The Weekly Beacon – February 21, 2025

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Musk and Tesla caught in the crossfire

As the trade war has heated up across North America, many Canadians have completely missed what is happening between China and the U.S. regarding trade. Canadians have been focused on domestic issues that will impact them. We cannot blame them for this focus due to its potential impact. Canadians are focused on President Trump’s comments about Canada, his new tariffs, and policy responses from Canadian politicians. How to respond to tariffs and Trump is a huge priority for leadership candidates in the Province of Ontario election coming later this month and the pending Federal election that will occur later this year.

In past editions of this publication, we have discussed the latest between Canada and the U.S. in depth. This week, we want to highlight the latest between the U.S. and its biggest adversary, China.

Trump has long been critical of China. He claims the country has “ripped off” the U.S. for years and has vowed to change things. His policy regarding China has been very strict. He has already announced pending tariffs on Chinese goods that could come into effect any day. Last week, President Trump placed a 10% tariff on all Chinese goods and a 25% tariff on steel and aluminum for all trade partners. China retaliated on the same day with the same sanctions but on U.S. goods.

As the U.S. and China take shots at each other through trade, Tesla could be the next loser. The Financial Times reported that Tesla Full Self Driving (FSD) driver assistance could be delayed in China. The Chinese government is reportedly using the EV maker as a poker chip with President Trump. Tesla is no bystander in this battle as its CEO Elon Musk has a strong voice in Trump’s administration and has helped drive policy.

China announced that Tesla gained approval to sell FSD in China last April. Investors have been excited regarding this news as it could mean more market share for Tesla in one of the world’s largest markets.

This Financial Times report did not hugely spook investors as Tesla shares opened flat on Tuesday. However, it gives investors another factor to consider when analyzing Tesla. Musk’s political activities have been part of Tesla’s post-December decline as investors evaluate what Musk’s position in the Trump administration means for Tesla stock.

Jobless claims up in one area

President Donald Trump and the Department of Government Efficiency (DOGE) led by Elon Musk have been slashing government expenditures over the last few weeks. This has included the firing of many employees employed by the federal government. According to the Department of Labour, jobless claims have been surging in Washington, DC. Analysts expect this trend to continue as the efforts from Trump intensify.

Jobless claims surged to 1,780 for the week of February 8th, a 36% increase week over week. The 2024 weekly average was 561 claims.

While it’s unclear what share of the spike is directly related to federal government workers, the rise coincides with the Trump administration ordering the layoffs of probationary employees along with thousands of others as the administration seeks a broad-based reduction in the labor force. In addition, some 75,000 government employees have accepted a buyout offer from Trump’s administration.

We expect this trend to worsen as Trump attempts to shrink the government and government spending.

Consumers could also reap the benefits of these spending cuts from the U.S. government. According to reports on Wednesday, some of the savings made by DOGE decisions could result in tax refunds for American households across the country. We think a small refund would be smart to give back to consumers who have been ripped off for years, however, some of these savings should be used to pay down the deficit.

Extremely bullish

Fund managers have turned extremely bullish in recent months according to the Bank of America Fund Managers Survey. Fund managers are almost fully invested and are carrying the lowest cash levels since 2010.

Are fund managers showing how bullish they are? Or does this have something to do with the ‘fear of missing out’? We think there is an alternative reason for this trend. Fund limited partners are forcing managers to go all in due to the recent strong performance by equity markets especially across the technology sector. Almost every day we see a video on how a few speculative stocks continue to dominate and outperform the market. Eventually, even the most sophisticated investors will give into their emotions and question why they have missed out on these spectacular returns.

We think this is a sign, and investors should buckle up. We think the market will eventually flex its muscles and show many novice investors that indexing has down periods and value investing has periods of outperformance. We remain vigilant and will not chase returns, especially in the areas of the market that we see as the most expensive and at risk of a market downturn.

The Bank of America research department shared an image that echoed the thoughts above that indexing could underperform over the next few years. According to current valuations, the S&P 500 could return 0-1% per year over the next decade while the average stock will return 5-6%. The regression analysis below reflects this.

Essentially, stock selection will matter, and those who index will underperform the rate of inflation moving forward.

Strong quarter for alternative financial

A longtime holding for numerous MacNicol & Associates Asset Management Inc. clients reported earnings this past week and the results pleased us as they came in quite strong.

GoEasy (GSY) is a Canadian financial services firm that provides alternative funding solutions to nonprime borrowers. The company is headquartered in Mississauga, Canada and was founded in 1990.

GSY shares are up 1% over the last year and have pulled back from their July highs:

Here are a few highlights of GSY before we jump into the company’s fourth-quarter earnings report:

GSY reported an adjusted EPS of $4.45 versus a consensus estimate of $4.37. This was GSY’s 94th straight quarter of positive net income. Full-year diluted earnings-per-share came in at $16.30, 12.5% higher than last year. Revenue for the quarter came in 1% higher than consensus estimates and was 19.8% higher than last year’s 4th quarter. The company generated $814 million in loan generations, a 15% increase from the same period a year prior, an all-time for the fourth quarter. The increase in lending was led by a record volume of requests for credit, which were up 28% over the prior year. Most importantly the increase in loan generations continues to be achieved with a corresponding increase in borrower quality.

