With markets rattled by a slowing global economy, investors should be cautious about sticking to what they know.
With inflation rising through most of the year, recessionary fears have slowly embedded themselves in analyst expectations, which have only worsened due to key earnings misses from the likes of BMO, Royal Bank, Nvidia and Zoom.
Commodities, which have been riding the wave of post-pandemic consumption, have also given up gains on souring prospects for future demand. Brent crude is down by 23 per cent from its recent high to US$88 per barrel, while copper and iron ore are down 28 per cent and 23 per cent, respectively, signalling potentially poor returns ahead due to reduced industrial production.
When we add the ongoing conflict in Ukraine, which has exacerbated Europe’s food and energy crisis, and China’s zero-COVID policy, which has put a dent in its partners’ expected cash flows, the most reasonable outlook for most investors would seem to be a mix of pessimism and conservatism. Markets are suggesting as much, with the TSX and S&P 500 down 8.5 per cent and 13.5 per cent year to date.
However, this stance may prove detrimental if you happen to be an active investor with cash to deploy. Here are three reasons why:
Expanding your circle of competence: When markets are beaten down due to macro factors, industries in every sector will suffer, presenting widespread value opportunities for those who care to look for them. This calls for breaking the golden rule, made famous by Warren Buffett and Peter Lynch, of having a too-hard pile of investment ideas beyond your capabilities that you simply never engage with.
In Buffett’s case, his too-hard pile held mostly technology stocks, leading Berkshire to ignore Google and Amazon’s meteoric rise into two of the biggest and widest-moat companies in the world. Rather than embracing the fear of due diligence in an unfamiliar industry, Buffett preferred to leave returns on the table, regardless of how attractive his entry prices may have been.
While knowing your limitations is a healthy stance on the road to meeting your financial goals, pushing them a little farther out in the name of maximizing returns is a valid path for those with the fortitude to undertake it.
Uncorrelated diversification: With the list of attractively priced names sure to grow across Canadian exchanges as borrowing costs rise, investors should assess their industry exposure with a view toward adding not only asymmetric return potential but also revenue streams optimized for different market conditions.
While Buffett famously referred to diversification as protection against investor ignorance, we will respectfully disagree by saying that it’s protection against the future’s unavoidable uncertainty. In other words, a portfolio of high-conviction positions across industries offers a better liquidity profile than a concentrated one.
For example, a technology company with low capital intensity and established recurring SaaS revenue is likely to persevere regardless of broader economic forces, allowing you to take profits in a time of need rather than lock in a capital loss.
Conversely, if growth industries like tech find themselves in turbulent times, where even proven companies are in for some pain, consumer names with brand equity and pricing power on top of positive cash flow are poised to outperform and facilitate your spending requirements.
Finally, faced with rising inflation, many companies throughout the quality spectrum have been forced to lower guidance and put their share prices at risk, except if they offer the very assets where inflation is taking place. Beneficiaries in this case include real estate operators, miners and energy producers, who continue to enjoy record prices in spite of murmurs of a recession ahead.
Contrary to popular belief, investments that are uncorrelated, which perform differently from one another in the short and medium term on their way to long-term gains, are a sign of portfolio strength. And the present moment, with its depressed valuations, may be an ideal time to actualize this strategy.
The individual investor’s edge: As we’ve mentioned on a handful of past occasions, The Market Herald Canada’s investor community enjoys a significant advantage given its focus on small and micro cap stocks. This is because institutional allocators manage too much capital to invest in smaller issuers without having to take controlling positions in them, which either goes against their mandates or is prohibited by securities law.
Our readers then sit at a perfect confluence between small and micro caps’ generally higher beta – meaning that, as a whole, they’ve fallen below the TSX’s performance for the year – and a relatively underexplored opportunity set where retail investors are prone to biases those with experience in the market can overcome and capitalize on.
Now that we’ve made our case for keeping an open mind in distressed markets, let’s examine three popular news releases over the past week, each of them in a different industry:
Simply Better Brands (TSXV:SBBC) announces Q2 financial results
Simply Better Brands (SBBC) announced its financial results for the quarter ended June 30, 2022.
Revenue in Q2 was up 445 per cent YoY, while gross profit was up 550 per cent YoY.
The company reported a loss of $2.8 million or ($0.09) per share.
CEO Kathy Casey sat down with Sabrina Cuthbert to discuss the results.
Simply Better Brands (SBBC) closed down by 20.73 per cent over the past week trading at $0.32 per share.
RooGold (CSE:ROO) receives assays from prospect sampling at Gold Star Project
RooGold (ROO) has received high-grade gold assays from first-pass prospect sampling at its Gold Star Project in Australia.
The results confirm the potential for significant gold mineralization.
Roo’s field team intends to sample additional prospective gold targets in the area once surface access becomes available.
CEO Carlos Espinosa spoke with Sabrina Cuthbert about the sampling program.
RooGold (ROO) closed up by 20 per cent over the past week trading at $0.06 per share.
ApartmentLove (CSE:APLV) signs listing agreement
ApartmentLove (APLV) has signed a rental listing license agreement with one of the largest listing aggregators in the U.S.
The company will earn a fee for every qualifying rental lead delivered to the channel partner.
It anticipates the agreement to contribute significant cashflow beginning in Q4 2022.
Projections see gross revenue rising to $5M with gross profit of $3.7M by the end of 2023, representing a 74-per-cent operating margin.
President and CEO Trevor Davidson joined Sabrina Cuthbert to discuss the achievement.
ApartmentLove (APLV) closed down by 4.76 per cent over the past week trading at $0.20 per share.
Make sure to join us next Friday afternoon for a look into the week’s market moving stocks on The Market Herald Canada.