One stock that we have an investment in and which has been disappointingly weak in 2018 is Maxar Technologies, which was formed last year when Canadian satellite manufacturer, MacDonald Dettwiler (MDA) bought U.S. satellite software firm Digital Globe (DGI).  With the stock already trading at a low value, we took the opportunity to meet the company again and hear more about the growth strategy at their Toronto Investor Day on March 6th.  What we like is the way that this acquisition combines the manufacturing capability of MDA with the imagery analysis experience of DGI across a wide range of space markets and technologies, which we believe offer long-term growth potential.  Maxar is well-positioned to capitalize on these opportunities by leveraging its existing assets, customer relationships, and technological expertise.  The company anticipates that consolidated revenue will increase at a 6-8% rate between 2018 and 2022 due to growth in the Imagery and Service segments, along with increasing demand for small satellites for low-earth-orbit constellations.  The company also anticipates that this will lead to 8-10% annual operating cash flow growth. Management highlighted and supported its understanding of where future commercial and government market opportunities exist in communication and earth observation satellite technology.  With strong expected demand for data imaging by both corporations and governments, the stock looks like a good long-term growth story at a discounted price.

Finally, while we think the energy sector looks like good value in the short-term as stock valuations are depressed and oil prices stays firm around US$65 per barrel, it’s a lot harder to make a good long-term argument in favour or the oil market.  This becomes very apparent when looking at the following statistics, which represent the targets for electric vehicles (EV) versus internal combustion engine (ICE) by country:

United Kingdom – banning ICE car sales by 2040
France – banning ICE car sales by 2040
India – Target for 100% EVs sales by 2030
Norway – All car sales zero-emission by 2025
China – 20% of vehicle sales to be EVs by 2025;  banning ICE car sales in future?
Germany – 1 million EVs by 2020
Japan – 50-70% zero emission vehicle sales by 2030

Our key reading from these objectives is that we really have to question the long-term demand for gasoline and, therefore, for oil.  Tesla is still projecting annual vehicle sales in 2019 of 500k, in a market which produces about 17mm vehicles annually.  While that would be only a 3% penetration rate, it will only be going higher from there!  I don’t think we’ll be seeing US$100 oil again in our lifetimes unless there is some catastrophic event that disrupts output in one of the key producer countries.

In terms of our overall outlook, we believe that global economic and profit growth will peak for this cycle in 2018.  Leading economic indicators from the industrialized (OECD) countries have already started to roll over.  Record global debt levels and rising interest rates will lead to retrenchment in consumer, business and government spending that will limit expansion.  Profit margins are expected to peak this year as rising input costs (wages, basic materials) offset further cost restructuring.  While the U.S. tax cuts will lead to double-digit profit gains this year, those cuts are one-time in nature.   Moreover, most of the excess profits have thus far been directed to share buybacks rather than direct investment in growth, making this more of a ‘stock market event’ than an ‘economic event.

Stocks have been in a nine-year bull market with the bulk of the upside generated by higher earnings multiples due to record low interest rates.  With the U.S. economy running at full capacity, inflationary and wage pressures are starting to grow, which will necessitate a period of rising interest rates, thereby turning a major tailwind for stocks into a headwind.  We have also not been impressed by the technical quality of the recovery in stocks off the Feb. 8ths lows.  The advance has been exceptionally narrow, driven largely by the FANG, financial and large industrial stocks.  New lows have exceeded new highs, ‘down volume’ has been much higher than ‘up volume’ and the new flow into ETFs has been negative and offset only by record levels of share buybacks.  Bottom line is that we are very late in this economic cycle and the usual cyclical pressures are starting to build.  The increased volatility in stocks this year is a clear sign that the unabated bullishness of investors over the past few years is being challenged, at a time when valuation levels are still excessive and the backdrop of generational lows in interest rates is ending.  We remain cautious on the outlook and are carrying higher-than-normal levels of cash in all of our accounts.

1 2 3