Stock Market Updates from 5i Research - March 2, 2021

Report Updates

We have report updates on Gildan Activewear (GIL), Lightspeed (LSPD) and A&W Royalties Income Fund (AW.UN). All are positioned well for an economic recovery, however one received a downgrade due to an elevated valuation. Log in and read the reports to see our thoughts.

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Market Update

Markets are moving fast in both directions lately, with broad market swings in excess of 1% being almost common over the last month or so. Meanwhile, certain sectors or niches in the markets are seeing even wilder swings. With all of this volatility and 'FOMO' hitting closer and closer to home for investors, we wanted to touch on a few investment reminders:

1) Beware chasing the next hot theme - There are a lot of themes (EV, SPACS, etc.) that are moving and showing at best, stretched valuations. It is important to remember that these things can go both ways. While a stock or sector might be up '100%' in less than a year, these large runs also mean that volatility is likely to be higher as well, and say a 10% move any given day is probably not out of the ordinary. So, while names like this could very well continue their upward trajectory, this does not mean they will not see a significant and material decline in a short amount of time and on no news. In short, the latest hot stocks, spaces or themes could continue to do well but high volatility should be the default assumption and an investor should have eyes wide open and understand the risk profile if deciding to invest in these spaces. 

2) An investor does not have to be part of every theme - This is parallel to chasing hot themes and is a reminder that an investor does not need to chase the latest theme at all. Whatever stock or sector is moving is not the first one to see a move like this and it won't be the last. No investor can/will be part of every big theme or trend, so do not feel the need to chase after the current one, there will be more and it is ok to be on the sidelines from time to time.

3) Don't forget about the fundamentals - We are believers that over time, the fundamentals will take over one way or another. We are seeing a lot of pre-revenue companies or even companies that simply have a concept, and not an actual product or service, trading at levels that typically an established, high-growth company might trade at. At some point, these companies need to show some results to support the valuations. Some of these companies very well might do so but with nothing to go on in terms of a track record or market acceptance, it becomes more speculation as to whether the fundamentals will actually 'arrive'. Companies are being given some leeway and time to show that the fundamentals and results are indeed on their way but markets will not wait forever for the tangible results. 

This also brings up a trend we are seeing in the Q&A where we are getting a lot of questions on pre-revenue companies, often at quite a low market-cap. As a general rule, pre-revenue and/or sub $100 million market-cap companies are just not our 'cup of tea'. We do kindly ask that members do their best to refrain from asking questions on these types of companies. Simply put, we do not really have a whole lot to add on these types of names and more often than not, pre-revenue companies are of a speculative nature. As always, this space could do well but it is just not our 'style'. 

4) If one wants to be exposed to the speculative areas, understand and accept the downside scenario - When different types of investments are moving so strongly and fast, it can override a lot of the 'rational investor' parts of the brain and lead to an investor taking risks they may not traditionally take or be comfortable with. If an investor wants to have a speculative portion of a portfolio, this is 'ok' but it is important that an investor has thought about and understands the downside scenario. When things seem to only 'go up', it can be easy to forget that they can also 'go down' and do so very quickly.

We try not to be wet blankets most of the time but some speculative areas of the markets are heating up. In turn, it can always be helpful for an investor to just take a step back and assess the risks they see in a portfolio and whether one is comfortable with those risks. All might be in order, but in times of increased volatility, taking a hard look at one's portfolio a bit more frequently might be prudent.
 

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