John O’Connell, chairman and CEO of Davis Rea
Focus: North American large caps
The election of Donald Trump has triggered a rally in cyclically-exposed stocks, leaving many other companies behind. Investors, at times, focus not on valuations but, rather, news stories. This provides opportunities for patient investors to buy quality companies momentarily out of fashion — companies driving progress and making money in spite of political speculation. Large information technology and drug companies have notably lagged the performance of the more cyclical sectors of the market since November 8, 2016 and yet, are amongst the most consistently profitable and fastest-growing companies in the world. We continue to search for companies that have durable, low-cost structures run by visionary and strong leaders who are delivering products and services profitably to the world.
What happens to human jobs when robots arrive? You might expect the answer to be very depressing. If there is one thing on which almost all economists agree, it is that digital technologies are performing many jobs that were once done by humans.
It is much easier to imagine jobs that will go away than new jobs that will be created. Today, millions of people work as app developers, ride-sharing drivers, drone operators, and social-media marketers — jobs that didn’t exist and would have been difficult to even imagine ten years ago. Make no mistake; these are jobs with high economic impact. The trick is to forecast where the puck will be next, not what the last play was. The slowing growth rate of our population and the aging of our work force are far greater risks to economic growth than the steady march of innovation.
Portfolio returns last year were stronger than most investors likely anticipated at the beginning of the year. The Year of the Rooster is expected to be a prosperous one, but we would not be too cocky about this market. While the “new rooster” seems to defy all odds, inevitably a fox enters the hen house. In this case, it’s the “elephant in the room”. Progress is always tricky. I predict this year may be one filled with hubris. Information technology and health care are but two areas where, over time, investors will be well served. We are sad to say that defence may be a good long-term investment theme if the world is run by roosters for long.
STANLEY BLACK & DECKER (SWK.N)
Stanley Black & Decker is a diversified global provider of industrial tools and security, which provides exposure to the U.S. home building, renovation and industrial markets. They recently purchased the Craftsman brand from Sears Holdings, after purchasing Newell Brands’ Tools division three months ago. Both are transformative acquisitions that will increase Stanley’s reach in the tools market as they expand revenue opportunities in both retail channels and industrial channels. The Craftsman acquisition also expands Stanley’s U.S. manufacturing base. Company management has proven themselves in integrating past acquisitions, and driving cost and revenue synergies quicker than originally forecast, while managing the business to continue growing organically, delivering consistent dividend and free cash flow growth.
KELT EXPLORATION (KEL.TO)
Kelt Exploration is an oil and gas exploration company, focusing on B.C. and Alberta. The company recently disposed of some non-core land in the Karr area for proceeds of $100 million, bolstering the company’s balance sheet. Over the downtrend in the commodity markets, Kelt’s management has stayed active and nimble in acquiring quality assets at deeply discounted prices. As a result, they have amassed a large inventory of land, especially in the Montney area, and with the recent infusion of capital, has the flexibility to begin exploring and developing the land base. In addition to adding to inventory through acquisitions, the company has also brought down its development and service costs. With a recovering commodity quote, and an improved balance sheet, we are optimistic that Kelt can execute and deliver growth.
Amazon is one of the biggest e-commerce retailers in the world today. It is a retailer of a large variety of products for consumers, and has consistently been expanding its moat in the e-commerce arena with its impressive infrastructure and scale. This scale allows Amazon to offer competitive pricing, and its infrastructure allows for quick deliveries to consumers. Amazon has also been expanding into subscription video and music on-demand, original content, hardware, and machine learning. Amazon also is a leader in public cloud services, with their Amazon Web Services (AWS) segment growing significantly over the last few years. With e-commerce continuing to gain both momentum and share of customer’s wallets, Amazon is well positioned to continue dominating the retail landscape, and is now moving to consumers’ residences. After a strong holiday season in which Amazon hardware devices (i.e. the Echo and the Dot), which enable use of Amazon’s virtual assistant Alexa, were some of the most popular gifts, the Amazon platform is well positioned to penetrate the home/smart assistant market. We continue to like the Amazon business model as a platform, as they continue to gain market share in cloud computing with Amazon Web Services, make inroads with innovative technology and machine learning, and continue dominating the e-commerce landscape.
PAST PICKS: FEBRUARY 10, 2016
- Then: $94.27
- Now: $119.78
- Return: +27.06%
- TR: +29.19%
- Then: +29.19%
- Now: $127.55
- Return: +26.28%
- TR: +26.28%
WALT DISNEY (DIS.N)
- Then: $88.85
- Now: $107.28
- Return: +20.74%
- TR: +22.53%
TOTAL RETURN AVERAGE: +26.00%
FUND PROFILE: DAVIS REA EQUITY FUND
PERFORMANCE AS OF DECEMBER 31, 2016:
- 1 month: Fund 4.25%, Index* 1.57%
- 1 year: Fund 8.90%, Index* 13.63%
- 3 years: Fund 7.04%, Index* 5.66%
* Index: 50% S&P/TSX60 Index, 50% S&P 500 Index
* Returns are gross of fees
TOP HOLDINGS AND WEIGHTINGS
- U.S. dollar: 10.71%
- Tourmaline Oil: 9.84%
- Spartan Energy: 9.06%
- Gear Energy: 8.72%
- Kelt Exploration: 8.26%