada, the TSX was buffeted by comments from the Fed as well as lower oil prices. The Canadian Energy sector accounts for almost 20% of the TSX, so if the Energy sector is down, it will take a good day in a number of other sectors to offset the fall of the Energy sector.
In the US, sparked by mixed messages from the Fed led to losses across all eleven S&P sectors, knocking down the three American indexes. On Sunday, a member of the Fed said considering slowing the pace of increases does not mean the Fed is ‘softening’ it stance in its fight against inflation. On Monday, another member of the Fed hinted the Fed is soon likely to slow the pace of its interest rate hikes. Sounds to me like the next interest rate hike by the Fed will be less than the previous 0.75% increases. Meanwhile, in the marketplace, the Financials ad Consumer Cyclicals sectors had the biggest drops for the day.
Tuesday: All four indexes were lifted higher by a good news US Producer Price Index (PPI) that followed up last weeks’ positive Consumer Price Index (CPI) report. The PPI dropped to 8.0%, down from September’s 8.4%, while analysts were expecting 8.3%. Investors interpreted this as a further sign that the Fed will ease off on the size of their next interest rate hike.
In Canada, investors welcomed more good news from the US as they await Wednesday’s Canadian CPI report, hoping it will echo last week’s positive US CPI data. On the ‘trading floor,’ the Technology sector was the biggest winner, doubling up the second place Energy sector.
In the US, it was shaping up to be a great day until reports of Russian missiles detonated in Poland, near the Ukraine border, killing two people. Despite a late afternoon pullback cause by the news of the Russian missiles, it was broad paced rally led by the Technology and Consumer Cyclical sectors. The Telecommunications Services was the only S&P sector to end the day lower.
Wednesday: So far this week it has been a bumpy ride for all four indexes, down, up, and down again today. In Canada, Statistics Canada announced Canada’s annual CPI for October held at 6.9%, year over year, matching September’s increase, and falling within the range of analysts’ estimates. Also impacting the TSX was lower oil prices caused by concerns of lower demand from China thanks to Covid-19 restrictions. In the market, the Consumer Staples, Industrials, Utilities and Telecommunications Services sectors were the only sectors to end higher. Of those four, all but Industrials would be considered defensive sectors.
South of the 49th, the three American indexes fell after retailer Target (NYSE:TGT) unexpectedly predicted lower holiday sales, sending the share price of many of the other big US retailers down sharply. In trading, defensive sectors Utilities and Consumer Staples were the only S&P sectors to gain ground today, while the Energy and Consumer Cyclicals sectors led the way downward.
Thursday: The euphoria of last weeks positive US CPI report has worn off as investors ran into the reality of another hike in the US benchmark interest rate, causing all four indexes to retreat for a second day.
In Canada, the ongoing decline in oil and natural resources prices, caused by softening demand from China, added to the downforce on the TSX. On the TSX, Consumer Staples, Healthcare and Telecommunications Services were the only Canadian sectors to end in the black.
In the US, a strong labour markets, coupled with comments from the Fed about the need to continue increasing US interest rates, weighed down the markets. Of the eleven S&P sectors, only the Telecommunications Services and Technology were able to eak out a gain. Interestingly, in the US the S&P Technology sector was higher, barely, while in Canada the Technology sector fell the most.
Friday: The four indexes each ended the day slightly higher, but not high enough to lift the respective indexes into positive territory for the week. In Canada, the TSX ended a two-day losing streak, buoyed by the Industrials and Telecommunications Services sectors as investors attempted to decipher which way the BoC will go at the December BoC meeting.
In the US, a member of the Fed said they may have to raise the benchmark US interest rate by 0.75% to get inflation under control. Analysts and investors had been hoping for a smaller 0.5% increase but now they are back to the drawing board to try and determine what the Fed will do at their last session of the year on December 14. In another bumpy day of trading, all three American indexes ended in the black. Gains by the S&P defensive sectors (Utilities, Healthcare and Consumer Staples) led the way upward, overcoming the drag created by the slumping interest sensitive sectors (Energy, Technology and Consumer Cyclical).
For the week, the TSX slumped 0.6%, the S&P 500 fell 0.7%, the DJIA was flat for the week with a 0.0%, and the Nasdaq declined 1.6%.
