Gordon Reid, president and chief executive officer, Goodreid Investment Counsel

FOCUS: U.S. equities 

MARKET OUTLOOK:

Banks are only viable institutions with the trust of their customers. By definition, banks rely on deposits to fund much of their business activity, such as commercial loans, mortgages and other debt offerings. Because they are vital to the economy, governments oversee and regulate banks rigorously. However, in this age of digital access, the concept of “a run on the bank” is quite different than it was 90 years ago at the start of the Great Depression. Old photos illustrate long lines of people waiting their turn to withdraw their money.

Today, instant access allows depositors to withdraw funds anywhere, anytime. As we witnessed last weekend that changes things. Even with enhanced regulations, rigorous stress tests and reporting transparency, liquidity risks have risen. Without due recognition, the actions of the U.S. Treasury last weekend to de-facto guarantee deposits have changed the landscape dramatically.

Banking in the U.S. is quite different than in Canada. For starters, there are close to 5,000 banks in the U.S. compared to just 34 in Canada. Many U.S. banks are quite small, serving niche markets, from both a focus standpoint and geographically. Such is the case of Silicon Valley Bank (SVB), a bank with a largely one-dimensional funding source, tech companies and tech start-ups.    

A brief explanation of what happened to SVB is in order. The history of central bank action is that inevitably something will break. Raising interest rates as aggressively as the U.S. Federal Reserve has done has left many portfolios with unrealized losses in their fixed-income holdings. This includes individual accounts, banks, insurance companies and government balance sheets. If these entities have enough in reserves, the losses do not need to be realized. The embedded unrealized loss simply slowly bleeds out through opportunity cost until the maturity of the underperforming bond. At that point, it pays 100 cents on the dollar. In the case of SVB, the bank did not have sufficient reserves to pay fleeing depositors, forcing them to sell bonds at losses. This forced them to raise additional capital, setting off alarm bells and a fear of a credit downgrade, leading to a “run on the bank.”

Exacerbating the problem, SVB’s management increased risk by allowing an asset and liability mismatch. Meaning bank assets, or bonds with longer duration suffering financially as rates rise, versus bank liabilities, or short-term rates on deposits becoming more costly as rates rise. The conclusion is a perfect storm for SVB but very unlikely to be a contagion event, in fact owning bank stocks may be safer than ever.

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TOP PICKS:

AGCO (AGCO NYSE)

Latest Purchase March 2023 at $142

Favourable agriculture prices and farm economics are supporting robust demand for farm equipment. AGCO, like its competitors, is working through supply chain issues, focussing on higher margin products, expanding its geographic footprint and using the benefits of precision farming to incent buyers. At 9x forward EPS AGCO is a buy.

Bank of America (BAC NYSE)

Latest Purchase March 2023 at $31

The SVB-led banking crisis of 2023 is unlikely to impact BAC from a liquidity or operational standpoint but could certainly change the macro landscape. BAC is trading at multi-year lows on several valuation metrics, such as price to tangible book value and price to earnings. As the dust settles, BAC will begin to look very attractive.

CVS Health (CVS NYSE)

Latest Purchase March 2023 at $77

CVS is a powerhouse in U.S. healthcare, sporting a major insurance division, a pharmacy benefit manager, and a fulfillment division of 10,000 physical locations, filling one billion prescriptions per year. It has been increasingly acquisitive, spending almost $20 billion to add Signify, a tech-driven home-based health option and Oak Street, a rural focused healthcare facility. At 9x earnings and with significant free cashflow, this defensive holding is a buy.

PAST PICKS: March 10, 2022

Booking Holdings (BKNG NASD)

• Then: $2,030.36
• Now: $2,441.04
• Return: 20%
• Total Return: 20%

Honeywell International (HON NASD)

• Then: $184.36
• Now: $187.51
• Return: 2%
• Total Return: 4%

Qualcomm (QCOM NASD)

• Then: $154.71
• Now: $117.42
• Return: -24%
• Total Return: -22%

Total Return Average: 1%