GVI Investor Market Update – December 12, 2022

Hi everyone. Let's look at the markets and the portfolio. I have got some brilliant pieces of analysis which have crossed my desk.

Well, let's just start off with the bigger picture, the macro picture as it were. Inflation is not just an American phenomenon, or even a British one, it is global. A lot of this being driven, of course, by hiking energy prices, but also by global quantitative easing, which has now come to bite after, what, over 12 years of central banks buying bonds and effectively printing money, you might say. It's now starting to bite all of a sudden simultaneously around the world.

What does that look like when we look at energy alone? Well, energy is a major component of that. As you can see, energy prices have doubled in the last two years globally, so all of those looking to blame their own domestic governments, there is an element of truth when your presidents and prime ministers say, "It's not just us." Some element of truth. Some countries have got it worse than others, of course.

Let's have a look at the markets then. This one I found interesting. When we look at indexes and you look at something like the S&P 500, which has a capitalization of about $36 trillion, the 10 companies on the left make up more than 25% of the index. You see those 10 companies? Apple, Microsoft, Alphabet, they make up 25% of the index. The rich are getting richer you could say, well, it's the same in the world of corporate.

What does this mean for us? Well, in one sense, nothing. So what. Does it mean we necessarily buy them? No, not necessarily. Although I do happen to own Apple, Microsoft, Alphabet, Amazon, United Healthcare, Johnson & Johnson. I did have Visa, but I don't at the moment. It is, to some extent, a bet on America. It's a bet on technology. It's a bet on the world when you have companies that large. Try not to read too much into it, but there is some importance to it. There's also some importance in terms of how the index is really a measure of those particular companies, and we are going to deep dive far more than just the headline companies.

Let's have a look at other countries. You can see China is catching up to the United States in many ways. The U.S. economy is about $23 trillion in size. It's got a debt of about $23 trillion as well. And the Chinese economy has now reached $17.7 trillion. (Doesn't mean I'm going to buy Chinese stocks, by the way.)

When it comes to ultra high net worth individuals, those with over $50 million, the United States is well ahead. You could argue that almost suggests China's wealth is more spread out or the data out of China's more skewed, but anyway. That's where China is and then Germany, Canada, India, Japan and France, they're the countries which follow the United States. The U.S. is way ahead.

Let's drill down to specific stocks and, as you all know, and just a reminder, my due diligence checklist from the hedge fund and what my team does in the office when we look at any stocks for GVI Investor is we go through factors of valuation such as price earnings, price earnings growth, price to book, price to sales, discount cash and so on. We go through growth, we go through income, we go through momentum, we look at the statistics around the company as well before we pick individual stocks.

The reason we do that is because of this chart here, which is from Bloomberg. What it showed is, what were the factors which influenced stock price movements in the second quarter of 2022? And they found that companies with high dividends tended to fall less.

Those which were growth companies tended to fall the most. Well, we don't try to gamble on whether a company is going to be in favor because it's a growth company or a value company or a high dividend or a volatility play. We try to tick all those boxes. So if the market happens to like high dividend stocks, then we will have stocks which are more resilient to falls because we'll have ticked that box. Equally, if the market has companies which are out of favor like growth stocks, well we won't fall as far because we didn't just pick growth stocks we picked high dividend growth stocks, therefore the high dividend part will make sure that we don't fall as much as the growth stocks fell. That's how we do it. That's why we tick all those boxes and I thought this was a good clever way of showing you that.

What do we look for? Well, we look for companies based on volatility, based on dividend, based on dividend growth, price momentum based on quality factors such as cash return on capital invested, value, and growth. So pretty much covered all of those bases. They are usually, by their nature, high liquidity companies as well, and most of them are fairly sizable. So we're pretty much ticking all those boxes.

Now as we approach 2022, you will be asking, "Alpesh, how will it look?" Well, I want to try and give you a little bit of good news. I think I said as we approached 2022, I meant as we leave 2022. S&P 500 returns after falling 20% from record highs since 1950, and what you find is that a year later, in most years, the market is up. On average it's up 15% and it is up 70% of the time. Given that we have now fallen roughly about 20% from record highs, that suggests over the next year, and certainly over the next two years, might not be bad at all. So I'm going to be getting a little bit positive on the statistics.

There's another thing here. The S&P 500 index returns from the hundredth trading day until the end of the year. Well, we're well past the hundredth trading day. And in most years when the year to date return on the hundredth trading day is negative, and you can see many years where that's happened, the return for the rest of the year tends to be positive and we've not quite had that massive positive rebound, but it does show that when it looks quite negative and dark, it's not too bad, actually.

The market scenarios, I love looking at bear, base, and best cases. S&P 500 cumulative returns during a recession. We're not necessarily at a recession right now, and I've shown this chart before, but I really want to reiterate it. We're not quite at a recession yet, but what you can see here is that actually the base case on average is a 16% return, so maybe we should look forward to a recession. Maybe that's the answer.

You might be worried about the Fed rate hike cycle. Well, when the Fed rates have been hiked during any particular cycle, the S&P index annualized return hasn't been too bad at all as you can see there. So again, that's not necessarily a negative. What we thought were negatives are not necessarily so.

Let's just look at the broader market and this is where we are. We have this downward channel and we've had it all year long where the market has fallen, okay, it might have a few times rising up and we've all thought, "Oh, is that the end?" And then it's fallen again. Then we thought, "Oh, is that the end?" It's gone up, down, up. Now the issue is it going to go this way or is it, as it has started doing, fall back off that upper territory and this is where it is.

