With today’s concerns about rising bond yields, recessionary indicators, consumer weakness & geopolitical instability, it’s little surprise that many investors are feeling compelled to play it really safe.
To prioritize preservation of capital over return on it.
That’s very understandable and for many, may indeed be the right choice. But it comes with tradeoffs. Ones that may well indeed be worth taking, but when taking them, it’s important to have your eyes wide open about the situation.
To discuss this important topic of investing for crisis, we welcome back Jonathan Wellum of Rocklinc Financial. As a reminder, Rocklinc is Wealthion’s endorsed financial advisor for Canadian citizens.
Transcript
Jonathan Wellum 0:00
Do you get scared out of the market? What exactly will be the conditions necessary for you to feel comfortable to step back in the market? And how are you going to do that? Are you going to do it slowly? Are you going to do it in pieces and chunks where you step right back in again. And you know, it’s was proven over time that as human beings is, that’s a very, very difficult thing to do, especially for retail investors without the discipline. And for professionals like myself, who have been doing this for 34 years, to try to time yourself in and out of the market is virtually impossible.
Adam Taggart 0:36
Welcome to Wealthion. I’m Wealthion founder Adam Taggart. With today’s concerns about rising bond yields, recessionary indicators, consumer weakness and geopolitical instability. It’s little surprise that many investors are feeling compelled to play it really safe to prioritize preservation of capital over return on it. It’s very understandable and for many may indeed be the right choice. But it comes with trade offs, ones that may well indeed be worth taking. But when taking them, it’s important to have your eyes wide open about the situation to discuss this important topic of investing for crisis. We welcome back, Jonathan, welcome of rockling financial, as a reminder, rock link is Wealthion, endorsed financial advisor for Canadian citizens. Jonathan, welcome back to the program.
Jonathan Wellum 1:25
Thank you very much. And it’s great to be with you again.
Adam Taggart 1:28
Hey, always a pleasure to have you on. Look, we’ve had a lot of feedback over recent weeks sort of about this topic, right? Where there’s a bunch of people that have been concerned for a long time about a lot of the macro issues that we talked about on this channel, there have been a number of recent developments that are getting people even more concerned, you know, I mentioned several of them, the bears bear steepening of the yield curve. We’ve just had the outbreak of some tragic developments in the Middle East. So, you know, people are a number of people are definitely concerned about their portfolio becoming collateral damage to some sort of corrective event that may happen in the future, not an invalid concern at all. But as I said, in the introduction, you know, there there are trade offs that come along with it in the long run. A bunker is not a strategy for wealth building. So you want to make sure that you are protecting your wealth, but you want to be doing it prudently. If your goal is to build your wealth over time. So we’re going to delve into that deeply. Because I know you, you have these discussions every day with people, and I want you to be able to kind of surface that in this video for our viewers today. But if we can, let’s just start with a question. I asked him all the beginning of these interviews, because it’s a good way for people to kind of just get a refresher of what’s currently in your head. What’s your current assessment of the global economy and financial markets?
Jonathan Wellum 2:55
Yeah, my current assessment is that the global economy is actually quite weak. And I think people need to be very careful and cautious in terms of how they’re approaching the market. And I think the large increase in interest rates that we’ve seen over the last 18 months is starting to have a significant impact on the global economy. And so yeah, so we’re very cautious. We’re, we’re scrounging around for opportunities. And we think that people need to be very cautious and careful, given what what’s transpired over the last, as they say, 18 months, and the concerns that we see with businesses, and as we talk to companies, you know, they’re certainly seeing slowdowns, traveling or slowing down a lot of discretionary items. Those businesses are seeing some pressure in terms of their businesses. So caution, careful. But we’re also also looking for opportunities all the ways in the market.
Adam Taggart 3:44
Okay, I want to talk about how you do that in just a minute. Very quickly there just because it’s so timely, I haven’t had a chance to interview that many people since the news broke this weekend, about the you know, the resumption of hostile aggressions between Palestine and Israel. And then now it seems in the more breaking news that Hezbollah in the north is now going at it with Israel, too. So it might be a multi front war at the time people are actually watching this video. So just on this specific development alone, how much does it concern you as a as a capital manager? What do you think it’s right now your assessment of its likely impact on the capital markets? And is it changing your positioning in any way right now?
Jonathan Wellum 4:37
Yeah, it’s a serious situation. from a human perspective. It’s tragic. What we’ve seen go on, it’s just horrific to see the scenes of cruelty and inhumanity to do other human beings and so forth. And so, let me just put that out front and so horrible and you see, you know, the evil that is possible, amongst men. Having said All of that, I think from an investment perspective, we’re going to try to look through this event as awful as it is, and try to look beyond and, you know, the world does, unfortunately, go through some of these things from time to time is wicked as evil and as horrible as they are. But as investors, we are looking at things, you know, medium to longer term. And so we’re going to invest through this, it does mean that we should continue to be cautious if this were to, you know, further, breakout further, and it ended up getting more countries involved. And then some people have suggested that you could end up with major, major, major war and world war three, in fact, is being tossed around. We’re trying to just keep level heads, maintain some cash, and continue to look for good businesses, because history tells us that’s the prudent thing to do as investment managers and not hit any panic buttons, but to stay disciplined and focused on the medium to longer term and work through this challenge that we’re currently experiencing.
