'You can really see the sector move the entire market': Sheluk on precious metals

[00:00:00]Taking a look at the TSX as you saw, it's just been above or below the line all day. Our next guest says there's a lot going on under the surface. Let's dive in with Josh Shellock. He's chief investment officer at Veracan Capital Management. Thanks for joining us today.

[00:00:15]>> Thanks for having me.

[00:00:15]>> So, we see energy stocks are gaining today in Canada. Do you think this is because there's still no certainty around what's going on with Iran?

[00:00:24]>> Yeah, it seems to be that the daily conjecture around Iran and the Middle East in general is driving energy prices either up or down on a daily basis and the energy stocks on the TSX tend to follow that one direction or the other.

[00:00:39]So, something here that you can't really predict on a day-to-day basis. It's better to have a bit of a strategic point of view on your energy allocation and stick with it rather than deal with the day-to-day fossil vacillations.

[00:00:51]>> Okay, let's get to gold stocks and precious metals. Most were down today.

[00:00:55]We know there's a specific storyline for Alamos Gold, but what else is triggering weakness?

[00:01:01]>> Yeah, we've seen the price of gold down a little bit today and that seems to be driving the sector down in general.

[00:01:06]Gold's been a bit curious over the past few months because you would think on the surface that all of these things like inflation, like geopolitical conflict, like markets correcting the way that they did in March would lead to higher gold prices, but they've gone the exact opposite direction. So, gold has always for us been a bit of an unpredictable type of asset class and that's feeding into the the underlying share prices of precious metals companies as well. But, the precious metals sector or subsector makes up such a big part of the TSX these days with over 10% of the TSX allocation in precious metals stocks that you can really see this sector move the the entire market one direction or the other based on how it's abbing or flowing.

[00:01:52]>> All right, let's get to retail numbers in Canada. They were up 0.5% for April from March. What does that tell you and and are you invested in any retail stocks?

[00:02:03]>> Yeah, the the retail numbers are a bit of uh >> [snorts] >> uh maybe a bit misguided at the headline because although the headline numbers up, a big part of that headline number being up was gas prices being higher. If you look at volumes, volumes are actually flat over the past couple of months and retail numbers haven't been strong for for for several months now.

[00:02:23]So, uh one of those indicators that if you look at it at first glance, it could appear fairly optimistic, but if you dig into the numbers a little bit deeper, you're not seeing as much strength out of the Canadian economy as you would like to see for sure.

[00:02:40]>> Okay, let's talk about tech, uh of course, which has been strong for a couple of months now, but you see some of the companies or maybe parts of uh that sector in a more precarious spot.

[00:02:49]Which ones, which parts, and why?

[00:02:52]>> Yeah, so I think precarious is a a good uh way to put it these days. It's not to say that's good, it's not to say that it's bad necessarily, but it could tip in one direction or the other.

[00:03:02]Uh when you look at hyperscalers, the hyperscalers have done incredibly well over the past several years and and really the longer term as well.

[00:03:10]Uh but what they're they're doing right now is spending massive amounts of CapEx, hundreds of billions of dollars, literally hundreds of billions of dollars on CapEx over the next several years, and you're already seeing that cut into free cash flow for these companies. Now, these companies are free cash flow behemoths, so that on the surface is not not necessarily uh the be-all and end-all of the story, but if you start to see some weakness in free cash flow, perhaps that trickles down to the stock prices at some point. And then you look at the more cyclical parts of technology. And technology as a sector is not often thought of as uh of as a cyclical sector, but when you look at memory companies and storage companies and to a a extent chip companies, they have historically been very cyclical. You almost need to look at some of these companies more of like a commodity like business. And commodities, one of the ways to look at them, and I think an intelligent way to look at them is uh not necessarily through a valuation lens because valuations tend to compress for cyclical businesses, commodities in particular, and and and chips to some extent, too, when earnings are at extreme high levels. PE multiples, forward PE multiples specifically, come way down. Now, that might [snorts] make them look attractive on the surface, but if you understand that the earnings are the cyclical part of it, and the next leg for earnings might be down, then you really have to question whether these stocks are a good buy even at apparently low value levels.

[00:04:41]>> Okay, let's get to uh part of the reason or one of the reasons I guess you're doubling down on diversification.

[00:04:48]>> Yeah, so lots of reasons I there, I think the all of the the things that I talked about uncertainty-wise are important, but I think what's been more and more challenging these days is to find true diversification. When you look at indexes as a whole, they are becoming more concentrated, especially in the US, especially globally, more concentrated in individual names, more concentrated in a sector, the technology sector specifically, and more concentrated thematically, thematically based off of the AI trade, which has really been driving seemingly everything over the last 12 to 18 months. But you can take it a little bit beyond just the publicly traded stock market as well because when you look at debt markets, debt markets are now largely dominated by the hyperscalers as well. We've seen massive amounts of debt issuance from AI companies that are looking to scale up, the Amazons, the the Googles, the Oracles uh uh into the debt markets. So now you have stock markets that are being dominated by AI type themes. You have bond markets that are being dominated by AI type themes. And even if you go to private markets, private equity, private real estate, private infrastructure, I went to a conference on private markets a couple months ago, and every one of those those asset classes, the representatives from them, private equity, private real estate, private infrastructure, were talking about how their asset class was a play on the AI theme. So, it's getting harder and harder to find ways to diversify your portfolio away from that AI theme, which means you need to be more and more thoughtful about your diversification approach.

[00:06:26]>> Yeah, energy, of course, is also a big play these days into AI. Okay, so where would investors look for if they're trying to balance out?

[00:06:35]>> Yeah, well, interestingly, the Canadian market does provide a decent amount of diversification uh against that AI theme. You have a bit more of a a commodity uh based market. You have a significant amount of financial exposure here, too.

[00:06:49]So, uh I think a lot of investors have moved more and more to a global-based portfolio over the past several years.

[00:06:56]And And really, as as a country, we're probably too invested in Canada, but I don't want us to forget about Canada because I I think that's it it's an important part of a diversified portfolio.

[00:07:06]>> So, I know uh as well, Josh, you are avoiding some of the some IPOs. Are they the big IPOs that you're avoiding or IPOs in general?

[00:07:15]>> Well, we tend to avoid all IPOs in general as much as we can, anyway, because IPOs statistically tend to underperform the market. And actually, your median IPO tends to provide negative returns. Doesn't just underperform, it provides negative returns over time. So, if you are going to this space, you really need to be selective. I think uh obviously, we all understand the the uh fervor around SpaceX today uh as the largest IPO in history. Uh and certainly, that's attracting a lot of attention, especially from the retail investor base that's out there. But, as I said, IPOs tend to underperform, and that's over a medium-term time horizon. So, best avoided because of that. And when you look at SpaceX specifically, it's a company that has very little revenue and no profits for the size of the company or the market cap of the company today.

[00:08:06]So, very, very challenging for us to wrap our heads around. I mean, I know they had 15 pages of rockets or pictures of rockets in their their offering documents, and that's very attractive to some people, but for us, not so much.

[00:08:18]>> All right. Josh, I'll leave it there.

[00:08:19]Appreciate your time. Thanks for joining us on the close.