Financial letter

January 29th, 2024

Volume 15 Number 1



Hello everyone,

The year is coming to an end on the markets, and they are still riding the bull wave that began in 2021. However, we are at a crossroads, and the coming weeks will be critical in determining with greater certainty the next stock index trends.

At Rivemont, our goal is not to predict the markets, but rather to listen to them and to position ourselves in order to take advantage of the opportunities that arise. For the first time in a long time, our “equity” portion is now fully invested. Right now, we believe the trend is upward, particularly in the electronics and engineering sector. That being said, if we fail to achieve new highs on the S&P 500, we do not rule out a return to a defensive posture, which we would obviously prefer to avoid.

In the last quarter, one of our companies under management, Flex Ltd., spun off its interest in Nextracker, a software management company specializing in solar energy. I will therefore take this opportunity to explain in greater detail what a spin-off company is and the usual effect of this type of company on portfolios. I will also review our investment decisions and briefly discuss the current state of microcaps. As usual, I will conclude with our market outlook and our largest positions.

We hope you find this newsletter informative.


Last quarter of 2023


The first week of November saw the long-awaited turnaround as the “Magnificent Seven” (Amazon, Apple, Alphabet, Meta, Microsoft, Telsa and Nvidia) continued to dominate the market. The so-called “Christmas Rally” came to fruition in 2023. This term is used in financial markets to describe a phenomenon where equity prices tend to rise in the period leading up to and immediately following the holiday season. This rise generally occurs in December and may extend into early January.

Several factors can contribute to a Christmas rally:

  1. Seasonal optimism: The holiday season, including Christmas, generally generates a sense of optimism and positivity that can impact investor enthusiasm. The spirit of generosity and the optimism that characterize this period can translate into increased consumer spending and, potentially, boost business profits.
  1. Year-end “window dressing”: Institutional investors, such as mutual funds and portfolio managers, can engage in “window dressing” at year-end. This practice consists in buying or holding stocks that have performed well throughout the year in order to improve the appearance of their portfolios and look good in the eyes of their clients and stakeholders (a practice in which Rivemont certainly does not engage).
  1. Tax considerations: Some investors may make investment decisions based on tax considerations, such as realizing capital gains or losses before year-end to optimize their tax situation. This practice may result in increased activity in December.
  1. Low volumes: During the holiday season, trading volumes tend to be lower than usual as many participants take time off. Lower volumes can lead to greater price volatility, and in some cases even small trades can have a significant impact on equity prices.

Fortunately, smaller caps have also rebounded, but the Russell 2000 Index (IWM) is still more than 20% below its 2021 peak. The dominance of technology mega caps, which had slowed in the fourth quarter of 2023, has picked up again in 2024.




Source: TradingView


The above chart, which illustrates the comparative performance of QQQ versus IWM, shows the dominance of Nasdaq technology companies over smaller caps since 2013.

For our part, we have made an impressive and, for the time being, lucrative series of purchases over the past few weeks. These include Costco (COST), Lam Research (LRCX), Advanced Micro Devices (AMD), Microsoft (MSFT) and CGI (GIB). Apart from Costco, which is in the consumer staples sector, all the other stocks are in the technology and semiconductor field. The indices now have to break through their all-time highs in order for us to fully benefit from these new rallies.

The portfolios are also fully invested in fixed income, which we believe has now reached a significant low. We remain overweight in the first third of the spectrum (short-term) due to the time premium, which seems to be non-existent (inverted yield curve, see below).


10-2 Year UST spread



Source: Bloomberg on ConvexityMaven’s X


Company resulting from the spin-off


A spin-off is a business strategy whereby a parent company separates or “splits” one of its business units or divisions into a separate independent company. This new company is then owned by the shareholders of the parent company and operates as a separate entity with its own management, assets and finances.