Adam Taggart 6:01
All right, um, yeah, so a big thing that’s driving people’s concerns right now. You know, it’s a fear, right, and it may very well be a legitimate fear. But it is a fear. And we do often say on this program, that making investment decisions based on emotion, whether it’s on the fear side of the scale, or the greed side of the scale, that’s generally a recipe for making sub optimal at best decisions, maybe some terrible decisions. And again, you’re a financial manager, you’ve you’ve worked with people for decades, you you’ve seen every permutation of investor behavior, what are some of the biggest mistakes that folks make when they’re making investment decisions based on fear? I think the biggest
Jonathan Wellum 6:56
mistake is that if they become fearful, they just sell everything they say, just want out of the market completely, and they just take off all their positions, which means that you have to then, you know, pick the best time to get back in the marketplace, once you’re out, then the issue becomes, you know, when do you step back in number one, number two, sometimes when people make that decision, also, there’s tax implications. So that often they’ll end up paying, you know, there’ll be capital gains, so they’ll crystallize and investment returns that they’re gonna have to pay tax on. And so that also compound that that mistake is one of the best ways to create wealth is to compound your money tax deferred, well, if you’re selling, you’re going to be crystallizing games and then paying tax. But to us, the biggest challenge is, when do you get back in the market? And what are you looking for? If you get scared out of the market? What exactly will be the conditions necessary for you to feel comfortable to step back in the market? And how are you going to do that? Are you going to do it slowly? Are you going to do it in pieces and chunks where you step right back in again. And you know, it’s it’s proven over time that as human beings is, that’s a very, very difficult thing to do, especially for retail investors without the discipline. And for professionals like myself, who have been doing this for 34 years, to try to time yourself in and out of the market is virtually impossible. The best investors, the most successful people in terms of wealth creation, make sure that they keep their oars in the water at all times, and that they are finding the best opportunities within the context of the market that they’re they’re faced with. For us. You know, we we’ve actually taken some money off the table, and we are sitting in large amounts of cash just in order to be conservative, but we’re also spending a lot of time looking for opportunity. So I think that’s the biggest mistake just ditching getting right out of the market. And, and not spending the time to actually look at the opportunities in the marketplace.
Adam Taggart 8:52
Okay, good. Yeah. You mentioned a couple of things there I want to delve into, which is, you know, it’s almost impossible for anybody, even the top pros to time the market with real certainty, right. There’s that Warren Buffett quote, you know, Jonathan, about oh, gosh, wait, is that we want to be right on average. What’s the quote?
Jonathan Wellum 9:14
Yeah, as Buffett says, You better to be approximately right, rather than precisely wrong.
Adam Taggart 9:19
Okay. Yeah. Great, great, great way to
Jonathan Wellum 9:21
never never Peter Lynch with with fidelity back. And of course, many of the listeners probably don’t know Peter Lynch, but he was an exceptional money manager ran the Magellan Fund back in the in the 80s and early 90s. They did a study on the Magellan Fund, even though it was the best performing mutual fund in his in that timeframe. And the majority of the investors in that fund made very little money over that period of time, and that’s because they would go in and out at the wrong times when it was easy to buy when the market was going up. They would buy the Magellan Fund. When people were panicking they would sell and it was quite interesting to see that the fund was one of the best parts Only funds but how the amount of money that people actually made owning it was a fraction of the overall performance of the of the fund itself.
Adam Taggart 10:07
That is super interesting. Random fact, Peter Lynch lived in, I believe, still lives in the town that I was born in. So I would actually see him a bit as a kid just on the street. And he had that famous quote that said, more money has been lost, basically, by being out of the market, worried about the next recession than was actually lost, and then the next recession? And look, again, folks, I’m not I’m not by any stretch, trying to give the impression that folks should not be cautious. You absolutely should, especially in the type of market environment we’re in right now. But to your point about, you know, people selling everything, and then not finding a good way to get into the market. I mean, I’ve heard from some of our US based advisors that they’re, they’re hearing from people still, from time to time who are saying, Yeah, I’ve been out of the market since 2013. Right? 24 is something shipped them out back then. And then the market took off. And they figured, well, I can’t buy it back in now, because the markets gone up, surely, it’s going to come down. And then of course, we had nothing but an up market until the end of 2021. Right. And then the market was declining and 2022. And so nobody wanted to catch the falling knife, right? So but the point is, is that these are people who were sitting on cash for the better part of a decade, right? Because they they tried to time the market and lost basically,
Jonathan Wellum 11:32
in cash wasn’t making much return over that period of time, at least. Now, if you’re in cash, you can you can grab 5% on the short term. But for years, there, you are getting less than 1%.
Adam Taggart 11:42
Right, and I want to share that I was in a high percentage of cash for, you know, a lot of the past eight years. So I myself, you know, I’m gonna say fell victim to this, because I don’t necessarily regret the reasons why I did it, I sure wish that the market had performed differently. But you know, I, I took the conservative approach, and certainly my returns suffered, because to your point, I was sitting on a lot of cash that wasn’t really returning anything. And even now in today’s market, you know, I still have a healthy amount of my my assets and cash equivalents, which fortunately, are now earning more. But, but it’s not like I’m hog wild and market. And by any stretch, I’m not advising anybody to go hog wild the market. But I do want to have this sort of honest discussion about the costs of being overly conservative, right, because building wealth over time is really all about using the miracle of compounded returns over time in your favor. And if you turn off the spigot on on compounded returns, you know, there’s a real opportunity cost to that. So anyways,
Jonathan Wellum 12:52
it’s part of the financial planning side of that, Adam, when you’re dealing with clients, as they come in, if you’re dealing with clients that are still adding to their portfolios, they’re younger, they have a large, longer timeframe, then they can be a little more aggressive, and they don’t need to be changed, chased out of the market. If we have someone that comes in who’s not adding to the portfolio, they’re retired, and they’re a little closer to the wire, I think it’s very important that they have a cash buffer or cash equivalent type of buffer in short term securities, and so forth. And so for the next five to seven years, they know where their money is coming from, it’s not going to be bounced around on the stock market. So a lot of times when you’re looking at your weightings in cash and weightings and equity, what’s your time horizon? Are you continuing to add to your portfolio’s these these these questions that are essential to think through in terms of portfolio management and investment planning?
