Introduction

 

Hello everyone,

As I write this on October 20, 2024, major indices have reached historic highs, and gold is at its all-time highest price. We’re in what is called an all-assets bull market. These periods are relatively rare, and one of the objectives of a portfolio manager like Rivemont is to take full advantage of them. And I can tell you that our clients are greatly benefiting from this positive period. We’ve been almost fully invested for over a year now, and the equities we’ve chosen generate some of the best returns on North American markets. It goes without saying that these investments are invariably accompanied by intelligent and true diversification of our portfolios. As a result, the equity portion of the portfolios has increased by more than 40% over the past year.

In this newsletter, I will be reviewing our investment decisions from the last quarter, while highlighting our preferred sectors for the future. I will then present the greatest risk which, in our opinion, we will eventually face in the markets, namely the market’s evaluation of profits. As usual, we will conclude with our market outlook and our largest positions.

We hope you find this newsletter informative.  

  

Third Quarter 2024

 

One of the most difficult decisions for a manager is not to sell a long-term, upward-trending stock too early. The reason technical analysis and trend monitoring work so well is that equities typically go up higher than they should relatively to the underlying fundamentals, and of course the phenomenon is also present in a downward direction. In other words, markets are not efficient, so you can take advantage of them.

One of the sectors where we have had the most success is electronics, including our preferred stock, nVent Electric (NVT).

 

NVT

Source : TradingView

 

The company is a global leader in components that enable the electrification of the economy. In the same sector, we have also added Flextronic (FLEX) to the portfolios in recent weeks.

However, the portion that is most surprising is that of the financials. We have four holdings in that sector: three insurance companies and one data management company. We are extremely positive about this part of the market, which has weathered the turbulence of recent years well. Unsurprisingly, XLF, the US sector exchange-traded fund (ETF), was one of the first in July to reach new historic highs.

 

XLF

Source : TradingView

 

Equity Return and Risk

 

At the end of a given year or period, the performance of each equity that makes up a portfolio can be explained in detail. These performance elements can be summarized as:

1. Growth in earnings and cash flow
2. The dividend, if any
3. Changes in the market’s assessment of earnings.

Earnings are fundamental in assessing the price of a share. They represent the portion of a company’s profits, once all of its expenses have been paid, attributed to each common share. When investors buy shares, they use these current and future earnings to assess the company’s real value. These earnings, of course, are not stable, unlike bonds, and can fluctuate considerably based on decisions made by management.

Dividend returns are defined as the portion of earnings paid to shareholders divided by the current share price. Although dividends are not guaranteed under a contract, companies often strive to maintain the distribution they have announced. The board of directors determines what percentage of earnings will be distributed to shareholders, which is one way of transferring economic value, usually in the form of cash. Some companies, particularly those in a growth phase, may decide to reinvest all their profits instead of distributing dividends. Others prefer a more tax-efficient method, which is to redeem shares.

The earnings valuation is usually done using the price-to-earnings ratio, which is the current price of the share divided by a company’s current earnings per share. Several factors influence this ratio, including interest rates, overall economic inflation, the sector’s growth rate and the company’s individual growth rate.

But let’s get to the issue at hand: what is the state of the current situation? On the positive side, companies that make up the North American equity indices have experienced stronger than expected earnings growth over the past few quarters. Analysts are constantly raising their profit and sales targets. Not to mention the growth of AI tech companies such as Nvidia (NVDA) and Iron Mountain (IRM).

However, company valuations have also experienced significant growth over the same period. Except for the notorious stock market bubbles, the price-to-earnings ratio has rarely been so high.

My advice? Let’s take advantage of the situation while we can, because the market has a nasty habit of bringing us back to earth. Not that I’m predicting an impending recession. Instead, I find that given the historical relationship between the initial valuation of an asset’s price and its expected return, the closer you get to the peak, the shorter the time to reach it.

 

Market Prospect

 

 

Favorite Securities

 

You will find below a list of the individual securities with the largest weight in our portfolios. These stocks were selected based on their respective potential to outperform the 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.

 

 

Conclusion

 

The first annual meeting of Rivemont clients, Outaouais version, will be held on November 7. We plan on doing the same in the Montreal area next spring. Please contact us if you did not receive the invitation to this event, which will take the form of a “cocktail hour.” Dress is casual.

Thank you and we look forward to seeing you soon!

Sincerely,

 

Martin Lalonde, MBA, CFA

President