Market, Report, and Portfolio Updates - March 3, 2022

Barkha Rani Mar 03, 2022
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New Report

We have posted a new report on Enthusiast Gaming Inc. (EGLX). The company is a media content and entertainment company whose target audience is focused on millennials and Gen Z gamers. EGLX has a market-leading position and operates a broad ecosystem of websites, Youtube channels, and is supported by the macro tailwinds of the esports industry. With a good acquisition strategy, an outlook of increased margins, and an attractive valuation, we think that this is a solid name to watch. 

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Report Update

We have posted a report update on Boyd Group Services (BYD). It is one of North America's largest collision repair center operators and has a very strong history of revenue growth, profitability, and generating positive shareholder value. The company has consistently been adding new locations to its network and is one of the only publicly-traded companies for the auto collision repair industry. While it has executed exceptionally over the years, it is encountering near-term headwinds through labor and supply chain constraints. We continue to like the long-term prospects but have downgraded this name for now.

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Market Update
The markets have faced a lot of volatility over the past two weeks amid the invasion of Russia into Ukraine. The US, UK, EU, and Canada have imposed sanctions on Russia, one of which has been banning Russia from the SWIFT payments system. Russia has kept its stock trading closed this past week, making this the longest closure since 1998. Oil and gas prices have been surging higher in response to global supply concerns, resulting from the Russia-Ukraine war. Fed Chair, Jerome Powell, stated yesterday that he supports a 25 basis point rate hike in mid-March, although this may be contingent on how high future inflation prints come in. With so much uncertainty and volatility in the markets, we wanted to provide our thoughts on how to navigate through volatility and what an investor can do during these times. 
Market Corrections are a Time for Building
There is a saying that bear markets and corrections are a time for building. This can be interpreted as a time to build one’s investment positions, research and reinforce investment theses in one’s positions, build a strategic plan for future bull markets, and likely a time to build an ‘iron gut’. There is also an expression that ‘everyone is a genius in a bull market’, and we have seen this many times throughout history, where investors can throw capital at several different stocks and see a good return. Although, once the tide turns the true fundamentals of these companies are exposed. The difficult part in all of this is that even the best companies can get unfairly damaged and scathed, and so it is the role of the investor to determine if the decline is warranted or not. In bull markets, it is easy to get distracted by the day-to-day price and get swept up in the euphoria, but in bear markets, this is where we find ourselves picking up the pieces to assess what is damaged but not broken, and what is likely beyond repair.
We will briefly touch on a few of these key investment ‘actions’ in the sections below.

Time to Build One's Investment Positions
Hindsight is 20/20 and every investor has once said ‘I wish I bought more at those lower prices’ or ‘if we see another big correction I’ll buy more at the bottom’. These are logical statements if the goal is to maximize one’s returns, but in practice, it is often a difficult task to carry out. While periods of steep corrections and bear markets are likely not to yield the best returns in the short term, they are typically some of the best buying opportunities historically. Bear markets and large corrections like the one we are in now make for good opportunities to build on positions that we have conviction in.

A Time to Research and Reinforce Investment Theses
Bear markets and corrections are the quietest of times in the market, and this is a good time to regather and center oneself and focus on what the future potential holds for our investments. In bull markets, there can be a lot of external noise, ranging from speculative bubbles and FOMO to missed entries and a plethora of opportunities, but in a bear market, the silence allows us to firmly plant our feet in our holdings. This is where the studying and research part comes into play. Bear markets and steep corrections can be some of the most opportune times to assess one’s holdings and determine if we are truly aware of what we own and why we own it.
Take for instance an investor that purchased Apple (AAPL) in March of 2014. That investor would have returned roughly 70% within the first year and would likely be feeling quite confident about that investment.


Fast forward to the following year in March of 2016, that same investor would have lost half of their gains over a nine-month period and might be tempted to sell and ‘stop the bleeding’ if they did not have deep conviction and a long-term vision of what they own.


Jumping ahead by one year again to March of 2017, we can see that if the investor held on through that 27% decline, they would once again be in a good position.


This is why we place importance on knowing what one owns and having the conviction to hold through large declines.

Build a Strategic Plan for Future Bull Markets
The financial markets have a tendency to ebb and flow, and this is partly due to economic reasons and also partly due to the human emotions of fear and greed. There will be times when stocks are in an ‘oversold’ position and there will be times when they are ‘overbought’, and while determining these conditions can be quite challenging, we want to plan and strategize for executing to portfolio rules that we have set in place for ourselves. This may come in the form of cash allocations, sector weightings, or single-stock concentration levels.

Time to Build an 'Iron Gut'
The stock market wouldn’t be what it is without periods of gut-wrenching declines and day-to-day rollercoaster price action. Building an ‘iron gut’ or being able to stomach large drawdowns is a key component to investing, as this is where one’s conviction is truly tested. It is difficult to watch one’s investments decline day-after-day and by large percentages, but a lot of money can be made in the long run by having deep-rooted conviction, holding through large drawdowns, and seeing it through to the other side. Watching the market decline is a part of the game, just as much as partaking in the large upswings are, and the key component to all of this is being mentally aware that large declines occur, and some odd 125 years later, there is not much new that the stock market has not seen at this point. It is important to not impulsively panic sell during times of large drawdowns.
Since 1946 the S&P 500 has faced a 5% to 10% decline 84 times, 10% to 20% drawdowns 29 times, and 20% to 40% corrections have occurred nine times. This works out to on average a 5% to 10% decline occurring just over once every year, a 10% to 20% decline occurring every three years, and a 20% to 40% decline occurring every eight years. Knowing this, when we see declines of these magnitudes in the market, it really should not surprise us, as the market has endured these time and time again. Currently, the S&P 500 is down roughly 15%, and according to the estimates below, 10% to 20% declines occur about every three years. The last 10% to 20% decline that we saw in the market was in late 2018, which would put us around the three-year mark.

Source: Guggenheim

Concluding Thoughts
To end this market update, we want to leave our readers with a quote: “Sometimes you’re flush and sometimes you’re bust, and when you’re up, it’s never as good as it seems, and when you’re down, you never think you’ll be up again, but life goes on.”
We believe it is best to avoid panic selling, continue to build (research positions, accumulate, develop an ‘iron gut’), and by studying the past, we can become mentally prepared for any future declines.

Disclosure: Analysts of 5i Research responsible for this report have a financial or other interest in AAPL.The i2i Fund does not have a financial or other interest in any of the securities mentioned.


Best wishes for your investing!