Adam Taggart 13:46
Great point. And one of the things I really appreciated about what you mentioned is, you revealed earlier that you guys are sitting on higher cash balances now than the normal. That’s not something that many financial advisors will publicly admit to. And the reason why is they have a fear that, well, my clients can be in cash on their own, you know, why are they why are they working with me if I’m going to put him in cash, right? And I always tell people, you pay the financial advisor to know when to be in cash and how much to be in cash for. And it also shows that your firm, you know, is is risk manage. In other words, you’re not oh, we’re just always long, right? Our portfolio isn’t 100% deployed and always long. You know, right now, you just admitted you got a pretty healthy cash buffer because you got some concerns. And presumably, as you said, you’re always looking out there for opportunities, you want to have some dry capital to take advantage when the valuations make sense, right. So let’s, let’s actually see if we can, let’s talk about how you are managing capital right now at Rock link with an eye out for the concerns that that folks are talking about here. wanted to remind folks of your approach in terms of how you sort of structure your portfolio and then you know, how are you managing Right, right now, given all these risks that we talked about the beginning of the discussion.
Jonathan Wellum 15:04
Yeah, and, and again, as you, as you mentioned already in this, in this discussion, we are concerned about the market, we are concerned about a lot of factors out there. So we share the concerns of the listeners and our clients as they come to us. So, when a client comes in, typically they’ll be coming in generally with, with cash, or they’ll be coming out of out of another firm, and they’ll generally be coming with the cash, if they, if they do come in with the securities, then we’ll look at all the Securities and we’ll analyze them, and we’ll say, do we want to own these, if we don’t, then we will sell them, you know, based upon tax considerations and so forth. But if someone’s coming in with cash today, we are only slowly investing them in the marketplace, it might take us six months to a year before we feel comfortable in terms of just building out that portfolio. So we’re being very, very cautious we’re are, we’re typically what we call value more value investors, we’re looking at companies that purchasing companies that are trading at a discount to what we think has intrinsic value. And that’s often a discounted, you know, free cash flow analysis, looking at the free cash flow over the next five years, and then doing an estimate for the next 10. And then building at a perpetual kind of value in there and then discounting them back. And so we’re trying to look at, you know, look at companies that we think are trading below what they should be trading at in the market based upon their their real economics, we will sometimes for some businesses look at net asset value. So we’ll look at the balance sheet and look at the assets minus the liabilities, typically, those would be more harder asset type businesses. And so as clients come in today, we have our focus list of companies. So we have 20, to 25, companies that we purchase across half a dozen industries, and will only invest in the companies today that we think are trading at attractive prices. And if they’re not trading at attractive prices, we keep the money in cash. And so that’s why the process will take a number of months, and maybe it’ll take six months to a year. But as the market opens up opportunities, or a certain sectors become more attractive, or businesses that we want to own, then will nibble away and will start picking off those, those businesses. So cautious, cautious, yes, but always driven by businesses that we like that are trading at prices that we think are attractive based upon the current market conditions that we’re in. And we think that’s, you know, a proven way of going about it in in finding a balance between having cash and also being in the market and letting your assets work for you in good equities that are often paying dividends and chugging along quite nicely. And and then making sure that our investors are starting to participate in long term gains, setting him up, setting him up well for the long term.
Adam Taggart 17:47
All right, great. And so Jonathan, it sounds like that your approach there at Rock link really is a value investor, as you said, but really, you know, looking looking for the discount price, hopefully the deep discount price, there’s that old saying, amongst veteran capital managers that you make your money when you buy, not when you sell, right, you want to be buying value at a lower price than its true value. And then the game is waiting until the market price catches up to true value, right? You’re nodding as I’m saying this. So, you know, presumably, you when you buy you also, I’m assuming to a certain extent have a little bit of a, an exit price already in your mind that like, Okay, if the price gets up to x, and the fundamentals haven’t changed to justify even further value creation, that’s when we know we want to get out of this thing.
Jonathan Wellum 18:34
Yeah, that’s true in sometimes, unless it’s trading at a fair premium, we would look at maybe a 30 or 40% premium, we typically will stick around in the business, if it’s a good business, and it’s continuing to grow. And partly because, you know, our valuations can be, you know, they’re not perfect. And often when a business has great momentum, and speaking not to stock, but the business itself, it’s you know, it’s growing the earnings, it’s reinvesting back into business, it’s generating high returns on invested capital, you want to stick around in those companies, it’s hard to find great businesses that continue to grow. So we’ll let it grow. But we wouldn’t be adding to position, we wouldn’t be bringing new investors into position. And that’s the big difference. When we when we add we want to be buying at a discount, but we’ll hold on if the business is really doing well. And it’s a strong company. Because businesses, I think what investors will find over time a well run company usually surprises on the upside. I mean, you got smart people, they work all day all night to figure out how they can grow. And even when you get in a market conditions like we’re in now in some sectors that we might touch upon. There’s pressure in those sectors, well run companies can take advantage of weak competitors. And so often when the market gets difficult, and there’s challenges, the weak competitor, the weak competitors get bought out and strong companies actually can can ratchet up their growth levels and certainly we’ve seen that back in The financial crisis, for example, look at the banks and gobbled up other banks or look at, you know, infrastructure companies that went out of business because they weren’t right. You know, they weren’t properly constructed their balance sheets, and then they get bought up by other larger players. So that’s what we mean by there’s always opportunities for a well run company, that’s well capitalized.
Adam Taggart 20:19
Okay, well, that’s maybe a good segue then into what what are the sectors that you’re looking at right now? Where do you see the opportunity? Or maybe where do you see, you want to make sure you stay away from?