Credit conditions deteriorating has led to many more applications from nonprime borrowers which continues to benefit GSY. Despite the slowdown in underwriting across the industry, GSY continues to see growth.

GSY also bolstered its balance sheet with another $200 million of new capital, increasing its total funding capacity to $1.9 billion. This new capital will help GSY bolster its organic growth plans. GSY has also decreased its leverage and repurchased $69 million worth of shares during the fourth quarter and over the last 6 weeks since the quarter ended. The company reiterated that it would remain opportunistic regarding buybacks.

GSY also increased its annual dividend by 25% to $5.84, the 11^th year of consecutive dividend increases.

GSY’s Executive Chairman and Interim CEO said in an earnings call that the company is happy they met 2024 guidance and introduced a new forecast for 2027 which scales the company’s loan portfolio to $7-8 billion by the end of 2027. This 2027 target implies a 60% growth rate in the loan book from current levels. The company sees another record year for earnings in 2025. GSY is expected to grow diluted earnings-per-share by approximately 20% in 2025 compared to 2024.

GSY currently trades below both Canadian bank and U.S. subprime institution industry averages for forward P/E multiples.

We have an upside target in GSY and have not been spooked by the company’s stock price performance over the last 6-7 months. We think this company provides investors with a good alternative to the Canadian banks as it trades at a more attractive multiple and will continue to see strong growth moving forward. GSY has no major solvency or liquidity issues and scores at a low to medium on MAAM’s risk rating model.

Disclaimer: MacNicol & Associates Asset Management Inc. holds goeasy (GSY:TSX) shares across various client accounts.

New world’s largest ETF

The SPDR S&P 500 ETF (SPY) is no longer the world’s largest ETF in terms of assets under management. Vanguard’s S&P 500 ETF (VOO) surpassed it in terms of AUM on Tuesday. VOO now has $632 billion in AUM. VOO launched in 2010, it was not the first to market but it has exponentially grown in AUM over the last 15 years. At the time of VOO’s launch, SPY had close to $100 billion in AUM, it had a huge head start, so how did VOO surpass it? VOO charges a much smaller fee to investors relative to SPY. VOO charges 0.03% per year while SPY boasts an expense ratio that is triple that.

Return-obsessed investors love a bargain and institutions looking for the smallest advantage would gravitate toward VOO over SPY purely based on costs.

These ETFs have grown in AUM exponentially as more and more investors turn to passive indexing. VOO has more than doubled in AUM over the last 5 years while SPY has grown by 50% over the same period.

VOO and SPY are not the only large index-focused ETFs in terms of AUM. Most of the world’s largest ETFs are passive and track an index. Currently, the only three ETFs with AUM greater than $500 billion all track the S&P 500, VOO, SPY, and the iShares S&P 500 ETF (IVV).

We think this is a great example of the herding effect as more and more investors buy the entire haystack rather than analyzing companies within the haystack. This strategy has rewarded them nicely over the last 10-15 years; however, history tells us this will not always be the case as there are often lost decades where U.S. indices are flat or face large drawdowns.

Apple’s new chapter

After a few years of flat revenue growth and falling behind relative to industry competitors in the AI race, Apple announced something new that caught the eye of Wall Street.

Here is Apple’s trailing 12-month revenue (in billions) since January 1st, 2020. Over the last 2-3 years Apple has seen no growth in terms of sales. This has been caused by fewer consumers switching and upgrading their smartphones and no major new product releases over this time.

Fast forward to Wednesday and Apple announced a plan to launch an affordable iPhone. The phone will cost $599 and will be named the iPhone 16e. This was an expected announcement, but the cost was not as cheap as some analysts had forecast. UBS’s analyst who covers Apple said his team expected the new product to cost around $500. Nonetheless, it will increase the demand for iPhones globally, especially in less developed nations. The new iPhone will be available for pre-order on February 21st and in-store on February 28th.

The 16e is a more bare-bones version of the iPhone compared with the latest models and costs less than the $799 price tag that the base iPhone 16 model carries. The higher-than-expected cost for the 16e is because the device will offer the company’s AI software and will be powered by the A18 chip.

Apple hopes this product launch will boost sales in emerging markets. However, their strategy could be a boom or bust as consumers could forego the more expensive models moving forward for their affordable option as it has the new AI capabilities that many consumers desire.

Despite slowing sales growth, iPhones make up most of Apple’s sales. However, demand has been under pressure with quarterly sales missing estimates and decreasing year-over-year.

Hedge funds leading the way?

Hedge funds dumped technology stocks last week at their third fastest rate since 2022. Is this a sign?

Tech stocks have continued to melt up despite their high valuations. Retail investors around the world continue to pile into many of these high multiple names. Some of these names make the likes of Alphabet inexpensive on a relative basis.

This is something we will be watching closely, you should too.

MacNicol & Associates Asset Management                                                             

February 21, 2025

The Weekly Beacon February 21 2025 US