Weekly Portfolio Review
Last week, three of the Indexes declined while the DJIA remained unchanged from the previous week. All in all, not a lot of news to push the markets one way or the other. Investors are trying to figure out what the Fed will do next. Given the overall downward trend and negative investor sentiment of 2022, I am not surprised that the markets and indexes default to downward when there is no major news.
As for the three Portfolios, I am a bit surprised they all performed worse than the four indexes, although not by much. Usually at least one of them has a better week than the at least one of the indexes. Looking back over the week I saw defensive sectors such as Utilities, Telecommunication Services and Consumer Staples were the best performing sectors a number of days. Meanwhile, the S&P Technology sector did not have a good week, hence the Nasdaq’s poor showing. Since all three Portfolios are Technology heavy (to one degree or another), I am guessing the combination of these factors led to the Portfolios bringing up the rear this past week.
Companies on the Radar
Two companies came onto my radar this week: Dream Industrial Real Estate Investment Trust (TSX:DIR-UN) and Restaurant Brands International Inc. (TSX:QSR).
I was reviewing the various Real Estate Investment Trusts (REIT) across all three portfolios and saw that Automotive Properties REIT (TSX:APR.UN) was essentially flat since the shares were acquired, while Dream is down 10%. Both are what I consider to be defensive, income generating stocks, paying in the 6% range.
I must admit it seems odd to consider switching to a company whose share are down, but I have been thinking about the future growth possibilities for both. APR is focused on automotive dealership properties in Canada, basically a one trick pony. Dream has a broader portfolio of properties, encompassing industrial properties across North America and expanding into Europe. In the long term (5+ years), I think Dream has more growth potential as you can see in the Radar Check below, but I will have to investigate further.
As for QSR, they recently hired the former head of Domino’s Pizza where he oversaw 29 consecutive quarters of sales growth causing the share price to go from US$ 12 in March 2010 to US$ 271 in June 2018. Not a bad eight-year run. At QSR, in lieu of compensation he received two million shares. He also receives performance driven stock options based on his ability to grow QSR’s share price at least 6% annually, with additional bonuses at 10% and 15%. He also agreed to purchase 500,000 shares with his own money that he must hold for the next five years. Quick math says 500,000 at US$ 60 equals US$ 30 million. Clearly, he is putting skin in the game. In addition, Tim Horton’s signed a two-year deal with Alibaba’s grocery unit. This should help Timmy’s accelerate expansion into China. Judging by the jump in QSR’s share price, other investors also view this as a positive.
For now, I’m adding QSR and DIR to my radar, joining energy companies Alvopetro Energy (TSXV:ALV), Crew Energy (TSX:CR) and International Petroleum (TSX:IPCO). I’m moving STMicroelectronics N.V. (NYSE:STM), Alphabet (NASD:GOOGL) off my radar.
- Crew Energy: a Canadian oil and gas company with interests in British Columbia.
- Dream REIT: income generating Canadian industrial property operator, with properties across North America and Europe.
- International Petroleum: a Canadian company with oil and gas assets in Canada, Malaysia, and France.
- Alvopetro Energy: a Canadian natural gas company developing natural gas projects in Brazil.
- Restaurant Brands: parent of a few major quick service restaurant brands, including Tim Hortons and Burger King. New CEO with proven capabilities of growing sales and share price.
- Automotive REIT: owns and operates car dealership properties across Canada. Considering replacing with Dream REIT.
Below are my Radar Checks on these companies, updated November 18, 2022.
Portfolio Update
Portfolio 1
Portfolio 1 for the week ended November 18, 2022: DOWN 
- Amazon (NASD:AMZN) is the latest of the technology heavyweights to announce layoffs. This week they announced they would let go approximately 10,000 employees, mainly in corporate and technology roles.
Amazon is taking another run at the healthcare industry. This time they are launching a virtual service that can treat common ailments. - Rising raw material costs is causing Rivian (NASD:RIVN) to lose money with every car they sell. It is not a good situation when every sale costs the company thousands of dollars.
- Yet another technology company making massive layoffs, this time its Singapore based SEA Ltd. (NYSE:SE). The company has let go almost 7,000 of its employees (10% of the workforces) to reduce rising costs.