Jonathan Wellum 20:30
Yeah, let me let me start off actually, with was interested in one area that we’re just very careful and cautious about. And we have been for a couple of years. So this isn’t just something that came out of last week or earlier this year. And that’s the banks were very cautious about the banks, and partly because we’re in a debt crisis, and the banks are basically own that debt. I mean, your liability is their asset. And, you know, I’ll let me just say a couple things about the Canadian situation. And I know that we’re speaking to investors from all over the world, but in Canada, a number of our banks, we look at Toronto Dominion Bank, CIBC bank Bank of Montreal, BMO those in all those banks operate in the United States. Also, about 20% of their current mortgages are negatively amortizing. And so that means that the actual payment that that people are making on their mortgages isn’t even covering the current interest. And people might say, Well, how is that possible? Well, the reason that’s possible is the banks don’t want to be kicking people out of their homes and foreclosing. And so what they’ve done is they’ve negotiated with people a lower payment, so that they can stay in their place. But we don’t really want to have your own financial institutions where you’ve got 20% of the mortgages, their assets, and negatively amortizing, we also see in some of these banks, about also similar number 20 22% of the mortgages have an amortization period now with 35 years, 35 years. And so what that tells you is there’s pressure, there’s a lot of pressure on the consumer, that higher interest rates are putting a lot of pressure on the banks, they’re sitting in unrealized losses, their assets are under pressure. And we would expect that loan losses are going to continue to tick up. And so from our perspective, that’s one area in especially in Canada that we want to be very, very cautious about. But then if you look south of the border, the United States, and we literally only have about one and a half percent of our assets and any banks. But if you look at the states, which has been well documented, and many of your people have talked about on your show, I mean, now you’ve got an industry, too, with unrealized losses on a lot of their assets that are in excess of 700 $800 billion, some people say higher. And again, we don’t know how all that’s going to play out. We’ve seen some challenges earlier this year on the number of bankruptcies in the US system. But you know, that could play out in a messy way. And me, Kyle bass was on your show recently talking about the commercial market, and you’ve got another 200 to 250 billion that could be taken off the equity of the banks, which is about 10% of the equity of the banks, and particularly focused on a lot of regional players. And so we look at that space. And we say, you know, that’s an area where why would we be compelled to jump into no need to go there. And, you know, as I mentioned to you mentioned, you have to before in Canada, if you’re buying the Canadian index, which is called the TSX, the s&p TSX index, about 30% of its banks. So if you’re an index buyer, you’re you’re getting banks, whether you like it or not. And so that’s why we like to be sort of getting way off index, and we’re value investors and focus. So one area, we’re cautious about long short, it is banks, we think that there’s still challenges on the banks, and not that they’re going to blow up or anything like that, but are you getting a you’re really going to get high rates of growth and earnings growth in the next little while, we don’t think so the same thing, really, with the life goes also Life Insurance Company. So there’s a sector where we say, we don’t need to go, we don’t have to be there, there’s going to be ongoing pressure for some time. And so we’ll just minimize our exposure and stay clear of it. A lot of derivatives, a lot of messy things in the banks. And and so we will go to it will go to another sector. So that’s one area where we actually stay away from
Adam Taggart 24:34
Alright, that makes great sense. And before you go on to the next sector, I just want to flag an important point you made there where somebody might say our banks don’t really care about them. I’m just an index investor. Right? I’m just gonna park myself in these index funds. Well, you have to know what those index funds are invested in because you just said in Canada, the main index ETF there for the TSX is 30%. Thanks, did you say?
Jonathan Wellum 24:57
Yeah, we knew we probably able 25% banks and other 5% the life insurance companies with 30%. Financials, financial
Adam Taggart 25:04
institutions, okay. Yeah, so anyways, the point is, is, no matter what you buy, you got to understand what you’re buying, right? So you might have just agreed with all of Jonathan’s logic there and might think, Oh, I’m sidestepping that because I’m just gonna own the general index, while something happens in the financial industry, it’s going to definitely impact your index, they’re given the the high weighting of that sector. So important point.
Jonathan Wellum 25:28
Yeah, one of the areas that we are much more interested in now, and we’ve had positions in the sector already would be in what we call sort of infrastructure, and utilities sector. And again, I don’t have to tell most of your viewers that that area has been pummeled in many cases. And that’s because you’ve seen massive increase in interest rates. And so if you’re a utility or infrastructure company, and you’re funding different projects, and you’ve got capital, capital demands coming forward, all of a sudden your cost of money has gone up, and your margins are under pressure. And so there’s a good reason why these companies have come off in value. But as we look at the carnage in this space, and especially the last quarter, and many of the I think the utilities are down in the Canadian marketplace is slightly different on the s&p, you’re talking 13 15% as a group in just one quarter. I mean, these are large drops for generally pretty predictable businesses. So we go into that space, and we say, are there some real gems here? Are there companies that are having balance sheets that are fortress, like balance sheets, they’re well financed, they have, you know, they’ve locked in their terms of money, they’ve got long term contracts in place, they’ve got inflation, adjustments, all of those sorts of things, right? So why are they being sold down to the same extent, and so we have positions in a couple of companies, that Brookfield companies, we have Brookfield infrastructure and Brookfield renewable, which are very, very well positioned companies. And year over year. I think they’re down maybe 20 and 30%. And Brookfield infrastructure may be down over 20%, Brookfield renewable, about 30%. And yet, those companies when you look at say Brookfield renewable, you’ve got 85 85% of their their cash flow is protected by index indexation to inflation. 90% of their debt is a fixed rate long term that goes a duration of over seven years on in the case of Brookfield renewable, it’s over 12 years all fixed rate debt, non recourse debt. So they’re very, very astute at structuring their investments and
Adam Taggart 27:40
fortress balance sheet you were talking about.
