2023 Outlook: Need Picks, Shovels and Patience
As investors, 2022 was a year that we want to get beyond, but also an opportunity to learn lessons and apply them to portfolio construction. All major indexes around the
globe had negative results as investors lost clarity in forward views. The Russia/Ukraine crisis is now at one year of conflict and the war last year on inflation was equally disruptive and currently, more problematic for market forecasting.
Recession or Not?
Portfolio Modelling for 2023 and Beyond
The Growth Bucket – Picks, Shovels, and More Patience
Based on my above viewpoints, I am predicting that 2023 is a small positive year given that the shock of the Russia/Ukraine crisis is not new headlines and economic policies are being effectively implemented. As long as neither war gets a surprise negative news shock, then I believe the market bottoms have already been established in 2022. Unfortunately, I do not see new market highs this year and it will take into 2024 to evaluate this area and provide clarity on both.
A significant amount of analysts are predicting a more positive 2023 than I am, but we will be positioned in our growth bucket to accept an earlier arrival of market highs. In terms of what companies we prefer to own in the growth bucket, as always they must be a dividend leader with positive earnings offering picks and shovels as their product or service. Pick-and-shovel businesses are businesses we cannot do without in terms of our day-to-day needs. For example, we need hydro generation and transmission for a light switch to work or real estate buildings to provide locations to offer health care providers space. In the gold rush era, a small percentage of people found any gold to build wealth, but the sellers of picks and shovels made a small margin of profit on every transaction. We are not trying to invest in a company that might find the gold, we are investing in the sellers of picks and shovels for the core holds.
Our Current Buy Signal Methodology
The most important piece to successful investing is to buy a great business at the right price. Overpaying for a great business will not produce the results we are seeking. Given we believe that the volatility we saw through 2022 will continue into 2023, we desire to take advantage of the volatility to buy pick and shovel businesses at a discount. Given that we forecast 2024 as the year we establish clarity, we are analyzing our positions over two years to establish the buy signal.
Our typical buy signal is a business trading at a 15% discount to value including the dividend yield over one year. As you all know, we use the Morningstar database and its survey amongst the financial analyst opinion of median value as our one-year forecast. We are positioning this price forecast internally to be a two-year prediction to allow the time lag that we feel is evident in this recovery as suggested above. Internally this moves our buy signal to companies showing a Morningstar median value of 25% or more price discount in the next year, not the typical 15%. When we add a typical 5% dividend yield to year two, it pushes the two-year target number to a total of 30%, which equates back to our 15% average forecast per year. We believe most of these returns come in year two, hence the need for patience.
The Sell Side – Same Two-Year Overview
I will not detail the sell side as above, but we have also moved it to a two-year horizon and thereby in effect, we are getting our sell-side a little more aggressive than we typically engage.
Need for Managed Accounts
We have introduced managed accounts to most clients after achieving my associate portfolio manager designation almost two years ago. This change allows us to trade the portfolios in a structured manner without receiving prior consent from the client. This was the right decision for our practice to enhance the client experience. Given the overview of the trading methods above, it certainly allows us to reposition account holdings in a similar manner for all clients.
If your account has not yet been moved to a managed account, we need to have this discussion. The conversion project involves transitioning one client at a time and we have new employees that are ready to assist. Please contact Brittany at our office to set up a discussion with myself to review. Brittany can be reached at 519-538-5254 ext. 110 or by email at bardiel@alignedcapitalpartners.com
Associate Portfolio Manager
RBA Financial Group
