When Everyone is in Agreement

“When all the experts and forecasts agree – something else is going to happen.”

– Bob Farrell, Wall Street Market Strategist

September and October have brought cooler weather and, along with it, volatility to the markets.  Neither are unexpected. Season are seasons, and September has historically been the weakest month of the year for stocks.[1] The S&P 500 ended September with a 4.8% decline which was only the second down month for 2021.  October is also considered to be a volatile month for investors. The 1929 “Black Tuesday” stock market crash occurred on October 29, 1929. The “Black Monday” Crash of 1987 took place on October 19, 1987.  And while the fall of Lehman Brothers technically started when the company filed for bankruptcy on September 15, 2008, October 2008 experienced major market declines as we steamrolled our way into the financial crisis. Even as recently as 2018, U.S. markets lost $2T in October.

Avoiding the Institutional Imperative

“Faced with the choice between changing one’s mind and proving there is no need to do so, almost everyone gets busy on the proof.“ – John Kenneth Galbraith

We continue to experience a K-shaped recovery.  Many of us (and most likely those reading this post) live in a way that limits insight to the challenges that many still face.  A narrow segment of the population is flush with cash having had limited spending outlets over the past year. As vaccine roll out becomes more widespread and faster, mask mandates begin to be lifted. Consequently, local economies open and an accelerated return to normalcy takes place filled with individuals eager to repeat the “Roaring 20s.”  Conversely, another segment of the population is having an entirely different experience that isn’t part of the “roaring re-opening” narrative. 

Blind Spots

“Bull markets end when the perception of earnings growth disappears […]. Manias, on the other hand, end when the market runs out of buyers.” – Andy Kessler

2020 ended with the world collectively eager to put a challenging year in the rear-view mirror while looking forward to the light at the end of the tunnel. The US election results are now (mostly) behind us, and we have two approved Covid-19 vaccines being distributed in the US with an additional 5 being used in other parts of the world.  What is most surprising to me is, having witnessed a year where we endured the worst global pandemic in a century, the fastest bear market in history, a global recession, and a contentious presidential election; that I would find myself in the same place I was exactly a year ago: contemplating whether the market accurately reflects the reality of our economy.  

Stepping Back from the Noise

“And so I moved that very day into the heart of a quince, where the seeds are few and almost silent.” – Khalil Gibran, from the poem “The Pomegranate”

I was always taught that evolution is a slow process that occurs over generations.  The reality is that evolution can occur quickly.  A meteorite slams into the earth, smoke and debris deny plants of sunlight, and the dinosaurs begin to die as their food sources whither. Mammals emerge from their tunnels and thrive as they realize their former predators are quickly dying away. Any change in our external environment can lead to faster evolution as species do what it takes to survive.  Scientists have even shown[1] that a species can evolve in real time. 

Viemed Healthcare (VMD) – “Healthcare from Home”

Company:    Viemed Healthcare, Inc. (VMD)

Sector:     Healthcare – Healthcare Equipment 

Price/Market Cap:   $9.85/$358M

Target Price/Implied Upside:    $15/52%

Thesis

Specializing in respiratory healthcare services, Viemed Healthcare (VMD) is a fast growing, free cashflow generating business serving an underserved niche market with tremendous runway ahead. VMD is building a moat by developing strong relationships with hospital systems and doctors while generating cost savings benefits to the healthcare system. 

The Market Looks Forward

“When you put a fire under a pot, you learn what’s in it.” — Malcolm X

If a deadly pandemic overtakes the world, but the market looks past it, did the pandemic really happen?

The equity markets staged a dramatic rebound during the quarter as local economies opened across the country.  The question for investors is, how can the market turn so positive when data points to rough months ahead?

The short answer is “because the market is forward looking.” Investors are peering many months into the future to a point when Covid-19 fades away, the population gains herd immunity, or researchers find an appropriate treatment or cure. Investors are looking past current data towards a recovery. 

Should the Market be so confident? 

Our World Has Changed

“Crisis does not create character; it reveals it.” – Jim Stovall, Wisdom for Winners

In just a few short months, our world has changed. 

Even the word “pandemic” is scary.  Health officials have labeled the coronavirus as “novel,” because the human species has never been exposed to it.  We seemingly have no natural antibodies. As the news of the virus has unfolded, and nations and communities accepted that our first (and possibly only) line of defense was the concept of “social distancing,” I gained a newfound respect for survivors of previous pandemics. The Bubonic Plague. The Spanish Flu.  Or even 1612 when Native Americans welcomed the Pilgrim settlers traveling from Europe bringing with them smiles, smallpox, and leptospirosis[2]

Waste Connections (WCN) – “Every Tuesday and Thursday”

Company:         Waste Connections (WCN)
Sector:                Industrials – Waste and Environmental Services
Price/Market Cap:                        $83/$22B
Target Price/Implied Upside:     $107/30%

Thesis
Waste Connections (WCN) is the third largest waste disposal company in North America, and the only company focused on secondary and exclusive markets.  The company has flourished behind the leadership of a seasoned management team focused on consolidating fragmented niche markets where they can streamline operations, exert pricing power, and improve profitability.

The Market Abhors Uncertainty

“Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold.” – Warren Buffett

From an investor’s perspective, 2018 was a challenging year that began with a strong first half, only to encounter a sharp reversal and decline.  Looking back to the start of 2018, if we had known that we would end the year with no major military conflicts, a major tax cut, a revised trade deal with Canada and Mexico, 20%+ corporate earnings growth and unemployment at 3.7%[1], any rational investor would have predicted a strong market for 2018.  The reality is that with the Republicans winning the White House in 2016 while already holding a majority of votes in The House and The Senate, the market expected legislation favorable to businesses and lower taxes. Expectations drove the market gains we saw throughout 2016 and 2017. The volatility we are seeing now….is based on investor expectations (and fears) for the year ahead.

Knowing When to Sell

 “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” – Peter Lynch

We are almost 10 years into a bull market birthed out of The Financial Crisis, throughout which, economists have described the stock market as climbing a “wall of worry”. The market continues to rise, but no one believes that it can continue. I am confident that at some point we will experience a correction. I am also confident that, many years from now, the companies we own will be much more valuable than they are today.