Jonathan Wellum 27:42
Yeah. And so again, we saw this in Oh 809. With Brookfield, they had very well structured businesses and some of their competitors had terrible balance sheets. And they were able to just step in and buy up a lot of these assets. And, and so when you look at the Brookfield asset, you really have 10, to 12% earnings growth already built into these companies for the next three years. And they just did an update in New York City back in September, just last month, and just reiterated all these numbers. And they’re they’re exceptional at raising capital, that recycling capital, which means they’ll sell some of their projects from time to time. And so they don’t need to be coming to the market to the same extent as some of their competitors in their in growth sectors. And so we look at that and we say to our investors, okay, let’s this dollar cost average is not that we’re going to put all of our you know, we’re not going to put the whole kit and caboodle if you will into you know, into two stocks. But let’s pick away at these companies. The dividend yields now on Brookfield renewable are six and a half percent, and you got almost five and a half percent on Brookfield infrastructure. And they’re growing these companies at high single to low double digit numbers. And as they say they’re they just don’t suffer from the same vulnerabilities as some utilities and some, some infrastructure companies wouldn’t. So there’s an example of an area where, okay, there’s been carnage they’re down, don’t run away this pick away this start picking away these businesses, because if interest rates settle, we are getting closer to the end of this interest rate hiking series, which is quite possible. I mean, we were thinking we’re pretty close. And of course, they’re off today because of the the war and a flight to safety into treasuries. But if we are close to the top, then these companies can really bounced back nicely. And you can have a nice game while you’re collecting a heavy dividend yield in very safe, well financed, well constructed companies. And so that’s an example of an area where we see where we can pick off some opportunities.
Adam Taggart 29:44
Okay, great. So I know there are a couple other sectors that you guys look at pretty close. I believe energy is one of them. What’s going on there?
Jonathan Wellum 29:52
Yeah, we were we’re fascinated in the energy sector because it’s one of those those areas that you know, it’s being attacked. I mean, is being attacked globally because of the energy transition ESG climate change all of these things, but the reality is we need oil, we need energy, we need fossil fuels for as long as the eye can see. And there’s some really well run companies. But if you’re attacking the industry, and you making it harder to get licenses and you know, drilling is cut back in your you’re discouraging companies to in terms of putting capital into more production.
Adam Taggart 30:31
I just interviewed Rick Rule. He said, We are de capitalizing the energy industry.
Jonathan Wellum 30:35
Yeah. And so if you’re decaf, exactly, if you’re de capitalizing it, what do you think’s going to happen to the price, I mean, if the demand is still there, globally, then the price is going to go up. And so you’ve got really in, you know, again, we’re not trying to make big predictions on the oil price, but you’ve got a generally a pretty good floor underneath you, because you’ve slash production, you’ve made it difficult to, to put capital into the business, and now you’re dependent on the, the Middle East and other countries where they would prefer to have higher prices. So in light of all that, if you look at you know, we’re looking at some of the Canadian oil companies, but certainly some of the large US players who would fit this bill, some of these companies are generating 12 to 18%, free cash flow yield some even higher. And that’s because these, you know, at 80 $85 a barrel, they are very, very profitable. And because they don’t have the use of cash into new production, to the same extent they would if we were encouraging the industry to grow, then what do they do with all that capital? What do they do with all that cash flow, they’re, you know, they’re paying down debt. They’re buying back stock, and they’re increasing their dividends. So we own companies like Meg energy M, eg Meg energy, some Suncor, which is now controls all of the substantially all of the oil, oil sands, now they’ve been buying out their partners, Canadian natural resources, but the same would apply in the US. These companies are incredibly profitable, they’re just printing money. And if they just kept doing what they’re doing, in many cases, they can buy back all the stock of their company in the next, you know, in the next eight to 10 years. That’s how absurd it is. So we looked at that space. Also, we say, well, with all of the pressures, and as Rick Rule knows very well, he is an expert in this area. In Commodities, I have a ton of respect for Rick and appreciate his information. You know, as you say, D capitalization is what you’re doing, that just is going to keep the price up, and what’s it going to do, it’s going to benefit, you know, the really well run oil companies. And so we have about eight to 10% exposure in our overall portfolio is to some of these companies, and we really liked the position. And as they say, dividends are going up, stock repurchases are going up. And we think that’s a really safe area to be if inflation continues to be a problem oil generally, you know, repricing this to inflation, and so you’ve got some hedges there also.
Adam Taggart 33:02
Okay, I am going to ask you once we go through the sectors here, just if we do go into a recession from here, which a lot of people are worried about in 2024, some saying maybe not until 2025. I want to have a sense of house some of you know how that might impact your outlook on some of these companies. But before we dive into that, let’s keep going through your list. industrials. Right.