Now, if it keeps sliding along there, then in about a year you'll be down 14%. If it, in actual fact, drops more sharply, you'll be down 31% in a year. Which of those is more likely? Well, right now certainly doesn't look like it's going to continue going upwards, which would've given us a 21% return if it continued going upwards at the rate it was previously. So where is it? Well, in the immediate present, certainly looks more like it's going downwards, and that means we're going to have to continue with our due diligence, which is fine by me. So whilst I gave you all the optimism, little bit of reason to be cautious and that's why you'll want to follow GVI Investor because we will be doing all that due diligence.

Our goals will be, of course, that we get the kinds of returns we had. We've just finished November this year. Well, when we finished November last year, we were up 54% with our picks and that's what we'll be looking for in next year, I guess not necessarily with these companies. After 12 months, we got out of them and thankfully we did because after that 12 month period they all fell because we'd sucked the marrow out of them, we'd sucked out the gains and returns and after they moved up say 208% or 137%, they were overvalued and so they then fell and that's why we got out of them after 12 months.

But the point is, if we get a good tailwind over the next 12 months, those are the kinds of returns we're looking for. Averaging 54% with some good numbers like that. That's the goal. Let's not take the eye off the prize. Let's not get too pessimistic and say, "Oh, it'll never happen. Oh, the good times are forever over." We will be doing our due diligence and that's the reason why. This is what we're after.

Let's look at our existing portfolio. This is where we are with Axcelis and you can see it's had a good run up recently. It's only slightly undervalued and you may well make a decision based on that. That one actually, we're at a good run up and it's hitting a bit of a support and if you are risk averse, you might get out. If you are still risk loving, you'll keep to the initial rules, which were as they are with most stocks, 12 month holding or if it drops 25% from the peak.

Lowe's, that's been a bit of a disappointment this year and you can see why we were fully expecting it to continue on. This upward generic trend sort of gone sideways here. However, the good news is on our analysis, and this is a discount cash flow analysis, looking at a company which is still 31% undervalued.

McKesson, it's been a fantastic one this year. I think we've pretty much picked it near the start of the year, somewhere around here and you can see what it's been doing, all very good. And should it continue, you still continue to see some good returns and you might as well, after that, surely it's overvalued. No, we still project this to be roughly 36% undervalued on a discount cash flow basis according to our data.

Occidental Petroleum, another one we like. You can see the projections we've put over there. This is slightly overvalued now and everyone's got into it, including Warren Buffet of course, and you might argue that's the reason why it's slowed down somewhat. If you are risk averse, you might say, "Well, okay, thanks very much, Alpesh, I'm not going to wait." If you are risk loving and had the original plan of action that we gave, you'll hold on and keep to the original rules. It's as simple as that.

AutoZone, you can see the projection of the trend that we did with that one and it's pretty much still sticking along there and you can see how we've projected that forward. Slightly undervalued but only slightly, so you might say fairly valued now on that one.

Sanofi fell off a bit of a cliff didn't it, and then recovered nicely. This one, interestingly enough, significantly undervalued according to our discount cash flow basis, 56% undervalued.

Franklin Covey, you can see the projections there. You can see where we've put in the bands across which it's been trading, it fell and rose, it's going over here. Worst case scenario from current levels should in a year give us a 29% return. The good news being it's about 50% undervalued and we estimate fair value at about $100.

APA Corporation really been doing nicely well for us. Grateful. You can see the channels under which it's been trading. Again, we did all the due diligence of value growth, income, cash flow, we still project that going forward to have good rises. 97% undervalued according to discount cash flow. Of course, discount cash flow doesn't guarantee future returns and the numbers on discount cash flow can be a bit erratic, but even if that just gave us a fraction of those kinds of returns would be happy.

Pinduoduo. You can, again, see with this projections look good, look side, look at the direction we think it's going to go in and undervalued still, so ticks a couple of boxes. Archer Daniels. What we did with this one back here, I did a projection based on sort of base case and bear case and the base case would give us a 66% return from down here and the base case would give us a 35% return to take the price here, from here, roughly a 35% return. We are on track for all of that and we don't know yet where it's going to end up there or there, but it's on track, so what can I say? Can't complain. It's slightly overvalued and that might make some of you think, "Well, you've had a bit of a return, you'll take it." Others of you'll say, "I'll stick to the original rules."

Genuine Parts Company, on that one we did, again, similarly, a bear case which is this, this is at the start point down there, which would've given us just an 8% return and then a 50% return if we did the bull case, which would've meant the price going up there and it's already shot up significantly there. Some of you may say, "Well, you know what, I'll just take it. I don't want to wait and for it to go there," but that's where we are, especially given that it's somewhat overvalued. But the original rules still stand, which is 12 month holding or 25% from the peak if it drops. But like I said, if your risk appetite changes and you think, "Oh, thank you very much, it's given me quite a bit in a short space of time, I'll just take the money and run," take the money and run. A bit like one of those shows, quiz shows on TV.

Neurocrine Biosciences, again done well for us and you can see the projections once again and significantly undervalued. 58% undervalued according to our data. Netscout Systems, one of the more recent picks over here, and again, value growth, income, cash flow, and then put the chart up there and sort of directions we're anticipating. Doesn't mean it's going to follow exact lines and this is roughly fairly valued at the moment. It's just only slightly bit undervalued.

ArcBest, again, more recent sideways moves, but 40% undervalued on discount cash flow basis. Dover, again, very recent selection, and you can see which direction we think, we anticipate, that trend continuing in and 33% undervalued.

Thank you all very much for watching. Have you got that sort of useful, clearer way of showcasing the portfolio and what we're doing. Thank you all very much.