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Report Updates

We have posted report updates on CAE Inc. (CAE) and Chartwell Retirement Residences (CSH.UN). CAE is a tech company which provides software-based simulation training and critical operations support solutions to pilots, cabin crew, airlines, defense and security forces. CSH.UN is an open-ended real estate trust that indirectly owns and operates senior housing communities. One company has executed well on its acquisitive growth strategy in 2024 and recent momentum has been strong, while the other has seen pressure on its margin profile and has a few near-term headwinds that can affect its growth.

Read the latest updates by logging in here!

Market Update

The markets have been sliding lower over the past few weeks, as an anticipated ‘Santa Rally’ never materialized, and instead hawkish commentary from the Federal Reserve sent stocks falling into year-end and the early parts of the year. There has been a lot of ‘noise’ in the stock market recently, as a slight change in tune by the Federal Reserve mixed with both a robust labour market and uncertainty around Trump’s inauguration has forced equities lower. There are a lot of important events on the horizon, with US inflation tomorrow morning, earnings season beginning this week, and the inauguration next Monday. Uncertainty is high, but we are beginning to see underlying early signs in the market that are encouraging. If there is one thing that the market does not like, it is uncertainty, and we see these clouds clearing up very soon. With that said, we wanted to use this market update as an opportunity to go over some of our ‘core principles of investing’ at 5i Research. 

 5i Core Principles of Investing

It’s a new year and we thought it would be a good time to give some reminders to members on 5i Research’s services and our core investment/portfolio principles. Investing is not a science, it is an art that each individual investor needs to unlock their unique investing style. There are general investing principles that, while at times may seem obvious or unnecessary, help to protect one’s portfolio over the long-term. In the sections below, we outline some of our core investing principles at 5i Research.

Avoid Concentrated Risks

Don’t make a portfolio reliant on a single stock. If the past few years have taught us anything, it is that no matter how well you know a company or how confident you are in it, it can still go down. Even if the fundamentals and results are fine! Having too many eggs in one basket can cause a lot of problems that are hard to bounce back from.

The Importance of Rebalancing

Be sure to rebalance. Similar to the above point, as certain names become a larger portion of a portfolio, make sure to consider rebalancing holdings (i.e. selling some winners, adding a bit to losers or new names). This helps avoid allowing any single name becoming too much of a weight in a portfolio but also allows some gains to be taken overtime. Meanwhile, it allows more cash to be put elsewhere as winners are trimmed. When stocks are working well, it is easy to feel confident and let a position run. Rebalancing helps to keep some overconfidence in check and ensure position sizes are being managed. There are numerous ways one can rebalance. How it is done is probably less important than the act of just rebalancing in some fashion.

Diversification

This parallels the above two points, but an investor should ensure they remain diversified. This means across asset classes (stocks and bonds), across sectors, and even across styles to some degree. Value will not always work. Growth will not always work. Nothing will ‘always’ work. So having a bit of a taste of everything can go a long way.

‘The Stock Market is a Device for Transferring Money from the Impatient to the Patient’

Keep the long-term in mind. Investors can sometimes become too laser focused on the next quarter and even just the next monthly macro data point. It always helps to remember that at the end of the day, the basic principle behind investing is that you are purchasing ownership of companies. Companies aren’t built in quarters and a higher interest rate probably doesn’t (or shouldn’t) change the math a whole lot on great companies. This doesn’t mean to ignore these other issues and risks but sometimes companies need to be given time to ‘breathe’ and grow.

Due Diligence Involves Multiple Sources of Information

We are not and should not be your sole source of information – we view 5i Research and similar tools/services as a tool in your toolbelt. One tool does not solve each and every problem. We can be a valuable tool in providing research and stock ideas, but we should not be relied on as the only source of information out there. As always, members need to ensure they are doing their own due diligence on names and are comfortable with what they own and why they own it.

There Will Always Be Something to Worry About

The core thesis of investing is to make money, generate returns, but humans are innately protective, and the fear of losing money can often outweigh the potential for making money. There is a common saying that ‘price drives narrative’, and when the price of stocks are falling, investors can begin to worry about further losses, and suddenly narratives of ‘recession’ or ‘bear markets’ can emerge. In reality, the markets go up more than they go down, and the math is simply in an investors’ favour. One of the keys to investing is keeping one’s emotional urges in check, and even anticipating them. It is almost certain that another growth scare, recession scare, or bear market scare can emerge at any time as stocks are falling, but it is how investors react to these narratives that will matter. Buying ‘the fear’ has been a proven method for ignoring price-driven narratives, and benefiting from the long-term success of companies and the markets.