Jonathan Wellum 33:30
Yeah, we were looking we’d like to industrial space, you can find companies that are favored in terms of areas where there is ongoing opportunities, like above average growth. So whenever wherever we’re looking at a sector, we’re saying, Are there secular growth trends here that are propelling certain aspects of this industry forward, you know, high and growing at faster rates than the overall GDP. So if you take a look at one area, we’re spending time we’re just about ready to pull the trigger. We haven’t done it yet. is sort of the whole electrical equipment space. So you’re looking at these businesses, like Schneider Electric, like Eden like Hubble, there’s there’s a number of them that we’ve looked at, that are helping the electrical utilities, rebuild their grids. The grids are under tremendous pressure. You’re in California and often tell you about that. How good
Adam Taggart 34:24
the grids are. Rolling brownouts. Yeah,
Jonathan Wellum 34:27
yeah. And so if we’re going to start plugging in all these electric vehicles, I mean, putting that put that aside for a second, the grids themselves are under a lot of stress. They were built in the 60s 70s. They need to be, you know, in terms of the underlying build, and they’ve been plugged and played for many years and investments haven’t gone into the extent that they should, and so they need to be rebuilt anyway. But now all of a sudden, we want to plug all these electric vehicles into the grid. And so there’s there’s just massive, you know, trillions of dollars have to be spent to rebuild to rebuild, refurbish, restore, increase To the capacity of these of the electrical grid, so looking at companies that are going to be selling a lot of the equipment that the utilities are going to have to buy in order to rebuild these grids. So as I say, we’ve been looking at Schneider Electric, which is European based Eaton which is US based helpful. There’s a number of other ones that that we’re we’re zeroing in on. And so we think of manufacturing companies, if this energy transition is going to take place, where some of the businesses that were really profit from that, and that’s not, that’s not the same, you look at someone like Schneider, they’re involved in a number of areas, same thing with Eaton. So it’s not that this is the only area that they’re going to benefit from, but it’s going to have a substantial impact on their business, it might be 30, or 40% of their business that will really be favored by that, which will help, again, spur up that growth give you faster economic growth in the business, faster business, faster growth in the business, than the economy. And that’s the kind of thing we’re looking for. And in very profitable growth and so boring, yes, but they the next 510 years, there’s gonna be a lot more money having to be spent, in fact, it’s going to be much more than five or 10 years, maybe 1520 25 years. And so yeah,
Adam Taggart 36:10
and that’s something that can really be a secular, a secular trend that can can overpower cyclical ones, right. So for example, you know, here in the US, you know, this year, there’s a lot of funds that are getting pumped into a lot of infrastructure companies for the, you know, the reasons you just mentioned that are coming from the inflation Reduction Act and what’s been approved by Congress. And even if we, you know, quote, unquote, go into recession next year, those funds are earmarked to be spent. And I’m trying to remember who I was talking to recently. But they were basically saying that the problem, the bottleneck right now is the projects. So the money is kind of piling up, and they’re trying to spend it, but they don’t have enough shovel ready projects yet to put that money into. So to your point, that’s just sort of going to be a tailwind for a long period of time for the companies in that space.
Jonathan Wellum 37:04
And we’re talking about companies that are very well run. They really have strong market positions, big moats around a business, you’re talking in many cases, oligopolies, right? There’s a handful of companies that control the different spaces that are and
Adam Taggart 37:17
they’ve got, for better or worse, they’ve got all the political contracts, they know how to, you know, be the recipients of the political dollars that are getting spent.
Jonathan Wellum 37:26
Exactly, exactly. Yeah. And that that’s exactly right. Yeah.
Adam Taggart 37:31
All right. We had also, were chatting about this list, before we turn the camera on, there were two other sectors, I remember you mentioning. One was technology, you know, which is certainly been on a tear this year. But not all of it, right? You know, everybody loves to now pull up the chart of the market cap weighted s&p versus the equal weighted s&p And you basically see that it’s The Magnificent Seven that are driving all the market return. Right. So I guess you gotta be judicious about where you put your money even in that sector. And it begs the question to, which is, you know, how much more momentum did these big names have in them, given the massive performance they’ve had this year? You know, how much higher can invidious price to sales ratio? Get one? It’s already in the stratosphere.
Jonathan Wellum 38:23
Yeah, I mean, technology is, is an amazing area to invest in, I don’t have to tell any of the listeners that it is exciting. There’s lots of growth, it’s, it’s, to me, it’s really become basic infrastructure. I mean, it’s, you know, it’s absolutely essential, you first thing we do we come into our office, we turn our car on our computers are on software systems, right, everything is run, in terms of technology, the issue is what are you prepared to pay for it? And, and you have to be cautious. You know, from our perspective, you know, we have to be cautious in terms of paying for 10 years of growth that, you know, at very high levels that it might materialize, it might not. But we would rather look at companies in the technology space that are essential, very important. Businesses have great moat moats around them, but are not trading completely in the stratosphere. Now, we love Apple. We’ve owned Apple for many, many years. We like Amazon, also, we think, you know, again, these are powerful franchises, but they’re not cheap. Amazon, probably, depending on how you evaluate is price to sales is still got some significant, we think more upside and is very defensive business and so on. But but they’re big there, and they’ve done well and they are trading high multiples things like things like new videos, and exceptionally high multiple things have to go very well for them. They really have to go well for the video, and maybe they will, but there’s also a high risk that it doesn’t and therefore you could see a substantial drop in the value of your investment. So what we’ve tried to do is look below the surface. We were able for a while to pick up a little and go will be, but then it took off like a rocket with the AI. And so we made a little bit of money on that, but not as much as we wanted, because it took off too quickly. But one of the companies that we’ve been adding to, and we still think it’s trading at 15 to 20% discount to what is a fair value on the company, and maybe even just slightly more than that would be Autodesk, which again, is a software company, very well positioned across many, many industries provides essential software for, you know, contractors, builders, engineers, that, you know, 20 years ago, they bought the leading player in, you know, for architects for building design. Last year, in 2001, they bought a company called No, no, no vase, and they’re the leader in water systems, water technology, water infrastructure. And so you get a company like Autodesk, which is, you know, got a free cash flow yield of a little bit over 5%. But growing 15% plus a year, has 98% retention rate on clients. I mean, once you once you’re established with Autodesk, it’s very difficult to get rid of them, which is what we love about the software companies high higher retention rates. Because they have higher retention rates, you need them, they can put prices up, which they did this year to adjust for inflationary costs. And they continue to, you know, build into other verticals and sell more and more products to the same clients. And so businesses like that are amazing franchises. And so if we can buy them at 5%, plus sort of free cash flow yields, and they’re growing at, you know, you know, 1215 16 17% consistently and still have that growth in them, then why wouldn’t we buy those companies, a company like Autodesk verse versus a company that probably is not really growing that much faster, but you’re going to be paying maybe twice the multiple if not, maybe two and a half to three times the multiple for it. So we just encourage investors look below the surface look for companies that really have strong moats are essential, but are not trading at the same valuations. Maybe they don’t have the same sex appeal in the market, who knows what, but they’re great businesses. We own another company, I think I mentioned on a previous we were talking, I think it was an MBA and a q&a with some of the other American advisors company called Roper technologies also which is, which is large software company and they own, you know, they own they control different small industry verticals with software. And it’s an amazing company to and that’s a company has been growing last five years, 20 to 22% a year, double the market over the last 10 they just continue to reinvest back into business, there are tremendous investors, they run it like a little bit of a mini Berkshire Hathaway, or they upstream the cash flow from the software business, they control and then they they take it to the head head office, and then they use that to reinvest in other businesses, and they just continue to grow and reinvest back into business. And businesses like that, again, aren’t front and center, but boy, are they profitable, and over extended periods of time they perform better than the s&p 500. And then so those are the kinds of areas that we were looking at, and we encourage investors just go a little deeper. You don’t have to just own the Magnificent Seven and then add Tesla into video and a few others too. You can add, you can buy great companies that are below the surface.
