This week's interesting finds

Cymbria’s 2024 annual report

Cymbria’s most-recent annual report is now available for your reading pleasure. You can find insights on how Cymbria navigated the last year and updates on our largest holding, EdgePoint Wealth Management.

This week in charts

Global labour participation rates 

10-year minus 2-year Treasury yield

Non-U.S. automakers share of sales in the U.S.

U.S. passenger vehicle imports

Automobiles and Parts % of Country Equity Market Cap

Defense spending vs. net interest payments

S&P 500 Index returns after a correction

Multiple contraction YTD

S&P 500 Index sector return difference

Stocks outperforming the S&P 500 Index

Narrow leadership from 1997 - 1999

S&P 500 Index broadened from 2000 to 2005

Magnificent 7 performance

Stoxx 600 Index vs. S&P 500 Index

What Covid’s One-Hit Wonders Should Have Taught Us

Nearly every American stock rebounded after the bottom of the Covid-19 bear market five years ago—a rally that made picking winners like shooting fish in a barrel. A tsunami of government stimulus and a realization that the world wasn’t ending were responsible for much of that.

But some companies’ shares did especially well precisely because of the pandemic. While that didn’t last, their lessons about Wall Street’s hype machine should.

Breakthroughs like AI, quantum computers and 3-D printing induce a fear of missing out, sending too many stocks rocketing higher. They give pundits something to talk about, brokers the next thing to sell and asset managers an excuse to launch new funds.

Covid beneficiaries were like those thematic stocks on steroids, jumping at the same time in a way that looks silly with the benefit of hindsight. Investors treated their sales gains in 2020 and 2021 as if they would keep going. Even if that were possible, competitors pounced on the same opportunities. Companies that sold in-demand physical goods during the emergency even cannibalized their own future demand.

Take Wayfair. As people found themselves spending far more time at home with enforced savings and stimulus checks, the online furniture retailer experienced more demand than it could handle. A year after the Covid bottom, its stock had surged 1,367%. But Wayfair’s sales per share in 2024 were lower than during the year before the pandemic.

Exercise equipment maker Peloton’s shares jumped 758% as demand for home-exercise equipment exploded, lifting its market value to nearly $50 billion. They have erased all of those gains, dropping 96% from their peak as social distancing has become a thing of the past and other fitness brands have launched online offerings. Peloton’s new equipment now also has to compete with plenty of its own lightly used machines for sale online. It has never earned an annual profit, and analysts polled by FactSet see sales falling for a fourth consecutive fiscal year.

Online pet-goods retailer Chewy’s rise and fall were slightly less extreme, and the boost to its business less fleeting too. After all, most of those pets adopted during the pandemic are still alive. But Chewy’s flatlining sales make its trailing price-to-earnings ratio of more than 4,000 times back in 2021 look insane in retrospect.

Zoom became a verb and its stock surged more than 700%, giving it a market value of more than $160 billion. Yet its multiple of 3,000 times trailing earnings implied it had some sort of permanent monopoly on videoconferencing—a service others offer for free.

Some other companies benefited beyond a temporary sales surge. Online crafts marketplace Etsy was one of the few sources of face masks for a while. After demand for them plummeted, it still had gained name recognition and new customers. Likewise, software company Docusign’s benefit from social distancing and a mortgage boom are over, but the public got comfortable with electronic signatures. Sales are higher for both companies—just not that much higher. Etsy and Docusign are down by 85% and 71%, respectively, from their pandemic peaks.

Sometimes a company’s fortunes really do change overnight. Investors lucky enough to own their shares still need to go back to the basics of what gives them value—decades of future cash flows. If it is hard to argue that the price gain reflects a business opportunity that is big and sustainable enough, then the next step is clear: Take the money and run before others figure it out too.