‘The Best Time to Plant a Tree was 20 Years Ago– The Second Best Time is Today’

The stock market has been in existence for roughly 230 years, and throughout history it has gone up and to the right. Yes, there have been long periods of sideways price action or severe volatility, but largely the market has been a great source of wealth creation and preservation of wealth for centuries. If any individual were to be asked whether they would have liked to buy stocks 20, 30, 50, 100years ago, the resounding answer would unequivocally be yes. This is why we think that regardless of the present-day fears of the market, recessionary concerns, macroeconomic challenges, investing in the market over time has proved to be a good way to escape an eroding purchasing power from the effects of inflation.

Summary

This is not a comprehensive list but we think it is a good start and some solid principles that can help an investor avoid a lot of pain and hopefully see a lot of success as well. As we embark on a new year, where new narratives will take hold, new macro forces and fears unfold, we feel that there is a lot of opportunity in the years ahead, and now is a perfect time to put in the work, to reap the future rewards.

Model Portfolio Changes

Balanced Equity Model Portfolio

Trim Savaria (SIS) Position to a 2.5% Weighting

Trade Rationale - SIS is up roughly 28% on a one-year basis, and margins are expected to improve in the coming years. It is a small cap company trading at a decent valuation, with a healthy, growing cash flow profile, and while we continue to like the name, we are opting to trim our exposure to balance out some of the smaller weighted names in the model portfolio.

Increase Nutrien (NTR) Position to a 2.5% Weighting

Trade Rationale - We added NTR to the model portfolio last year, and while it is one of Canada’s larger stocks, it has mostly seen negative momentum since 2022. It pays a decent yield of 2.9%, and we feel that its momentum is beginning to shift. While the shifting momentum is likely still early days, we are looking to slightly increase our exposure in the materials space, and we like how NTR is positioned here.

Growth Model Portfolio

Trim Celestica (CLS) Position to a 6.5% Weighting

Trade Rationale - CLS has been a significant win for the growth model portfolio since adding it, and while we continue to like the name here, it has increased to a weight above 7%, and we are preferring to rebalance names at these levels.

Trim Galaxy Digital Holdings (GLXY) Position to a 6.5% Weighting

Trade Rationale - GLXY has also seen strong momentum, and its exposure to both the digital assets space and the AI data center space continues to provide it with some lift in the current market environment. As its weighting has moved above 7%, we are looking to trim and rebalance into other names.

Sell Full ADF Group (DRX) Position

Trade Rationale - DRX is a cyclical business, and while its momentum was extremely strong for quite some time, it has faced some headwinds with a few contracts being pushed out, alongside the potential for US tariffs. Momentum continues to be weak, and its position size in the model portfolio has become small. While we could see a turnaround in the name if tariffs are lighter than expected, we are preferring to initiate new positions that we feel have the potential for solid future momentum.  

Add New 1.5% Position in Pollard Banknote (PBL)

Trade Rationale - We initiated company coverage on PBL in early 2024 and we like its leading position in the lottery and charitable gaming industry. It provides instant tickets, licensed games and more, and management believes it is the largest provider of instant tickets in Canada. It has a healthy growth profile, expected strong margin expansion, and a reasonable valuation of 11.6X forward P/E.

Add New 1.5% Position in Kneat.com (KSI)

Trade Rationale - KSI is a software company specializing in digitizing and automating validation processes for regulated industries. It is a healthcare SaaS name with a $585 million market cap. We like its organic growth profile and analyst estimates have been trending higher. Revenue growth has been reaccelerating, and we feel it can continue its strong momentum.

Income Model Portfolio

Trim iShares Canadian Preferred Shares ETF (CPD) Position to a 2.5% Weighting

Trade Rationale - When including distributions, CPD is up just over 20% over the past year, and while we continue to like its benefits of diversification, we feel its forward return profile may not be as attractive as recently, given a shifting outlook for the forward rate cutting cycle. In addition, given its rise in price, we are preferring to lean more towards individual stock names at this time.

Trim iShares Convertible Bond ETF (CVD) Position to a 2.5% Weighting

Trade Rationale - Similar to CPD, CVD has had a nice run over the past year, but we feel that its forward return profile may not be as attractive, and we are preferring to lean more towards individual stock names at this time.

Increase Parkland Corp (PKI) Position to a 3.5% Weighting

Trade Rationale - PKI has a good dividend yield, a solid buyback plan, and is actively paying down debt. Forward earnings growth estimates are strong, and its free cash flow yield is quite high. We feel that if the energy space sees a positive shift in momentum this year, that PKI can benefit from this, and we are looking to increase our position size as a result.  

Increase Pason System (PSI) Position to a 3.5% Weighting

Trade Rationale - PSI trades at a decent valuation, has a good margin profile, and growth has been fairly strong recently. Similar to PKI, if the energy space sees improving momentum in the coming year, we feel that PSI can benefit from this.

With precision and insight,

The 5i Research Team