Adam Taggart 43:26
All right, great. And Jonathan, I do want to thank you for being so granular, in what you’re sharing with us today, you know, not just strategies in general industry assessments, but you’re giving us actual names for viewers to go and research. So thank you so much for being that specific. All right, and then last, and then we’ll start to wrap things up. The mining sector, I know in particular, it rock link, you guys. Look at the precious metals, mining sector. But Canada has lots of rich natural resources. I know that’s been on your radar. But it’s been it’s been a tough year. I’ll say right.
Jonathan Wellum 44:05
It’s been it’s been it’s been very difficult. In fact, I was just reading your third quarter report. If you go back year over year, gold is actually up 11% to the end of September. But the last quarter it’s off. And so it’s not off a great deal from its high when you think of the way commodities trading a little over 2000 2070 I guess without ultimate high down to you know, 18 1850 1860 words today type of thing. But the stocks themselves, many of them especially some of the leading miners have been cutting Yeah, maybe cut by 40%, maybe almost 50% too, so and so when you look at that, yeah, we see some good opportunities and for a lot of investors who are nervous and concerned about the market, which is we’ve talked about we also are that’s why we’re digging so hard to find companies that are trading at good values. And again, just dollar cost averaging keeping some powder dry, being very cautious as we go All, but for people who are very concerned about the market, often they don’t, they’ll just go and buy gold gold companies or gold stocks and so forth. And yet, you know, the all they’ve been rewarded with is just pain, you know, pain trade, you’re thinking, when is this going to end like what is going on. So what we do is we again, just try to build positions, and the best one have it as a certain portion of the portfolio. So when we’re thinking about, really the premier miner, as we’ve talked about, on previous shows, mostly, you know, we own royalty companies, I’ll come back to that in a second. But in terms of miners, one of the best miners when major Miner is Agnico, Eagle, it’s great. It’s a well run company, it’s politically in the safest areas in the world, for the majority of assets. And yet, it’s trading REITs, I’m always thinking Canadian dollars, little over a little over $60. So beyond $50, you know, high 40 $50 in the US. But back way back, you know, two years ago that that stock was practically $100 Canadian, and probably about $80, almost $80 us, and they continue to grow, continue to expand, producing more and more gold. And so we think that’s if people are looking at really premier miner and want to want one of the best technique legals is very inexpensive and trading, you know, 30% discount, at least, to any kind of reasonable intrinsic value. And that’s not, that’s not factoring in 2500 gold, or some, you know, 5000 gold or anything like that, that’s factoring in current prices. And then we do own a number of the royalty companies, because as we talked about before, they finance the mines, but then they get a piece of the action, they get a royalty stream that comes back, they’re much safer, you can diversify across many regions, they are not plagued with the same, you know, challenge with inflationary costs and so forth. And there’s some really good, well run royalty companies. So Franco Nevada would be the big the big daddy of them all, if you will. But even Franco, which does trade at a higher multiple of nav net asset value, is still in our view, probably about 10 to 15%. Below, really where it should be trading at these prices. And because of its elite status, and the quality of its investments, and also the growth, but if you take a Wheaton precious metals, which is a another royalty company is probably the you know, the second largest one, they have tremendous growth prospects built into them over the next five years. And we think they’re trading probably a 25 to 30% Discount again at these prices. That’s not factoring in you know, large increase in gold is Sandstorm royalty also be trading at a similar discount. And, and so we think that space, Cisco royalties, is another quality company, they got they got hit More recently, only because they had a change in CEO and a little bit of a tussle at the board level. But again, as a real, as a royalty company, they already have all these great assets all lined up, do they need a good CEO, of course, they need a good CEO, but we think there’ll be able to replace the CEO. And, you know, their underlying assets are fantastic and long term and undervalued. So that’s another space. If people are nervous and concerned, valuations there have not done very well. But the price of gold and silver have been pretty robust. And so there’s a disconnect there. That’s another place to just pick away, be careful, be disciplined, and chip away and add to your portfolio’s if the world does get into a real mess, then boy, the upside could be significant.
Adam Taggart 48:31
Yeah. And obviously, I hate to root for the world getting into a real mess. But again, that’s sort of some of the some of the way to be along something if you’re worried about crisis, right? Yes, absolutely. All right. So in wrapping up here, I did say a few minutes ago, I’d ask you, you know, the prospects of the economy. The global economy will say US, Canada and many other countries going into recession, for argument’s sake, let’s say within the next 12 months. What impact if any, does that have on what you just told us?
