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Resilient Building Blocks

2021-09-24, Steven Kim



It was a rollercoaster in global stock markets this week, as debt issues at mega Chinese property developer, Evergrande, threatened potential repercussions for global financial markets.

There will always be something to be concerned about from a macro or micro perspective. Almost equally assured, market participants tend to overreact. Work by Robert Shiller supports this notion, showing that the S&P 500 is 18x more volatile than the fair value implied by discounting dividends over the past 100+ years. At QV, the diverse, balanced and ‘real’ nature of the economic exposures and growth prospects within our portfolios supports long-term successful outcomes for clients, even when faced with exogenous events or extreme volatility in the short term. Ultimately, owning the right companies while managing valuation and balance sheet risks will dictate performance over time.

Speaking to the resilience of QV’s portfolios, consider the breadth of their underlying business exposures. QV Canadian Large Cap Strategy holding Loblaws provides value for many Canadians through attractively priced groceries. Importantly, the company seems poised to continue to leverage its Loblaws, Real Canadian Superstore, and Shoppers Drug Mart locations to drive 8-10% earnings growth in the medium term. Commuting to the store, office (hopefully soon?), and the great Canadian outdoors can be fueled by QV Canadian Small Cap Strategy holding, Parkland Corp., whose network of gas stations stretches across most of Canada. For the early electric vehicle adopters, Canada’s first coast to coast recharging network is provided by PetroCanada, a subsidiary of Canadian large cap holding Suncor Energy. If you are feeling hungry on the road, a Teen or Beyond Meat burger can be found at A&W, an attractive quick-serve restaurant franchise owned in the QV Canadian Small Cap Strategy.

Shelter wise, Alberta-based small cap holding Melcor Developments provides appropriately sized lots in planned communities according to the needs and building preferences of Canadians and US homeowners. Home renovation products, such as cabinets, windows, stairlifts, and fencing, can be procured through Canadian small cap holdings Richelieu Hardware, Savaria Corp, and Stella-Jones, respectively. Canada’s economy is heavily supported by financials, and those in need of a mortgage or personal loan can stop at any RBC, Scotia or TD branch, all owned in the QV Canadian Large Cap Strategy. For entrepreneurs, commercial lender Canadian Western Bank is growing its branch and digital footprint across Canada to service small-medium business owners in what could be industry-leading loan and earnings growth in the next 5+ years. Clothing retailer and QV small cap holding Aritzia Inc. is capitalizing on e-commerce growth trends with over 40% of sales from e-commerce this past quarter. We believe our auto parts suppliers Magna International, Linamar Corp. and Martinrea International will be able to keep pace with customer adoption of electric vehicles and continue to be relevant as the overarching trends of reduced weight and efficient manufacturing persist. If you need protective film for your vehicle, QV Global Equity Strategy holding 3M has got that covered. And, as we get into the fall season, Johnson and Johnson has medication available for those feeling under the weather.

It is interesting to see the many touch points our 25 to 40 company portfolios have in our day to day lives. Importantly, this is what supports our confidence in the direction of the portfolios. Although a systemic contagion risk, like Evergrande, could result in global financial and economic repercussions, we also recognize that life would go on. Consumers need food, shelter, power, financing, mobile phones, and even the internet which has become an essential service. A diverse portfolio with balanced economic exposures can more easily absorb the uncertainties and unknowns, and should generally allow us to capture the historic earnings growth of the markets in the 6-7% range. In fact, our experience shows that market confidence shattering events tend to serve as valuable opportunities for our portfolios, as other market participants tend to overreact or reduce exposure to quality businesses that we believe will continue to survive, and in some cases thrive, for the long term. The balanced economic exposures in our portfolios typically allow us to recycle capital from areas that are doing well to fund those on sale.

All views and projections are the expressed opinion of QV Investors Inc. and are subject to change without notice. This Update is provided for informational purposes only. QV Investors takes no legal responsibility from any losses resulting from investment decisions based on the content of this Update.

ABOUT THE AUTHOR

Steven Kim | Portfolio Manager, Canadian Equities

Steve oversees QV’s investment process and makes portfolio decisions for the Canadian small and mid cap strategies.