Tarek 00:00:00 The Magnificent Seven. Blink, if you will. There was a chink in the armor. There was, you know, the the the way the market moved, it changed a little.

Mark 00:00:08 This is the problem with portfolio managers. Too many of us think we’ve got great intuition. We’ve got great minds, we’ve got brains that can. And you know what? We blow it all the time when we pick stocks. But running a system that has a screen on it, I think is the way around that those.

Tarek 00:00:22 Returns are actually coming from smaller cap stocks. And that’s a good thing. And that’s part of the rotation we predicted.

Mark 00:00:29 And for our fundamental strategy we’re going to see this groundswell of fundamental companies, companies that make real things that produce real services are going to start performing better.

Tarek 00:00:39 Hightower talk listeners, as you can see, we’ve got a great episode planned for you, and we’ll get back to it in just a minute. Now, if you’re not currently a tower client, but you have questions about your investment portfolio, or maybe you feel like you’re not receiving the best service at your current firm.

Tarek 00:00:54 Please reach out for an information only, no pressure discussion. We would love to hear from you. The email address is in the episode description. Now, if you are a tower client and you have questions, we’d love to hear from you as well. I think you know how to get Ahold of me, but if not, that email address in the episode description will work as well. All right, let’s get to today’s show.

Mark 00:01:15 Welcome here. We’re delighted to have a little bit of your time in July 2024. Thank you for making time to listen to this. We have only a couple of, things that we want to talk about. One is this rotation in the market. We have been anticipating that possibly there will be a rotation from this concentration of these few stocks, the tech stocks, over to the broader market. It looked like it might have started last week and is going to talk about that. Then the second item that we’re going to talk about is a new dividend portfolio that we’re putting together.

Mark 00:01:47 Just wanted you to know in case that would be of interest to you. Number one, what’s happening in the market. Tarek.

Tarek 00:01:53 Awesome. Thanks, Mark. so I’m certain that all of our current listeners listen to the last episode, but if not, I am loathe to. But going to give you a little bit of homework. Go ahead. Listen to the previous episode where we talked about the concentration in the US market in particular. it’s The Magnificent Six or the Magnificent Seven. You do. If you’ve listened to any sort of financial press, you’ve heard about these companies, these big companies. We’ve all heard of Amazon, Apple, Google, Nvidia, meta and Microsoft that have just been carrying the US stock market and in fact, the world market, they are responsible for the vast majority of the returns in the S&P 500 in the last year. And what we have been saying is this concentration is too high. Those six names represented, over 33% of them are over 32% of the market. And we think a rotation is coming.

Tarek 00:02:45 The valuations are outrageous. These are big established companies. We understand that. But the valuations are still very, very high. We talked about the high price.

Mark 00:02:52 What does that mean. What does that mean. Outrageous piece of.

Tarek 00:02:56 Yeah, we talked about Nvidia’s PE at the time of our last episode. It was 76 times earnings, maybe almost 77 times earnings. So that’s 76 years of earnings in the current price. Not to say Nvidia is not making a lot of money, but that’s just very, very high. now it seems as though in the first two weeks of July we’re recording this. there was the Magnificent Seven. Blink, if you will. There was a chink in the armor. There was, you know, the the the way the market moved, it changed a little. So there’s a couple reasons for that, and I’ll get into. But to demonstrate that the S&P 500 from the end of June to July 12th, that’s when roughly we’re recording this, the S&P 500 is up 2.9% now usually or historically for for the concentration we’ve seen most of that return has come from the Magnificent Six that I listed previously, but Amazon didn’t hit that number.

Tarek 00:03:53 Google didn’t hit that number. Meta was negative over that time period. Microsoft didn’t hit that number. So those returns are actually coming from smaller cap stocks. And that’s a good thing. And that’s part of the rotation we predicted. And you know I think we do a good job. If you’re a regular listener of saying, when we miss a call, when we call a recession, it doesn’t happen, we’re happy to say, hey, we missed that one, but we’re also going to take credit for this one because we definitely said this market rotation is coming, and we’re starting to see signs of it right now.

Mark 00:04:24 What this does for us is it helps serve the the strategy that we have. We do not have a strategy that will rotate into these sort of hot areas of the market, we do have a momentum strategy, but we limit our exposure in those to only 25%. We will not if there are 12 stocks in that momentum portfolio, and there will only have three stocks in an area.

Mark 00:04:47 Well, to to really be in the S&P over the last 18 months, you needed to have six names in there and they would have been screened in. But we wouldn’t have that type of concentration. Our limit would be three. What’s going to happen next is our strategy of not being overly concentrated will allow us to participate in the next ones that are starting to move. So we think that this is good both for the momentum strategy that we have. And number two, for our fundamental strategy, we’re going to see this groundswell of fundamental companies, companies that make real things that produce real services are going to start performing better. Where do we go on multiples on those magnificent six seven stocks? If they’re 70, what should they. What should the multiple be?

