Market Commentary

May 2021

Fewer Rabbits in the Hat

With most of Q1-2021 earnings in the books, 2021 estimates for the S&P 500 are up about 16% on the year.  Had the index simply risen with estimates, it would also be up 16%.  Instead, the S&P 500 is up about 12%.  The index multiple is contracting. 

There are a few reasons why this should worry investors.  First, there probably aren’t many more double-digit earnings revisions ahead.  Second, we may not be able to count on low bond yields forever.  That means the tide may no longer lift all boats, making stock selection all the more critical.

Just to stay where it is, the market will need a steady diet of cheap money, risk-on equity premiums AND upwards earnings revisions.  To illustrate:

  • If the Treasury yield hovers at 1.6%;
  • The earnings yield premium continues at 2.9%; and
  • 2021 earnings come in 10% higher than the current estimate of $174 …

…  the index reaches 4,253 by next March, only slightly above its current level (i.e. $174 x 110% / 4.5% earnings yield).  If Treasury yields or the risk premium rises, such that the earnings yield expands to 5%, the implied S&P target falls to 3,828, or 9% below current levels.

The potential for upwards earnings improvement is also not a given.  Current-year S&P 500 operating estimates are already above 2019 levels in all but three sectors:  Financials, Industrials and Real Estate.  Even if these sectors were to jump to 10% above 2019 levels, we estimate overall 2021 S&P earnings would rise less than 5% from current levels.

Similar to the S&P, we think it will be hard for most TSX sectors to improve on their estimates from here.  Market-weighted forecasts for 2021 now exceed 2019 earnings levels in 7 of 10 sectors, the exceptions being: Communications (-7% vs. 2019), Real Estate (-36%) and cannabis-heavy Health Care (-13%).  On the plus side, Consumer Discretionary (+12% vs. 2019) and Staples (+28%) are up significantly, as are Utilities (+34%).   

We see opportunities in individual names.  Our funds continue to benefit from the ideas generated by one of the best equity research teams on the street, Veritas Investment Research.  Following their advice, we are diligently sticking to companies with strong free cash flows, high quality reporting and room to improve their outlook.  The flow of cash onto the balance sheet should grow equity value, even if multiples continue to contract. 

Year-to-date through May 31st, our Absolute Return Fund has returned 13.5%.  Our Canadian Equity Fund has returned 14.4%, equal to the 14.4% for S&P/TSX.  (Performance based on F series). 

We thank you for your continued support.

Your fellow investors,

Anthony Scilipoti
Sam La Bell


Veritas Absolute Return Fund May 2021 Performance Sheets
Veritas Canadian Equity Fund May 2021 Performance Sheets

April 2021

April 2021

Will the Beats Go On?

The story of this earnings season has been the steady stream of Q1 earnings beats and upward revisions for 2021.  In a typical quarter, roughly 71% of S&P 500 companies beat analysts’ earnings estimates; so far, for Q1-2021, that figure is 87%. 

Predictably, the steady stream of earnings surprises has resulted in a series of upwards earnings revisions that now predict 2021 earnings will far exceed those in 2019. 

Two things stand out for us:  the relatively narrow breadth of these earnings increases and the fact that, in many sectors, updated estimates now far exceed pre-pandemic earnings.  In terms of 2021 bottom-line earnings estimates:

  • For the S&P 500:  2021 earnings forecasts are up ~17% YTD and now exceed 2019 levels by ~26%.
  • For the S&P/TSX:  2021 earnings forecasts are up ~15% YTD and now exceed 2019 levels by ~17%.

For the S&P 500, Financials, IT and Communications account for close to three quarters of this year’s upward move in 2021 operating estimates.  Add in Energy & Materials, and this rises to 92%. 

For the S&P/TSX the sector mix is even narrower.  Financials, Energy and Materials account for ~87% of the YTD increase in 2021 bottom-line earnings estimates.   (S&P/TSX earnings based on Refinitiv data.)

The lack of breadth means many sectors have yet to recover their pre-pandemic outlook.  And the driving forces of this year’s earnings momentum are in sectors that are prone to shorter-term reversals.  With markets still debating the direction of interest rates, inflation and government fiscal policies, higher earnings expectations leave considerable room for sentiment and valuations to soften from here.

On the whole, we think this year’s broad sector differences and uneven progress so far, set up favorable opportunities for stock picking.  As always, our funds benefit from Veritas’ unique forensic-accounting based research, which remains among the best equity research on the street. 

Year-to-date through April 30th, our Absolute Return Fund has returned 8.96%.  Our Canadian Equity Fund has returned 10.71%, versus 10.63% for S&P/TSX.  (Performance based on F series). 

We thank you for your continued support.

