Equity Commentary: As at December 31, 2021
Source: David Picton | Jeff Bradacs, CFA | Michael Kimmel, CFA | Michael Kuan, CFA | Travis Irwin, CFA
Publish Date: Jan 12, 2022
Since the depth of the recession triggered by Covid-19, both the economy and equity markets have roared back above pre-pandemic levels. There are signs the economy is entering the later stages of the cycle with the US output gap closing and the economy running above full potential. For equity markets, over the coming quarters we believe markets will need to navigate headwinds from monetary tightening and fading fiscal tailwinds.
Within the portfolio, we have reduced our exposure to cyclical names in favor of quality compounders with positive change. We continue to have a favorable view on select commodities like copper, that have a positive fundamental outlook and in addition can provide inflationary hedges within the portfolio.
Despite the headwinds posed by the emergence of Omicron and fear of a more hawkish U.S. Federal Reserve, we expect international equities to perform well in 2022, with Europe leading the way. Growth will likely decelerate and policy normalization will likely accelerate, but both should remain supportive for the markets. We expect Eurozone companies to deliver very strong earnings growth, helped by the deployment of the Recovery Fund and rising, but still relatively low interest rates. European Banks will be one of the biggest beneficiaries of this setup and we have increased our exposure to this sector by adding to our Italian and French bank holdings. On the flip side, we expect high sales growth, but expensive stocks to underperform. Many of these stocks are in the technology sector. We have reduced exposure and taken profit in these types of stocks over the past couple of months.
We would like to highlight our position in Hardwoods Distribution Inc. We view shares of Hardwoods Distribution Inc (HDI) positively. HDI is one of North America’s largest suppliers of specialty building products to fabricators, home centers and builders servicing the new residential, repair and remodel, and commercial construction end markets. HDI’s specialty products include hardwood plywood and lumber, stair parts, mouldings, decorative surfaces, doors, and other related items. HDI recently closed the acquisition of Novo Building Products which advanced their ongoing change to offering a broadening product selection and structurally enhancing margins of the business. The acquisition itself was 30% accretive to Earnings Per Share, and the additional scale cements HDI as one of the largest suppliers which gives them a competitive advantage in this tight supply market which has allowed them to gain market share and expand margins. As they continue to scale and broaden the product offering, their Merger & Acquisition opportunities have increased as well and the company has a demonstrated history of acquiring at accretive prices and integrating transactions prudently. Given the track record of management, the growth opportunities ahead of them, and relatively inexpensive valuation of the shares, we view the company positively.
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