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ARE THE STOCKS IN YOUR PORTFOLIO A CONTRARIAN POSITION?

PORTFOLIO ACTIVITY

In August, we liquidated Canadian Tire from DM Cdn. Equity and Carmax from DM Foreign Equity, realizing substantial gains in the process. Proceeds were used tore balance both mandates in the face of recent market volatility.

FEATURE STOCK Kinaxis Inc. (KXS)

KXS provides cloud-based subscription software for supply chain management to industries rang-ing from aerospace, to life sciences, to electronics and industrial products. Its applications focus on areas such as production scheduling, order fulfillment, sales planning, and inventory management. The company has built aformidable customer list, including names like Lockheed-Martin,Qualcomm, Sikorsky, and Volvo and, in early September, management announced that Honda would begin using KXS product sat its auto plants in Japan. The stock jumped by as much as 6%on the Honda news, helping to liftits year-to-date return above the25% mark. KXS has followed a familiar path to the DM CanadianEquity Portfolio, having first been acquired in the DM Small CapFund when it was a smaller, less mature company, and later be-ing graduated to our senior man-date when its scale and strength had grown. We continue to likeKSX due to its highly profitable business model and its leadership position in a fast growing industry.

ARE THE STOCKS IN YOUR PORTFOLIO A CONTRARIAN POSITION?

It’s a curious thing. Even though publicly traded shares are a direct connection to the wildly successful free market system and the easiest way to graba share of the wealth that has been and will be created by the capitalist economy, individuals are surprisingly ambivalent about owning them. In fact, the calls we get about stocks are often tinged with a trace of dread. If markets are up, people are skeptical about how long it’ll last and if they’re down, they worry that the dip is the beginning of something worse.Currently, a common lament we hear is the vague assertion that “the mar-ket is high”, which begs the question “relative to what?” The trailing earnings yield on the S&P 500 is presently about 6%, while 10-year US and Canadian government bonds were both offering less than 1.5% at the beginning of September. The cap rate on a residential rental property in Vancouver orToronto is (maybe) 3%, and that’s before deducting property taxes, regular and unexpected maintenance, and possible strata fees. Importantly, S&P companies have grown earnings at an average annual rate of about 7%over the past half decade—we know for certain that the yield on the 10-year bond won’t rise once an investor locks it in and we’re pretty sure that no jurisdiction in the country allows landlords to hike the rent by 7% per year.

If you’re nervous about stocks, there are two things to know: first, you’re not alone and second, the more people that feel that way, the better. The graph below shows the proportion of US investors who characterized them-selves as ‘bullish’ over the past 20 years. On average, just under 40% of survey participants are positive on stocks at any given time, with extreme sentiment landing above 60% on the high side and around 20% at the bottom.

^^End of August

When 75% of investors loved stocks in early 2000, things didn’t go well, but when the public is disinterested, the subsequent performance is impressive. The following table shows 12-month returns following the low points circled on the chart (we’ve ignored the 2008/09 period due to its extraordinary nature). Given where investor attitudes sat at the end of August and the performance that such indifference has presaged in the past, it seems just as likely that quality stocks now represent a great contrarian opportunity as they do a genuine cause for worry.

Dixon Mitchell Investment Counsel - Stewards of Wealth Evolution, Wealth Management, Asset Management, Preserving and growing your wealth, Vancouver, BC

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