Your fellow investors,

Anthony Scilipoti
Sam La Bell

Veritas Absolute Return Fund April 2021 Performance Sheets
Veritas Canadian Equity Fund April 2021 Performance Sheets


March 2021

March 2021

Pacing the Marathon 

Relative to the last thirty years, the TSX sprinted out of the gate in 2021, posting a top ten Q1 return of 8.05%.  Our Canadian Equity Fund (CEF) continued its outperformance in Q1 and is now up 20.3% over the last six months – 251 basis points (bps) ahead of the Index. Meanwhile, our Absolute Return Fund (ARF) bested the Index by 300 bps in March and is up 7.7% YTD with low volatility and correlation to the S&P/TSX. (Performance based on F Series Units.)

The marathon is just beginning, however.  Q1 and Q2 returns tend to be negatively correlated, with a strong Q1 typically followed by a weak Q2.  While not necessarily guaranteeing a reversal, experience suggests that investors should prepare for a choppy second quarter.  Of the 11 times where Q1 returns have exceeded 5% since 1991, in Q2 the TSX has been flat to down 6 times, with returns averaging 1.8% overall. 

They say never look back until the race is over.  But with more than a year passed since the pandemic lows of 2020, it may now be safe to look back, if only to acknowledge how extraordinary the rebound has been.  Early U.S. data suggests corporate profits slipped to 8.7% of national income in 2020, down from 9.0% in 2019, while national income contracted by just 2.6%; the result was a relatively shallow drop in corporate profits of ~6%.  Public company earnings, which are typically more levered, declined by more, with S&P 500 operating earnings estimated to have dropped 22% last year.

But how much worse would things have been had the U.S. government not upped its deficit to ~14.7% of national income, from 5.8% in 2019?  This was a much more dramatic intervention than in 2009 when the deficit hit 10.9%.  Last time around, deficits continued into 2010 (10.7%) and 2011 (9.6%), helping shore up the economy and stock markets. 

U.S. legislators along with their Canadian counterparts appear to understand the need to keep spending.  The U.S. has already rolled out another US$1.9T stimulus package (~9% of GNP) with the Biden administration announcing plans for a US$2T infrastructure package over the next eight years.  The go-forward effects on markets may be muted, however, as the administration plans to fund most of its infrastructure plan by hiking U.S. corporate tax rates to 28% and tightening offshore profit rules.             

We anticipate U.S. stimulus cheques will continue to buoy markets in the early parts of Q2, with volatility returning over the remainder of the year.  CEF is invested to benefit as the economy ramps back up, while defensively positioned should reopening take longer than expected.  ARF is similarly positioned to capitalize on the transition, using strategies to enhance returns and maintain its low correlation and volatility versus the market. (For further details please see our monthly commentaries, linked below.)

In our view, markets are facing a much different race in 2021.  What worked last year is unlikely to work again. Managing this year’s risks requires even greater focus on the fundamentals and careful stock selection.  Research still makes all the difference.

We thank you for your continued support.

Your fellow investors,

Anthony Scilipoti
Sam La Bell

Veritas Absolute Return Fund March 2021 Performance Sheets
Veritas Canadian Equity Fund March 2021 Performance Sheets


February 2021

February 2021

Tantrum Part II 

There was no shortage of commentary about frothy markets in February, even as indices marked new all-time highs.  With valuations continuing to climb, it also doesn’t take much to rattle markets these days.  Exhibit A is the rise in long bonds, which were up 45 bps last month, reminiscent of the beginnings of the 2013 Taper Tantrum, when U.S. 10-year treasuries rose 120 bps.

In 2013, the Fed triggered a sell-off by saying it would slow its bond-buying. This time it only took the Fed saying that it was happy with its current pace.  And unlike 2013, when the Fed reacted to the tantrum by launching a new QE, this time around the Fed seems more reluctant to fuel the market’s already-rampant speculation. As a result, equity investors remain on edge, particularly where valuations are stretched and growth faces a re-rating.  With certain companies investing their cash balances in Bitcoin, we don’t think analogies to March 2000 are too far fetched, at least in some corners of the market.

Most recently, we have highlighted Technology and Renewables as two areas of concern. These sectors now appear to be correcting. We also see pressures ahead for perceived ‘work-from-home’ stocks, as many valuations have raced ahead of fundamentals. With the pace of reopening likely to be uneven and many stocks already recovered to pre-pandemic levels, we think research and active stock-picking will be critical this year and next. We are proud to be backed by some of the best research on the street. 

We are positioned for the market’s change. Over the last six-months, Our Canadian Equity Fund is up 12.77%, 175 bps ahead of the S&P/TSX Index.  Our Absolute Return Fund is up 6.77%.

Thank you for your continued support.

Your fellow investors,

Anthony Scilipoti
Sam La Bell

Veritas Absolute Return Fund February 2021 Performance Sheets
Veritas Canadian Equity Fund February 2021 Performance Sheets


January 2021

January 2021

Barbarians at the Gate

This past year’s market rally has been chalked up to many things – helicopter money, rock-bottom interest rates, FOMO, etc. – but one of its ugly truths was laid bare in January:  global markets have become overly dependent on a quasi gold rush of new retail money.  

