Investors better hope the blasts from the past don’t rock them today

Investors better hope the blasts from the past don’t rock them today

Martin Pelletier: Magnificent Seven whittled down to Magnificent Three complemented by a few smaller AI companies

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We find it fitting that the Technotronic classic Pump up the Jam perfectly characterizes the current market environment, especially since it was released in 1989, around the same time the average U.S. equity trader was born.

Only a few stocks dominate today’s global markets, with those beating the Artificial Intelligence Jam getting pumped up big time while the rest get ignored. This creates a real problem for those of us who are quite familiar with these blasts from the past, having been born a decade or two before.

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Take legendary investor David Einhorn, founder of Greenlight Capital Inc., who has decided to wave the white flag and change strategies altogether by focusing on those companies that will pay him back via share buybacks and dividends since investors appear to no longer want to properly reward non-AI companies for success.

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You might think money would eventually start to move into other segments, but the opposite is happening. Not so long ago, it used to only be about the Magnificent Seven, but that’s since been whittled down to the Magnificent Three complemented by a few smaller AI companies.

For example, since 2022, Nvidia Corp. is up more than 150 per cent, Meta Platforms Inc. is up 40 per cent and Microsoft Corp. nearly 25 per cent, according to Charlie Bilello, chief market strategist at Creative Planning LLC. Meanwhile, the S&P 500 is up only eight per cent, Apple Inc. is up five per cent, Amazon.com Inc. is up three per cent and Alphabet Inc. is up by only one per cent, while Tesla Inc. has run out of battery power and is down by over 45 per cent.

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It doesn’t help that giants such as Berkshire Hathaway Inc., despite already sitting on a pile of cash, have been trimming their position in Apple. Meanwhile, billionaire investor Stanley Druckenmiller dumped shares of Alphabet, Amazon and Broadcom Inc., but is still sitting on his largest position — Nvidia.

As a result, Nvidia has now surpassed both Alphabet and Amazon in market cap and is also larger than the entire U.S. energy sector combined, which produces more than 13 million barrels per day. Then you have smaller companies such as Super Micro Computer Inc., which is up over 200 per cent this year. If you had invested $10,000 in that company about four years ago, it would be worth roughly $325,000 today.

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More impressive is that these few dominant companies seem completely unaffected by broader market developments while the majority of the others are not as fortunate and are selling off on negative macro developments and barely moving on positive micro ones.

For example, on Feb. 13, worries about interest rates after higher-than-expected U.S. inflation data came in had zero impact on Nvidia and Super Micro Computer and yet the iShares Select Dividend ETF, representing the largest U.S. dividend companies, including International Business Machines Corp. and Verizon Communications Inc., sold off nearly three per cent.

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You also had West Texas Intermediate oil prices that rose one per cent and yet both Canadian and U.S. exploration and production companies were down two per cent on the day.

Those few of us goals-based investment managers have the luxury of watching all this from the sidelines, given we don’t have to chase any tech-heavy benchmarks or try to get the entry and exit timing right, which we think is extremely difficult, if not impossible, to do.

The longer this goes on, the greater the fall, and some fall it will be if companies such as Nvidia follow the same path that Cisco Systems Inc. did post-2000. However, this all means putting up with days like Feb. 13 in the interim.

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In today’s environment, our conservative pension-like portfolio is by no means as sexy as Nvidia, but it’s doing the job for us and our clients. Our allocation remains: 45 per cent long equity with an overweight in dividend-focused companies in Canada and the U.S. paying on average five per cent in dividends; 40 per cent in structured notes as a fixed-income replication, paying six per cent to 12 per cent annual coupons with 30 per cent downside barriers; 10 per cent in short-term bonds and the money market paying five per cent to 6.5 per cent; and five per cent in private equity for longer-term, low-double-digit growth. This is enabling us to meet our clients’ financial goals and objectives.

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While we like the tunes from ’89, such as Poison, Paradise City, Every Rose has its Thorn, Bust a Move, Girl You Know It’s True, The Look, Like a Prayer and How Can I Fall, we just don’t want them in our portfolios.

Martin Pelletier, CFA, is a senior portfolio manager at Wellington-Altus Private Counsel Inc, operating as TriVest Wealth Counsel, a private client and institutional investment firm specializing in discretionary risk-managed portfolios, investment audit/oversight and advanced tax, estate and wealth planning.

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