During the first half of 2021, the World Indices returned 12% in Canadian dollars and since the beginning of 2020 earned a total return of 28.4%.

Almost an entire market cycle was crammed into the last year and a half. We began the 2020 pandemic with the flight to quality and defensive businesses. Anything with a hint of cyclicality was discarded and for the first time ever people were modeling near zero revenues for entire industries. The economic drop led governments to supersize policies as failure was not an option. This political support reversed markets out of the sharp decline and into the fastest recovery on record for indices. If you blinked, you would have missed it. All losses that occurred between February and April were recovered by July. Market behavior also changed with the clear backstopping by the government. Professionals and individuals post the bottom went out and purchased the cyclical, volatile, and damaged businesses, venturing out shelter that was used during the storm. Over the past year this had been the prevailing trend in the market up until the peaking of SPAC (Special Purpose Acquisition Company) and Meme stocks over the last couple of months.

This led to what worked best: the opposite of expectations with levered, volatile, and speculative companies being the best performers. Inflation expectations have set in a new high of 2.5% in May and been steadily declining since. Often times a leading indicator for people switching from cyclicals back into stable businesses. When economies stabilize off such hot GDP numbers from the bottom it is hard for cyclically orientated business to continue beating expectations.

What This Really Means Is That It’s Time to Upgrade Your Portfolios

This has setup quality, defensive, and profitable investment factors to be very underweighted by professionals and are near their cycle lows in terms of relative performance. This is exactly where we are currently invested. Despite swimming against the stream with low levels of cyclical investments, the Kipling Global Enhanced Growth Fund has managed to hold its own. While still showing strong protection in down markets where the resilience shined in losing less than benchmark indices.

Time to Go High
Rebound in top-quality U.S. stocks is just starting in Morgan Stanley’s view

We continue to own defensive growing businesses at reasonable valuations and shun the higher multiple unprofitable growth companies or the heavily cyclical. Speculation and junk in every cycle have their moment in the sun during the early economic recovery, but as things stabilize from such a low base it is hard to keep the momentum going.
Here are a few company highlights:

Amazon

Amazon has been one of the greatest beneficiaries over the past year. With both its online retailing taking significant share from physical stores and Amazon Web Services acquiring larger workloads. However, over the last year it has lagged the S&P500 by 19%. Given the significant under performance, its two year forward P/E ratio has declined to 30x today from the highs of 50x. While markets are expensive, hitting 90% plus percentiles ranges for valuation, Amazon is sitting in the lower third of its historic range. It is now the cheapest it has ever been over the last decade relative to the indices. The business is still on track to triple its profits by 2024 using consensus numbers.

NVR

NVR is one of the United States largest home builders, producing approximately 20,000 homes annually. New homes sales have had an incredible resurgence while existing home inventory fell from 4 million in 2007 to 1 million at the end of 20201. NVR carries net cash on its balance sheet and the order book has grown 26% year over year. Similar to Amazon, NVR is trading at the lowest relative P/E multiple (0.75x the Global Index) in the past decade while still having the ability to grow its earnings per share at a double-digit rate going forward.

Liberty Broadband

Liberty Broadband is the holding company for Charter Communications, USA’s second largest cable company. The pandemic has shown the absolute necessity that broadband internet is for households and corporations. They are a buyback force having shrunk their share count by one third since 2016 and still growing broadband users at a mid to high single digit rate. Meaning, that the business is still growing at a double-digit rate per share. Liberty is also not expensive. Sitting exactly in the middle of its historic cash flow valuation range versus the global index.