GameStop, AMC and Blackberry are merely the latest symptoms.  For some time now, investors have been paying more attention to themes and storylines than to balance sheets and income statements.  And in the short term, it must be said, it is hard to distinguish between this herding and a successful investment strategy.  

The universe of public assets in any sector tends to be relatively fixed – IPOs and secondaries remain a small percentage of market cap every year – so when new money flows in, asset prices are bid up.  The new money also supports trading, with the increased liquidity, all else equal, making assets more valuable.  It should be no surprise that Robinhood makes nearly all of its money from selling its users’ liquidity to institutional investors.  

The risk is that the latest wave of retail money is banking on quick gains and a short turnaround.  If this year’s asset prices are not matched by actual value creation – income, cash flow or otherwise – and relatively soon, sentiment could reverse and new retail money could dry up.  The resulting correction may not be so orderly.

During the extreme volatility, both our funds continued to outperform the market in January with less volatility, as we stick to the things that have always mattered: transparent reporting, excellent management, strong corporate governance, and growing cash flows.  

Your fellow investors,

Anthony Scilipoti
Sam La Bell

Veritas Absolute Return Fund January 2021 Performance Sheets
Veritas Canadian Equity Fund January 2021 Performance Sheets

December 2020

Playing Offense and Defense

Peace of mind was at a premium in 2020, with the S&P/TSX posting two of its worst months in twenty years (March was #239 of 240 and February #231) as well as two of its best (April #1, November #3). Volatility on the index more than doubled versus its long-term average. The incredible rally that brought the S&P/TSX back to life in 2020 was only lacking for two things: breadth and fundamentals.

In terms of breadth, Shopify contributed 4.7% of the 5.60% TSX return on the year, while Materials stocks added 3.4%. The remainder of the TSX composite was down 2.5% on the year. In terms of fundamentals, based on Reuters data, TSX stocks are now priced at more than 17x next-twelve-month earnings, versus just over 15x at the end of 2019, before the pandemic – despite expectations that 2021 earnings will be approximately 3% lower than 2019 levels.

There are few ways for a negative on earnings to trigger a multiple expansion: if investors are suddenly more optimistic than analysts, if new money moves into the market or if interest rates collapse. Buyer euphoria, record high stimulus spending and rock-bottom interest rates are clearly factors driving up current markets, however these factors can reverse quickly, which is why we continue to be cautiously positioned against the market’s rally.

With our focus on quality and capital preservation, the Veritas Canadian Equity Fund outperformed the index in Q1-2020 and again in Q4-2020. Most importantly, the fund is well positioned to both capitalize on the reopening theme and protect capital, because the timeline remains uncertain. In times like these, the role of the Veritas Absolute Return Liquid Alternative Fund has never been clearer. The Fund returned 3.27% in 2020 after fees, with less than half the volatility of the index and near zero correlation.

Diversifying portfolios against market exposure should continue to deliver benefits in 2021.  

Thank you for your continued support and trust.

Anthony Scilipoti
Sam La Bell

November 2020

What A Difference A Month Makes

At the end of October, the world still did not know if any vaccines would work, or if effective inoculation programs could be rolled out globally by the end of 2021.  Now, with seemingly every vaccine reporting promising results (even Sputnik V), confidence in a full economic recovery appears to have skyrocketed.  November was, in short, a great month to be fully invested.

Outside of the Materials sector where ~60% of stocks posted negative returns, more than 90% of TSX composite stocks were up and 60% of stocks were up by double digits.  In last month’s commentary we mused about how expensive both Tech and Materials were looking – while Materials traded down, Tech did not:  9 of 10 composite names in Information Technology beat the index.  In this case, investors appear to be betting that many of the societal shifts benefitting Technology will compound.  And the pursuit of growth over dividends continued, with stocks without yield posting a market-weighted +15.5% return versus +9.8% for dividend payers.

The question, of course, is how sustained the current rally might be.  Here we see a few potential risks:  rising interest rates, particularly if the Fed backs off its record bond-buying program in 2021; a normalization of earnings yields on stocks relative to bonds; and the potential for more normal levels of inflation.  Any or all of these factors could generate headwinds next year, even if the worst set of market outcomes now appears to be off the table.

Our funds did well in November, with the Canadian Equity Fund outperforming the index and the Absolute Return Fund posting a solid positive return, extending its performance for the year.  We continue to be cautious as we think the vaccine news has brought on a period of high expectations that may take longer to realize than may be imbedded in certain stock valuations. The flip side of anticipation is often disappointment. 

In our experience, companies are just as likely to stretch to meet expectations as they might be to gloss over poor performance.  We remain on the lookout for opportunities, both long and short.

We thank our fellow investors for their continued support.

Anthony Scilipoti
Sam La Bell