NCM Small Cap Update - Dec. 2019

December 18, 2019

Sector Spotlight
• Looking very forward
• Restaurants in Canada
• Retail Therapy (Black Friday)
• Canada Goose

Secular Bull Has 10 Years to go?

Two strategists that we follow closely (Brian Belski at BMO and Mark Deriet at Cormark) both recently published reports. They each concluded that despite the fact that we are already ten years into the current secular bull market, we are in fact only halfway through and that there is still another 10 years to go.

As highlighted in the chart below, while returns may slow during the “middle” phase of the bull market cycle, there still remains solid upside potential in the coming years.

Source: BMO Capital Markets

Another interesting point from the reports is that both firms believe that the market is transitioning from growth to value (BMO thinks the move is to "stable growth" from "momentum"). We have seen evidence of transition in the markets in recent months and we believe that if this trend continues it will provide an opportunity for both Canada and small caps to begin to outperform.

Restaurants in Canada

A number of Canadian restaurant chains reported weaker sales during the most recently reported quarter. The restaurant business can be difficult at the best of times as there is virtually no recurring revenue and there is the constant threat of changing consumer preferences and trends. Currently, our research indicates that food delivery services such as Uber Eats and SkipTheDishes are reducing in-store traffic for many restaurants. It appears to us that many restaurants are having challenges adapting quickly to this change in customer preferences.

Furthermore, the meal kit business has become among the fastest-growing food sectors in Canada (albeit from a modest base), according to the market research firm NPD Group. It’s roughly doubled since 2014, and revenue is expected to top $400 million in the next year. The firm reports 13% of Canadians have used meal kits at some point, and 42% say they are interested in trying one.

Additionally, Loblaws has created a “meal solutions” unit that will “create an inspiring portfolio of easy and nutritious meal solutions for consumers”. Loblaw’s research indicates that the vast majority of Canadians do not know what they are having for dinner as of 4 p.m. each day. The advent of a dedicated “meal solutions” group by Canadian grocers provides yet another potential competitor to a traditional restaurant.

Finally, there are signs of weakness in the Canadian economy. According to Statistics Canada, the Canadian economy lost 71,200 jobs in November, the worst month of job losses since the financial crisis. Economists had been expecting the Canadian economy to add 10,000 jobs during the month. Statistics Canada also recently reported that retail sales fell 0.1% in September (the most recent month for which data is available).

When combining these factors, we think investors should be cautious about investing in the Canadian restaurant sector. At NCM Investments we have significantly reduced the weighting in restaurant stocks. Moreover, we do not expect to increase our holdings in the sector until we see signs of stabilization or improvement in these trends.

Retail Therapy (Black Friday)

According to Adobe Analytics, online sales rose by 22% on Black Friday and 20% on Cyber Monday south of the border. Interestingly, Cyber Monday sales are almost double that of Black Friday’s. As a result, Amazon is hiring 200,000 temporary workers for the holiday season, double last year’s total.

Canada Goose Is All About the Experience

Canada Goose, a manufacturer of luxury outerwear, and a holding in our small cap products has introduced a one-of-a-kind immersive cold room experience at its Sherway Gardens retail outlet. It offers customers a multi-sensory experience through temperature-controlled rooms. Could this be the future of retailing?

 

For More Information:

Alex SassoChief Executive Officer & Portfolio Manager

Alex Sasso is the Chief Executive Officer (CEO) and a Portfolio Manager at NCM Investments. Alex leads the firm’s small/mid cap investment team. He has over 21 years of investment management experience. Prior to joining NCM in 2004, Alex worked at…

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