Tarek 00:05:32 Well now multiples are usually higher for tech stocks. You know I you know I hate to be an aggressive bear to be doom and gloom. But I think it’s reasonable to assume a sizable cut. You know once. rates start to come down in the US.

Tarek 00:05:48 And I think that’s part of the reason why we’re seeing this, all of a sudden, a number of other companies become very, very attractive. and capital gets deployed there.

Mark 00:05:58 Right? So if the market multiples should be between 18 and 22 and these are at 70, should it come back to 30. Yeah, probably earnings will grow a little bit and the stock price will come back anyway. Enough on that. we’re launching this new strategy. I think it’s a really interesting strategy. In fact, we will see it. Elaine and I will put some of our money into it to to be the first account to go into it. It’s the dividend yield portfolio. I’m really quite excited about it. Just going to talk a little bit about how what makes it the key that I want to say is it is a mathematical screening system again. This is the problem with portfolio managers. Too many of us think we’ve got great intuition. We’ve got great minds, we’ve got brains that can. And you know what? We blow it all the time when we pick stocks.

Mark 00:06:46 But running a system that has a screen on it, I think is the way around that. And take it away, Terry.

Tarek 00:06:52 Absolutely. So we’re happy. You know, we’re seeking high dividend paying stocks in Canada on the TSX. And so of course we’re going to screen for high dividend yields. There’s going to be a minimum market cap. We don’t want any junior really really small companies. But the big thing we’re looking for is a dividend payout ratio. So that means how much of a company’s cash are they paying out as dividends. Right. So if you’re paying out over 100% of your earnings as dividends, you can’t do that for very long. So we’re screening for the payout ratio. dividend coverage. What that means is how much? How much of the dividend is covered by. Yeah, the cash flow or the earnings of the firm as well. So we want to see a coverage over a certain amount. And then the growth rate of the dividend over three, five years, different things like that.

Tarek 00:07:36 Just to make sure that we’re picking companies that have high dividends, sustainable dividends. So they’re not just high currently because they have to maintain their dividend, but they can’t do that for very long. and that they’re going to be paying that dividend consistently going forward.

Mark 00:07:52 And maybe even growing it. So what if you were to put together this portfolio right now, what we’ve talked about, how many stocks and what’s the yield.

Tarek 00:08:01 So we’re looking at putting 20 stocks in this portfolio going to be well diversified. We’ll have some limits around sector to make sure we’re representing the entire Canadian market. Excuse me. And the yield we’re seeing based on what we’re currently running is around 6%, maybe a little bit higher. and we’re really, really happy with that yield because we have to remember, dividends are taxed more favorably than, than income in Canada or in most places. And so, 6% is is much higher than 6% on an interest earning investment or a bond or, you know, GIC or something like that. Right.

Mark 00:08:35 So the using just an envelope, you quickly look at it, you’d say that, approximately, you know, the exact math would be a little bit different than this, but approximately a 6% dividend yield would be equivalent to what type of bond yield?

Tarek 00:08:52 Probably around 8%.

Mark 00:08:54 Yeah, only about 8%. Yeah. Yeah.

Tarek 00:08:56 So what we look, if you’re at the highest tax bracket in Alberta, it’s around 50% for income. but only 34% for dividends at the same tax bracket. Right. So the substantial savings there and so, you know, that that that results in. Yeah. You know, there is.

Mark 00:09:14 Really good logic. The government has really good logic in why they tax dividends at a lower rate than bonds. It’s not because it’s higher risk. The fact is it’s because the company has already paid corporate taxes on it. Yeah. So to tax it as if it’s interesting would be saying it was double taxation anyway, but it’s not as onerous. So that’s the reason is that the the company has already paid taxes.

Mark 00:09:41 It’s after tax money that’s paid. The question that I want to ask now is what what’s the timeline on getting this in place? When could people buy put money into this strategy?

Tarek 00:09:53 Well, if you’re interested in the strategy, you know, we understand it’s a new strategy. Mark’s going to have it in his account. We have every strategy we offer in Miner Mark’s account. let me know. we’ll obviously be reaching out to clients. We feel like this may be applicable to. At least I will. now, in terms of when, honestly, it won’t take more than a few weeks, I believe, to get this this setup. We’re very close. We’ve been working on it for some time. So if if you feel comfortable and are interested, we can definitely put that.

Mark 00:10:21 So we might be able to do something September 1st. the other thing is we’ll be rebalancing these. Right now we’re thinking of an annual anniversary rebalance on each account. So every account will have its own anniversary date or anniversary month.

Mark 00:10:35 And in the month of that anniversary, we will rebalance each account back into the equal weighting of 20 stocks. Okay, I think we’re done.

Tarek 00:10:45 I think so, thank you.

Mark 00:10:46 Thank you for your time, Tarek. Wrap it up.

Tarek 00:10:48 All right. Thank you for tuning in. Appreciate it. If you have any questions, concerns or if you want to talk about your own investments. Please reach out to us. Thanks.