Hello and welcome to The Download. I’m your host, Dave Richardson, and I will take full responsibility; because of my schedule yesterday we pushed Stu’s days to (S)Wednesdays. So Stu Kedwell, Co-Head of North American Equities at RBC Global Asset Management, welcome back.
Hi, Dave. Thanks for having me, as always.
Sorry that my intense life is getting in the way of our fantastic discussion each week… and messing your schedule around. Because you’re a very important investment manager. It shouldn’t be working out that way.
You should talk to the rest of my family and tell them how important.
Any times Stu, but with Covid restrictions, it’ll have to be pushed down the road. But my weak attempts at comedy are not why people listen to this podcast; they want to hear your insights. And we got an extra day to think about this, so it should be pretty sharp today. We’ve been seeing tons of earnings results through the month of January and perhaps the most incredible of the different companies reporting. Now, into February are some of these large technology companies that just continue to astound not only with their scale, their size, the amount of profit, but the growth rates. You’ve got some thoughts from your observations of what you see from these companies.
Yes, it’s a great point. We’ve talked about the different buckets of opportunity in the stock market and we’ve broadly thought about the market in three buckets of stocks. The first is a subset of things that have been unbelievably strong performers but also have extremely high valuations. Time will tell whether or not those businesses grow into those valuations. While many of them are good and interesting young companies, we’re a little bit suspect that if you pay 20, 30, 40 times sales for something, it implies just a hell of a run of growth for a very long period of time. The second group is some of these very large companies, most of which are U.S., that have been absolutely dominant in terms of driving returns in the broader market. But also, when you look at their financial characteristics, that are still hard to argue against. Yesterday, Google reported stock is up smartly this morning or today. But just to put it in perspective, this is a business that, give or take, has an enterprise value— you take the market cap and you add the net debt, that gives you the enterprise value—, in which case, Google doesn’t have any debt. They actually have net cash. So, you’re talking about a 1.3 trillion dollar company. Then you say, well, how much cash flow are they going to generate next year? It’s likely to be in the neighborhood of 90 billion dollars. So that’s 15 times cash flow. And within that cash flow is a five-billion-dollar investment for cloud computing. There’s an investment in the Waymo car company, which will be autonomous vehicles one day. There’s a variety of different investments. When we think about these companies— whether it’s Google or Microsoft or Amazon—, growing revenues at two to three times the stock market, with balance sheets that have net cash, that have tremendous operating margins and are making investments for the future and have valuations that might be a little bit elevated to the broader market, but not at levels that this type of growth can’t allow them to grow into; and that is a very powerful bucket in a long-term portfolio. There’s plenty of exposure to those companies across a whole variety of the funds that would be under the care of RBC Global Asset Management. Then there’s the third bucket where we have good businesses with good balance sheets and we have strong recovery potential to the other side of the pandemic. While we had a hiccup last week, which was largely positional around some of the GameStop trading, that created a lot of volatility in some of the hedge funds books, whether or not they were short GameStop and had to cover. But there were also long some things which they may have had to cover as well to post a margin, and things like that. We are in an environment where we’re prone to these bouts of volatility, where you get a very quick downdraft and then it kind of reconciles itself. People go back to thinking about the future. The combination of a portfolio of some of these extremely well capitalized growth businesses, coupled with a portfolio of businesses that will recover nicely on the other side of the pandemic, that’s still a pretty good place to be, all things considered. We talk a lot about the businesses that will be better on the other side of the pandemic, I think there’ll be a lot. But we can’t forget that some of these very large companies are showing growth that even the smallest of growth companies would aspire to. And that’s something that has been quite impressive when we look back at the past week.
And particularly that they were able to do it under the circumstances of the last year where they had to pivot on the spot. Although positioned very well to benefit from what was going on with the pandemic, there still were adjustments that needed to be made to take advantage of the situation that they were presented. Just the strength of the management and the strength of those businesses through the pandemic has been particularly incredible.
Even when you think about Google, a percentage of their search revenue would be cyclical, like travel-oriented search revenue which is a big bucket for them and still hasn’t recovered. So there’s still room for these businesses to be bedrocks in the portfolio for some time to come.
Well, that’s a really important part of the market, as you say, for investors to focus on and it really has been highlighted with these most recent earnings. Stu, always interesting to hear what’s on your mind. Thanks again for joining us today.
Thanks very much, Dave. Have a great day, everybody.