October 10, 2023
Commentary: NCM Small Companies Class
On October 10, 2023, Portfolio Manager Alex Sasso, CFA provided a brief update on resilient US earnings and the fund’s impressive metrics versus its benchmark.
Hello, everybody. Today is October 10th, 2023, and I'm here to give you a quick update on the NCM Small Companies Fund. A lot happening in the world. Over the weekend, we saw a significant escalation in Israel. Israel is now at war with Hamas. We still have a significant conflict in Ukraine.
And despite this, the U.S. economy continues to be very, very resilient. And I think a lot of this is because of the major infrastructure spending unleashed by the U.S. government over the last few years. We're talking trillions of dollars of stimulus. But it's not just government spending. It's also U.S. corporations are still seeing earnings growth. This is something that we reviewed with the other portfolio managers this morning, and to all of our surprise, U.S. earnings growth continues to be strong.
The area of strength is the major market, the S&P 500. It's the biggest of the big corporations as well. We saw earnings growth of 0.8% looking forward, and that might not sound like a big number, but given where market expectations were prior to this, it's quite strong.
Now, that's significantly better than Europe and it's also better than the TSX, which is seeing negative earnings growth changes. Now, the S&P 500 is trading at a historical valuation of 17.8, which just happens to be the ten year forward multiple for that market. And it's down from 19.2 times last month. Now we're seeing a slowdown looking forward into ‘24 and ’25, but that can change very quickly. We saw that same pattern in July just prior to the earnings season and then both in Canada and the U.S., companies started reporting much better numbers than expected.
Now, let's talk about some of the attributes of the Small Companies fund. So in the fund now, we have 31 equity holdings and one ETF holding. The metrics continue to look very strong.
The trailing price earnings ratio is at 12.2. That's versus the BMO Small Cap Equity Index at 18.6. The estimated price earnings ratio is at 9.4 versus a number much higher with the benchmark. Now, 9.4, that is a very compelling valuation metric for the portfolio, and the price to cash flow is 5.6 versus 6.8 for the benchmark.
In terms of profitability, if we look at the trailing return on equity, it's 15.1 versus 6.8 eight. So you get more than double the return on equity for a less expensive price. The expected return on equity is 18 versus 11.2 and the return on capital is 15.3%. Again, very impressive metrics. It just goes to show that our companies are much more profitable and they trade at a less expensive valuation.
On the earnings growth side, we still have earnings growth in this portfolio and the quarterly earnings momentum is a plus 5.3. Just to give you a sense of how good that is, the market, the benchmark is -2.0. Our earnings surprise, where companies are beating is 2.4 versus the benchmark at one. And then our free cash flow yield is 6.2 versus almost flat for the BMO Small Cap Total Return benchmark right now.
So you can see that you get better growth, you get better free cash flow, companies are reinvesting back in their businesses, they're growing quicker and you're paying a less expensive price. So I'll leave it at that. If you have any questions, please contact your regional NCM salesperson at email@example.com. Thank you.
The information in this video is current as of October 10, 2023 but is subject to change. The contents of this video (including facts, opinions, descriptions of or references to, products or securities) are for informational purposes only and are not intended to provide financial, legal, accounting or tax advice and should not be relied upon in that regard. The communication may contain forward-looking statements which are not guarantees of future performance. Forward-looking statements involve inherent risk and uncertainties, so it is possible that predictions, forecasts, projections and other forward-looking statements will not be achieved. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.
Alex Sasso, CFA
Chief Executive Officer and Portfolio Manager of NCM Small Companies Class and NCM Income Growth Class.