The bottom line, in our view, is that companies are more adept at managing profits than they have ever been. Productivity growth, low interest rates and global diversification are here to stay. While we may have already seen most of the benefits from this already in the current cycle, the long-term future for stocks looks brighter to us. If the stock market is really that over-valued, then why are the large corporate acquisitions that have been picking up pace in the last few years always so accretive to corporate earnings? Either the target companies are still under-valued and adding value to the acquirer, or there is some major league financial engineering that is taking place that investors just don’t understand. We don’t think so. Stocks will continue to rise as long as interest rates stay low (so as long as inflation doesn’t come back) and the global economy keeps expanding. Currently we don’t see any of the warning signs that either of those situations are about to change. It doesn’t mean that stocks can’t have a 10-15% correction at any time, but we would view it as an opportunity to add to stock positions. For now we have cut back our stock exposure a bit since valuations have moved above long-term levels and also because we’re going into a traditionally weak seasonal period for stocks (can’t ever forget about “Sell in May and Go Away”). We took some profits in the Canadian energy stocks as well as some of the golds. But we still favour stocks over bonds or cash for the balance of this year.

One area that has corrected recently and looks like tremendous long-term value is the housing sector in the U.S. Economic weakness over the winter along with the increase in mortgage rates last year has heightened investor worries about this key sector in the U.S. economy. When we strip away the rhetoric, the fundamentals of the housing sector look exceptionally attractive to us. The chart below shows the housing inventory (New and Existing Home for Sale versus Total Units Owned) over the past 25 years. While the long-term average has been about 3.6%, the inventories actually rose over 5% just prior to the peak of the housing market in early 2008. Today that number is back down to 2.5%, the lowest in over 25 years!
Housing Inventories back at lows
The most direct way to play the U.S. housing recovery is through the iShares Homebuilders ETF (ticker XHB). Exposure can also be gained through the renovation retailers such as Lowes and Home Depot, which was recently featured on the cover of Barrons Magazine as a top growth stock at a reasonable valuation. A less direct play is through the banks and mortgage companies that provide financing to both builders and buyers. In Canada, a good way to play a U.S. housing recovery is through Tricon Capital (ticker TCN). This company owns and manages a diverse portfolio of residential properties in the U.S. both for its own account as well as some third party funds. They collect management fees, they own the properties and they also benefit from the strong rental market. We still see U.S. real estate as one of the exceptional bargains in the investing world and believe that it’s far from too late to be getting into this sector, despite the strong moves already seen over the past four years.

Stock for the next 25 years. CNBC recently celebrated 25 years on the air and did a review of that period of time, including the best performing stocks over those 25 years. This of course gave rise to some discussion as to what viewers, guests and commentators thought would be the best stock to own for the next 25 years. Most of responses included the biggest winners over the past year or so. But for those who think that Amazon, Netflix, Facebook, Twitter or Tesla will be the great growth stock, they should be warned that they will all be faced with ‘breaking the law’ over the next few years; the ‘law of large numbers’ that is! Once companies reach a certain size, the ability to grow at ‘triple digit rates’ is simply not mathematically possible. Moreover, investors stop paying up for that growth knowing that it is not sustainable once they reach a certain size. Look at Coca Cola, Walmart or Microsoft. Growth has slowed over the past 10 years at all these industry leaders, and the earnings multiple that investors are willing to pay has also shrunk. Cisco, which was the largest stock by market capitalization at the peak of the tech frenzy in 2000 (over US$500 billion) and traded at over120 times earnings; today it is still growing but trades at under 12 times earnings! The big winner in the stock market over the next 10 years will be a stock that barely anyone knows of today and which would have a market capitalization of probably under $100 million. That’s not a ‘rocket science’ analysis I’ll admit, but I’m sure it’s the truth.

J Zechner Associates Global Hedged Growth Fund

We haven’t made it a habit in these market commentaries to highlight our own products but we have had a lot of interest lately in our Global Hedged Growth Fund, due to its strong returns since it was launched at the beginning of 2008. The Fund does tend to be somewhat volatile and therefore is more appropriate for investors who are able to tolerate a moderate degree of risk. However, the Fund is also unique in our shop since it is the only product in the so called ‘Alternative Strategies’ category. Some of the bullet points on the Fund:

  • The Fund capitalizes on the proven strength in ‘Top Down’ Economic and Strategic investment analysis at money manager J. Zechner Associates, Inc.
  • The Fund provides exposure to major industry sectors throughout the world without taking specific ‘individual stock risk.’
  • The Fund is able to hold ‘long’ or ‘short’ positions in its underlying securities allowing it to generate strong returns in all different types of investment environments.
  • The Fund does not borrow any money so the investor will not take on additional risk from the use of financial leverage.
  • The Fee Structure for the Fund is competitive with comparable Hedge Funds.
  • The Fund had an exceptionally strong track record during volatile times after it was originally launched in January, 2008.

The table below shows the performance since inception to the end of 2013. The Fund is off to a good start in 2014 as well, rising over 13% so far this year (to April 25th).

I am the lead manager on this Fund and have been since its inception. You can learn more about the fund here.

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