Jonathan Wellum 49:08
Yeah, no, we are we we believe that the probability of a recession again, we’re not predicting that we’re not stock market prognosticators in terms of economic predictions. But it’s got to be fairly high, because you’ve just hiked interest rates to such a large extent. And that has to run through the system. And we’ve had a fairly strong, you know, the economic growth has been quite strong coming out of COVID, and so forth. So we fully anticipate in our analysis and in the valuation of the companies, we’re looking at a slowdown in the economy, you know, if that doesn’t come, fantastic, that’s great. But we’re factoring that in and we’re doing that both with the, with how we’re valuing the businesses in terms of conservatism and also by carrying a little extra cash around in the portfolios. But, yeah, we’re in the camp where, I don’t know I mean, we had such a long period of almost zero and risk rates, that there’s too many zombie companies out there, there’s too many places where the pressure points are being put on that, it’s almost impossible to see that we’re not going to have at least some, some kind of some type of recession. And to be honest with you in Canada, we’re we’re already, you know, it’s a tougher goal in Canada than it is in the US. And in Europe. It’s not an easy go. Also, they’re having a tough time over there UK also, and is we’re seeing China now is trying to stimulate their economy and pumping more money into the just announced over the last 24 hours, because they’re, they’re also feeling a lot of pressure. So we could be back to central banks, you know, loading in some more capital, we’ll see. But so it doesn’t really answer your question directly. It doesn’t really change what we’re doing right now. We’re trying to factor that into our analysis and our thought process.
Adam Taggart 50:49
Got it. Okay. So it sounds like you know, when you are considering making an investment in a stock, you have done your your bottoms up valuation for the company, and then you’re basically putting some sort of recession haircut in there already. And you’re nodding as I’m saying this. Okay, great. All right. Well, Jonathan, look, this has been a great discussion, thank you. And I was, I was trying to figure out how to massage this discussion, because it’s a really important one to have. Because again, I’m not telling people not to be concerned, and not to play defense, and not to be conservative. I’m all three of those things myself. But as you and I have talked about before, when we decided to have this discussion, we wanted to make sure that people were eyes wide open about those trade offs that I mentioned. And I think you’ve given a really good explanation for how a capital manager who’s got a fiduciary duty to say, I’ve got to do the best thing for my clients assets, if the best things were to spill the money in a shoebox, that’s what you’d be doing right now. But you’re not, you’re deploying it intelligently, with a fair hedge with a good chunk of cash still in the portfolio. But walking us through that logic, I think, is really helpful for giving people a sense of what they could be doing themselves, or what they could be partnering with a professional financial advisor to do. So thank you very much. So real quick, Jonathan, as we wrap things up, I just want to give two resources for folks, when Jonathan, you’re going to be at this event coming up in just a week and a half, which is Wealthion. Fall online conference, Saturday, October 21. Folks, that conference is almost here. If you haven’t registered for it yet, and you’re interested in registering it do. So now, really. And the reason why you want to do so now is because the last chance to save price discount expires this Sunday, and then the tickets jump up to the full ticket price. I want as many people as possible to get a discount for this event, if they haven’t registered already. So act. And to do that just go to wealthion.com/conference. And a reminder that even if you can’t watch the event live, everybody who registers will be sent replay videos of the entire event, all the presentations, all the q&a, we try to get those to you the same night as the as the event ends, but that might be the next day, but within 24 hours, so if you can’t watch live, you’re gonna have the chance to watch everything very quickly thereafter. And just a reminder, again, you know, the tough times confusing times challenging times for individual people to figure out how to navigate their wealth through all this uncertainty we’ve been talking about Jonathan, you’ve given some really good ideas on a framework and a strategy. Most folks, I think, you know, it’s very good for them to have that orientation. The actual implementation is challenging for a lot of folks, because they don’t have the experience that obviously a professional like you do, but they also have real lives, like their attention is demanded by their jobs, their families, other commitments, they’re not sitting at their desks, watching the markets, you know, day after day, minute after minute, like you guys are rocking my car. So that’s why I always, you know, encourage people unless you’re highly experienced already doing this yourself, work under the guidance of a good professional financial advisor, who can be your guide here, just make sure that they take into account all of the issues, macro and otherwise that Jonathan talked about here. If you’ve got to go when he’s doing that for you, great, stick with them. But if you don’t have one you’d like a second opinion from when he does. Maybe if you live in Canada, Jonathan himself and his team that rock link, then consider filling out the short form, consider scheduling a consultation with the financial advisors endorsed by Wealthion. And to do that you fill out the short form over@wealthion.com only takes a couple seconds to fill it out. It’s consultations are totally free. There’s no commitment to work with these guys. It’s just a free public service that these advisors offer to help as many people as possible position as prudently as possible for what may lie ahead. If you’ve enjoyed this discussion, would like to see more discussions like this with Jonathan, where we bring him back on and he’s, you know, opening the kimono in showing us all the specific countries or companies that he’s actually looking at right now. Please vote in support of that by hitting the like button and then clicking on the red subscribe button below, as well as that will little bell icon right next to it. Thanks so much, Jonathan. I’ll let you have the last word here if you have any parting bits of advice or counsel for the viewers here.
Jonathan Wellum 55:08
Yeah, thank you very much, Adam. It’s been wonderful to speak with you. Yeah, I think I’ll just reiterate. Yes. Be careful, cautious as we go. But don’t neglect to have some oars in the water, if you will. You need to be participating. And so be cautious, careful, but go forward with as much knowledge as possible.
Adam Taggart 55:26
All right. Thanks so much, Jonathan. I’ll see you at the conference. Everyone else? Thanks so much for watching.
