Sometime around 2015, it seemed as if Europe had finally turned a corner.  None of the bloc’s fundamental problems had been fixed, but the generalized financial panic had stopped, and monetary stimulus had begun to kick in.  The depreciation of the euro helped by boosting exports, and the collapse in oil prices helped by reducing spending on imports, although the bulk of Europe’s recovery was driven by rising domestic spending on consumption and investment.  Now, the brief and overhyped “euroboom” of 2017 has completely faded.  The latest official data show the Euro area growing at the slowest annual rate in more than four years.  Real gross domestic product grew at an annual rate of just 1.2% in the first nine months of 2018, versus 2.7% in 2017, 2.1% in 2016, 2% in 2015, and 1.6% in 2014.

Recent surveys of European businesses suggest the situation is only getting worse.  IHS Markit reported that “backlogs of work fell for the first time in almost four years” in December as businesses adapted to “the reduced inflow of new business.”  Focusing on Germany, where growth was actually negative in the third quarter, Markit’s survey found that business “optimism was the lowest recorded for over four years,” marking a “stark contrast from the situation this time last year.” In France, Markit’s “latest flash data pointed to an outright contraction in France’s private sector for the first time in 2½ years.”  In Italy, “output fell at the fastest pace in 67 months.”  Spain is a relative bright spot in terms of actual orders and activity, but even there, “business expectations were at their lowest level since June 2013.”   With growth slowing in China and Japan seeing contraction in the third quarter, the global economic outlook can no longer be looked at as a ‘synchronous expansion,’ the buzz-phrase from 2017.

Any good news for stock investors?   While ‘catching a falling knife’ is rarely a good investment strategy, the excessive decline recently argues that we are more than overdue for at least a ‘trading bounce.’  Sure, the Santa Claus Rally failed to arrive, but the annual re-balancing of U.S. pension funds still needs to occur.  This program has the largest funds moving their actual asset weightings in line with their targets.  Given the sharp fall in stock prices, this means that most funds would be under-weighted in that asset class and would need to buy.   The quantity is around US$60-80 billion.   While it all doesn’t have to happen before year end, there should be a new bias to the buy side.  In terms of portfolio strategy, we have started adding back some stocks where the valuation has fallen to attractive levels and the outlook is overly pessimistic, in our view.  Three stocks that meet that criteria now are Maxar Technologies, Fedex Corp and Uranium Participation Corp.

Maxar, the satellite and space systems manufacturer/operator had an awful year, falling over 40% despite the successful acquisition of Digital Globe in 2017, which helped to integrate its total satellite orbit offerings by putting together the satellite manufacturing business of MacDonald Dettwiler with the mapping and data capabilities of DGI.  But a negative research report by Spruce Point Capital Management, a hedge fund with a track record of launching negative campaigns against North American public companies after taking a short position in their stock, caused investors to ‘sell first and ask questions later.’   Investors remain in a ‘show me’ mode and it will take some quarters of earnings growth to convince the skeptics (and short sellers) that the stock has more upside than downside.  Improvement of free cash flow with a priority to pay down debt is of primary importance.  Strong free cash flow generation will allow them to pay down acquisition debt relatively quickly.  Valuation exceptionally low at under 8x forward earnings and 7x forward EV/EBITDA.   Biggest risk is a gradual shift away from the geo-satellite market in favour of other monitoring instruments such as drones.

Fedex Corp is an exceptionally cheap stock with strong longer-term growth.  It did lower guidance for next year due to weakness in Europe and Asia after beating expectations last quarter.   But it still expects EPS of $15.50 to $16.60 in 2019, putting the stock below a ten multiple on next year’s earnings for a company with a global footprint and positioned for continued growth in e-commerce deliveries.  The forecast assumes “moderate” U.S. domestic growth and no further weakening in international economic conditions. Management expects to see further benefits from the TNT Express acquisition.  We are optimistic on FedEx’s ability to offset weaker product mix with lower costs.  We think the exceptionally low valuation overly discounts a more muted outlook.   The biggest perceived risk for investors is the impact of Amazon’s in-house shipping projects on FedEx, in addition to the logistic giant’s correlation to the weakening growth for the global economy.

Uranium Partipation Corp is a direct play on Uranium and is currently reflecting a Uranium price of US$26 per pound, while the spot market price is $28.50.  Contract prices are even higher and the long-term cost to develop new uranium supply is closer to US$60 per pound, suggesting that no new long-term supply will be developed until prices rise significantly.  Due to excess purchases over two decades ago and the de-enrichment of prior nuclear weapon grade materials, there is still a global surplus.  But it is being reduced and new nuclear facilities are being built globally, especially in China, which means a sustained period of demand growth.   Annual global demand is almost double the current annual supply.  Prices will get squeezed higher as inventories are run down.  We also expect a weaker dollar in 2019 contribute to an overall jump in commodity prices and this is a pure play on the commodity, at a discount, without any of the production and other risks associated with owning the miners directly.

Another short-term lift for stocks could come from ongoing corporate stock buybacks, corporations have announced over US$1 trillion of buybacks for 2018 and remain well short of that target, suggesting more buying still to come.  This might prove to be only a passing positive as companies may start questioning the wisdom of these share buybacks over the past few years.  General Electric (GE) bought back over US$25 billion of stock from 2015-17 at prices of over US$20 per share.  With GE stock now at US$7.50, that’s about US$16 billion that could have been allocated to real spending and expansion rather than being ‘evaporated’ with stock repurchases.  Even Apple’s purchase of US$60 billion of stock buybacks this year would have a market value today of under US$50 billion.  That missing US$10 billion could probably have been spend on some interesting technology acquisitions that would help the company’s growth profile down the road.   But this has been, if nothing else, an ‘immediate gratification’ kind of market.  Recent stock market results might be payback for that short-sightedness!

Finally, while we don’t want to even begin to ‘open the book’ on the constant flow of mis-statements coming from the U.S. President, which at last count numbered over 7000 by the official ‘fact checkers’, or more than ten per day, we do have to point out the glaring error in the ‘fact’ most responsible for the bulk of the support for the current U.S. Administration, which is the strength of the economy and the consequent growth in employment over the past two years.  As expansions go, this one rivals of the biggest in the past 40 years.  Since hitting a post-crisis low in February 2010, more than 20 million jobs have been created.  While under Trump’s watch, more than 4 million have been added, it has to be pointed out that almost 16 million new jobs were created under the Obama Administration, more than double what had been lost during the Financial Crisis, which the economy was in the throes of when he came into power in 2009.  Assuming the current pace of job growth is maintained, the current run will in the next year surpass the 21.1 million jobs created between December 1982 and June 1990 under the Ronald Reagan and George H. W. Bush administrations.  But it will still take some time to catch up with the 1990s.  Between May 1991 and February 2001, more than 24.5 million jobs were created, most of that under Bill Clinton’s presidency.  So Trump may spend most of his days patting himself on the back, the bottom line is that he has overseen about 20% of the 3rd largest period of job growth in the past fourty years.  Not exactly the “greatest economic performance in U.S. history.”  But after over 7000 factual errors in two years, what’s one more?

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