Here are the main reasons why a company may undertake a spin-off:

  1. Focus on core business: The parent company wants to focus on its core business and chooses to divest some non-core businesses that are not in line with its strategic objectives.
  1. Create value: By creating a separate, independent company, the parent company seeks to unlock the value of the spun-off unit and improve its market valuation.
  1. Strategic direction: A spin-off can be a strategic move that positions both the parent and the spun-off company for growth and competitiveness in their respective sectors.
  1. Regulatory compliance: In some cases, regulators may require a company to spin-off some of its businesses to comply with antitrust or other regulations.

For example, in the last quarter of 2023, Flex announced the complete spin-off of its remaining Nextracker shares. Some of the reasons cited include the desire to unlock significant value, which gives Flex shareholders direct tax-free ownership of Nextracker and gives Flex greater strategic flexibility. In other words, Flex wants to focus on its core business while offering investors the opportunity to keep or not keep their stake in Nextracker, which has grown significantly in recent years.

As hoped, and to Rivemont’s delight, the transaction automatically increased the combined capitalization of the two companies by nearly 5%.

This is the second time we have experienced this type of major financial transaction. At the first opportunity (slightly different), we quickly sold the newly created entity. This time, we plan to further study this particular situation to assess whether the new value proposition could be meaningful in the long term.


Microcaps (Excerpt from Les Affaires, Martin Lalonde, Jauary 2024


For an active investor looking for bargains, microcaps are fertile ground because of the many inefficiencies that can be found. Because they are very small businesses, it is structurally unfeasible for big asset managers to invest large sums of capital in them. So the small retail investor or the emerging portfolio manager is sheltered from most financial professionals.

Although microcaps have historically provided more attractive returns than large caps over very long-time frames, they occasionally still experience severe periods of underperformance. We are currently in one of those periods.




Some sources even suggest that the current performance gap is at the same levels as during the technology bubble of the early 2000s. And what happened when that bubble burst? As you may have guessed, small caps outperformed significantly over the next five years.

Two professors from the University of Rotterdam recently looked at the concentration of the U.S. stock market and its impact on the performance gap between small and large caps. Their study, published in October 2023, shows that you have to go back to the early 1970s to find a U.S. market as concentrated in a handful of large companies as we see now.

A high level of concentration reduces the capital allocated to small businesses, making their valuations more attractive. And of course, when valuations are attractive, the potential returns are higher in the future.

However, there’s no guarantee that the underperformance of the past seven years will not continue for small caps. A potential avenue to realize the full value of these undervalued stocks is acquisitions. In recent months, we have seen a sharp increase in the number of transactions in the Canadian microcap sector. In particular, U.S. private equity companies have been very active in the Quebec market, including acquisitions of H2O Innovation, Logistec and OpSens for substantial premiums.

Finally, if equity investors don’t recognize the great opportunities that are staring them in the face, other entities won’t hesitate to seize them. Canadian investors could benefit from a wave of acquisitions and privatizations, courtesy of our neighbours to the south.

Although micro and small caps are currently trading at attractive valuations, both in absolute terms and in comparison to large caps, it remains difficult to determine when we will see a trend reversal. That’s why we continue to focus on the construction of a well-diversified portfolio.

That said, we see small caps as a very attractive addition to a portfolio both for its diversification benefits and for the high returns that the asset class may generate in the coming years.



Favorite Securities


You will find below a list of the individual securities with the largest weight in our private wealth portfolios. These stocks were selected based on their respective potential to outperform the stock market. You will find a short description of their activities, the annual dividend, if any, and the total return since their first inclusion in our portfolio.






This newsletter was finalized on January 15 and due to current market levels, it’s quite possible that the bull market will be confirmed with a new high on the S&P 500 and the gold index, which I mentioned in the last financial letter.

Rest assured that we will keep a close eye on the movements of the different sectors and will not hesitate to move if necessary.

To keep in touch in real time: Martin Lalonde @MartinRivemont on X (Twitter).


Martin Lalonde, MBA, CFA



The information presented is dated December 31, 2023, unless otherwise specified and is for information purposes only. The information comes from sources that we deem reliable, but its accuracy is not guaranteed. This is not financial, legal or tax advice. Rivemont Investments is not responsible for errors or omissions with respect to this information or for any loss or damage suffered as a result of reading it.

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