- Home Depot (NYSE:HD) beat analysts’ expectations for the third quarter thanks to raising their prices to offset a lower number of transactions, as well as homeowners choosing renovations over a higher mortgage on a new home. However, Home Depot does not expect a strong fourth quarter.
- GM (NYSE:GM) plans to enhance its North American based battery supply chain so it is less reliant on China in order for GM to deliver one million electric vehicles a year by 2025. GM has signed approximately 20 battery supply chain agreements to help build out its Ultium battery manufacturing network.
One of the latest deals of bringing GM’s supply chain back to North America involves a deal with Brazilian mining company Vale S.A. (NYSE:VALE). Starting in late 2026, Vale Canada will supply battery grade nickel, a major resource used in electric vehicles. - In an anti competition lawsuit against Alphabet’s Google, Epic Games states Google made deals with twenty-four or more big game developers to keep them from creating their own game stores that would have competed with Google’s Play Store. These agreements ensured the only way to get games on the Google platform was through the Google store, leading to higher prices and lower quality of service for consumers.
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
US $
BSR Real Estate Investment Trust (TSX:HOM.U)
Quarterly Reports
Home Depot, Inc.
All currency listed in millions of US dollars
Selected highlights from their third quarter 2022 financial results on November 15, 2022
- Revenue of $38,872 for the three months ended September 30, compared to $36,820 for the same period in 2021. An increase of over 5%.
- Net income of $4,339 for the three months ended September 30, compared to net income of $4,129 in the same period in 2021.
- Diluted earnings per ordinary share of $4.24 for the three months ended September 30, compared to earnings of $3.92 for the same period in 2021.
- Revenue of $121,572 for the nine months ended September 30, compared to $115,438 for the same period in 2021. An increase of over 5%.
- Net income of $13,743 for the nine months ended September 30, compared to net income of $13,081 in the same period in 2021.
- Diluted earnings per ordinary share of $13.37 for the nine months ended September 30, compared to earnings of $12.31 for the same period in 2021.
SEA Limited
All currency listed in thousands of US dollars
Selected highlights from their third quarter 2022 financial results on November 15, 2022
- Revenue of $3,155,951 for the three months ended September 30, compared to $2,688,884 for the same period in 2021. An increase of over 17%.
- Net loss of $569,275 for the three months ended September 30, compared to net loss of $570,981 in the same period in 2021.
- Diluted loss per ordinary share of $0.66 for the three months ended September 30, compared to a loss of $0.84 for the same period in 2021.
- Revenue of $8,998,121 for the nine months ended September 30, compared to $6,733,076 for the same period in 2021. An increase of over 33%.
- Net loss of $2,080,610 for the nine months ended September 30, compared to net loss of $1,429,151 in the same period in 2021.
- Diluted loss per ordinary share of $3.73 for the nine months ended September 30, compared to a loss of $2.72 for the same period in 2021.
Global-E Online Ltd.
All currency listed in US dollars
Selected highlights from their third quarter 2022 financial results on November 16, 2022
- Revenue of $105,556 for the three months ended September 30, compared to $59,119 for the same period in 2021. An increase of almost 79%.
- Net loss of $64,551 for the three months ended September 30, compared to net loss of $28,469 in the same period in 2021.
- Diluted loss per ordinary share of $0.41 for the three months ended September 30, compared to a loss of $0.19 for the same period in 2021.
- Revenue of $269,184 for the nine months ended September 30, compared to $162,557 for the same period in 2021. An increase of over 65%.
- Net loss of $166,934 for the nine months ended September 30, compared to net loss of $52,442 in the same period in 2021.
- Diluted loss per ordinary share of $1.07 for the nine months ended September 30, compared to a loss of $0.61 for the same period in 2021.
ZIM Integrated Shipping Services Ltd.
All currency listed in millions of US dollars
Selected highlights from their third quarter 2022 financial results on November 16, 2022
- Revenue of $3,227.5 for the three months ended September 30, compared to $3,136.0 for the same period in 2021. An increase of almost 3%.
- Net income of $1,165.7 for the three months ended September 30, compared to net income of $1,462.9 in the same period in 2021.
- Diluted earnings per ordinary share of $9.66 for the three months ended September 30, compared to earnings of $12.16 for the same period in 2021.
