Stock Market Updates from 5i Research - April 1, 2021

New Report 

We have a new report on Magellan Aerospace Corp (MAL). This company manufactures aircraft components and services aircraft manufacturers globally. The company has done well in maintaining and growing the dividend despite the COVID shock to the industry. We think MAL is well-positioned to benefit from a recovery in the airline industry while providing low downside risk for income-seeking investors. 

Read the new report by 
logging in here!


Report Updates

We have an updated report on Chartwell Retirement Residences (CSH.UN). CSH is well-positioned compared to peers and vaccine rollouts should reduce risk. The company continues to pay a solid distribution and interestingly trades at a discount to its historical premium valuation. However, a slow recovery is expected. We have maintained our rating. 

Read the latest updates by 
logging in here!


Market Update

The recent interest rate scare has spurred a market rotation from growth stocks into value. Almost any company that had good performance heading into March saw weakness regardless of the fundamentals. In many pockets, stocks were down 30% in contrast to markets that were flat or up. The table below displays returns, which hides a lot of the volatility underlying the markets.
 

 
The market returns compared to volatility within the markets highlights that this appears to be an equity market rotation opposed to assets going from equity to fixed income or cash. This is where one can have certain sectors decline, but other areas offset it and potentially lift the broad markets. 
 
If we are indeed seeing a rotation, what exactly performed well and what lagged? We looked at the performance of underlying stocks in the TSX composite and S&P 500 and separated out companies that were above the market performance over the last month, and companies that were below the market performance. This essentially creates a ‘winners’ and ‘losers’ bucket. Then, we wanted to see what the general composition of companies looked like in these two buckets. The below table highlights what we found.
 


The results seem to align with the general commentary investors are hearing, that a lot of the companies that have fared well in the last month or two have tended to be lower-quality value names. In the S&P 500, we see that the general trend of ‘winners’ looks to be more value-oriented. Of interest though, the ‘winner’ basket also appears to have lower-quality balance sheets (lower current ratio and higher debt/equity) as well as a lower average return on equity (ROE).
 
The TSX actually has a bit of a different dynamic, with what looks like higher-valued stocks doing well. We think this is more of an ‘anomaly’ in that a lot of this probably relates to energy companies that show high earnings valuations but would more than likely look cheap on other metrics such as price/book. Regardless, the trend around fundamentals remains the same with lower quality balance sheets appearing to outperform. Similar to the P/E ratio, ROE is a bit skewed due to commodity companies being a larger part of the ‘loser’ bucket. 
 
As always, diversification and time frame help protect from these types of risks. If an investor did not own lower-quality value in the last month, they probably felt the pain a bit more than the markets show, but it is a single month in a long-term endeavour and being properly diversified allows an investor to ‘fight another day’. 






Model Portfolio Updates
Changes as of market close on April 1, 2021.

Model Growth Portfolio
New 1% position in Mission Ready Solutions (MRS)
MRS company sells nylon protective gear and soft armor ballistics to protect military personnel from injuries. This is a small company that has strong recent sales traction and high revenue visibility with its current backlog of orders. Revenues grew from $3.1 mln in 2018 to $21 mln in 2019 to $60.7 mln in 2020. The company was also cash flow positive in the most recent quarter and no analyst coverage could mean potential price discovery. Insiders also own 11% of shares and the company is revamping operations with new management. We like what we see here so far and are starting with a small position. 



Best wishes for your investing!

www.5iresearch.ca