- Revenue of $10,372.7 for the nine months ended September 30, compared to $7,262.3 for the same period in 2021. An increase of almost 43%.
- Net earnings of $4,212.5 for the nine months ended September 30, compared to net earnings of $2,940.7 in the same period in 2021.
- Diluted earnings per ordinary share of $34.91 for the nine months ended September 30, compared to earnings of $24.79 for the same period in 2021.
Nvidia Corporation
All currency listed in millions of US dollars
Selected highlights from their third quarter 2022 financial results on November 16, 2022
- Revenue of $5,931 for the three months ended October 30, compared to $7,103 for the same period in 2021. A decrease of almost 17%.
- Net income of $680 for the three months ended October 30, compared to net income of $2,464 in the same period in 2021.
- Diluted earnings per ordinary share of $0.27 for the three months ended October 30, compared to earnings of $0.97 for the same period in 2021.
- Revenue of $20,923 for the nine months ended October 30, compared to $19,271 for the same period in 2021. An increase of almost 9%.
- Net earnings of $2,954 for the nine months ended October 30, compared to net earnings of $6,749 in the same period in 2021.
- Diluted earnings per ordinary share of $1.17 for the nine months ended October 30, compared to earnings of $2.67 for the same period in 2021.
Portfolio 2
Portfolio 2 for the week ended November 18, 2022: DOWN
- Mother Nature was not happy with TC Energy (TSX:TRP) as she threw three separate storms at its Illinois delivery station. The storms knocked out power at two of their pump stations, causing a temporary shutdown. The issues have now been resolved but TC Energy cut back the volume shipped through their Keystone system.
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 $
Summit Industrial Income REIT (TSX:SMU.UN)
US $
No US$ dividends this past week.
Quarterly Reports
No quarterly reports this past week.
Portfolio 3
Portfolio 3 for the week ended November 18, 2022: DOWN
- goeasy (TSX:GSY) announced a C$ 50 million bought deal to a syndicate of underwriters. Goeasy will sell 425,000 common shares to the group at a price od C$ 118.50 per share. The additional money will be used to continue executing goeasy’s growth plan. I’m not thrilled with my ownership percentage being diluted but at least the shares are as high as the current share price.
- Alvopetro Energy announced that thanks to 68% increase in cash flow from operations, they increased their quarterly dividend by 50% (from $0.08 to $0.12), and plan to buyback shares. Both are shareholder friendly moves. Not bad getting a 50% raise without doing anything. 😊
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.
No dividends this past week.
Quarterly Reports
Alvopetro Energy Ltd.
All currency listed in thousands of US dollars
Selected highlights from their third quarter 2022 financial results on November 15, 2022
- Revenue of $15,594 for the three months ended September 30, compared to $9,968 for the same period in 2021. An increase of over 56%.
- Net income of $8,795 for the three months ended September 30, compared to net loss of $20 in the same period in 2021. I had to check this twice. 😊
- Diluted earnings per ordinary share of $0.24 for the three months ended September 30, compared to earnings of $0.0 for the same period in 2021.
- Revenue of $43,552 for the nine months ended September 30, compared to $23,852 for the same period in 2021. An increase of over 73%.
- Net earnings of $26,541 for the nine months ended September 30, compared to net earnings of $2,817 in the same period in 2021.
- Diluted earnings per ordinary share of $0.72 for the nine months ended September 30, compared to earnings of $0.08 for the same period in 2021.
Real Matters Inc.
All currency listed in thousands of US dollars
Selected highlights from their fourth quarter 2022 financial results on November 16, 2022
- Revenue of $58.2 for the three months ended September 30, compared to $125.6 for the same period in 2021. A decrease of almost 54%.
- Net loss of $10 for the three months ended September 30, compared to net income of $9.1 in the same period in 2021.
- Diluted loss per ordinary share of $0.14 for the three months ended September 30, compared to earnings of $0.11 for the same period in 2021.
- Revenue of $339.6 for the twelve months ended September 30, compared to $504.1 for the same period in 2021. A decrease of over 32%.
- Net loss of $9.3 for the twelve months ended September 30, compared to net earnings of $33.1 in the same period in 2021.
- Diluted earnings per ordinary share of $0.03 for the nine months ended September 30, compared to earnings of $0.48 for the same period in 2021.