This week’s fun find

Visit to Picasso: Watch Pablo Picasso painting on glass (1949)

Filmed through the opposite side of the canvas, a large glass plate, we see the grand brushstrokes of Spanish painter, sculptor, printmaker, ceramicist, stage designer, poet, and playwright Pablo Picasso. This clip is from Visit to Picasso (“Bezoek aan Picasso”), a 1949 documentary film by Belgian filmmaker Paul Haesaerts. It was filmed at Picasso’s home in Vallauris, France.

This week's interesting finds

This week in charts

Foreign and U.S. holdings

Foreign holdings of U.S. financial assets

S&P 500 Index Top 10 price-to-earnings ratios

U.S. equity index valuations vs. history

Rotation out of U.S. stocks

MSCI China Index vs. S&P 500 Index

Inflows into U.S. short-term Treasury funds

Bull market trends

S&P 500 Index correction

Historical S&P 500 Index returns after inauguration day

Retirement fears

Leveraged loans

Private market performance

Why China is suddenly flooding the market with powerful AI models

Retaliation seemed certain. When the US tightened its grip on advanced artificial intelligence technologies in January — blocking China’s access to advanced AI chips and locking proprietary models behind trade barriers — the response appeared predictable. China would build its own walls, guard its breakthroughs and double down on secrecy.

Instead, China is doing something unexpected: it is giving away its most advanced AI models.

In recent weeks, Chinese tech groups including Alibaba, Baidu and Tencent have been flooding the market with powerful AI models. But in an industry where secrecy is the norm, the real shock is their openness — these models are free to download, modify and integrate.

At first glance, this surge might seem like a statement that AI should be open to the world, not just a handful of companies. But in business and geopolitics, generosity is rarely without strategy. The real question is not why China is open sourcing its AI, it is why the world assumed it would not.

For now, most US tech groups treat AI like an exclusive resource, restricting access to their most powerful models behind paywalls. OpenAI, Google DeepMind and Anthropic limit full access to their most advanced AI models, offering them through plans such as paid subscriptions and enterprise deals. Meanwhile, the US government views open-source AI as a security risk, fearing that unregulated models could be fine-tuned into cyberweapons. US lawmakers are already pushing to ban DeepSeek AI software from government devices, citing national security concerns.

But Chinese tech groups are taking a very different approach. By open sourcing AI, they not only sidestep US sanctions but also decentralise development and tap into global talent to refine their models. Even restrictions on Nvidia’s high-end chips become less of an obstacle when the rest of the world can train and improve China’s models on alternative hardware.

AI advances through iteration. Every new release builds upon the last, refining weaknesses, expanding capabilities and improving efficiency. By open sourcing AI models, Chinese tech groups create an ecosystem where global developers continuously improve their models — without shouldering all the development costs.

The scale of this approach could fundamentally reshape AI’s economic structure. If open-source AI becomes just as powerful as proprietary US models, the ability to monetise AI as an exclusive product collapses. Why pay for closed models if a free, equally capable alternative exists?

For Beijing, this strategy could be a powerful weapon in the US-China tech war. US AI companies, built on monetisation through enterprise licensing and premium services could find themselves in a race to the bottom — where AI is abundant, but profits elusive.

Of course, this comes with trade-offs. If AI is freely available, nothing will stop foreign companies from taking China’s models, refining them and outcompeting Chinese companies. Over time, companies such as Alibaba, Baidu and Tencent may face the same pressures as US counterparts — forcing them to restrict access to protect intellectual property and generate revenue.

Beyond market dynamics, Beijing may have its own reasons to rethink this approach. The Chinese government, which prioritises control over key technologies, may also push for stricter AI regulations to manage misinformation, maintain oversight and ensure compliance with state policies.

But for now, open-source AI remains China’s best bet — a way to compete without access to the best chips or the advantage of an early lead.

The timing of the open source rush is no coincidence. It is a response to a closing window. With US chips and AI technology restrictions set to tighten under President Donald Trump and proprietary AI models becoming entrenched, China’s most effective strategy is speed and scale. To flood the market, to shift the balance before AI monopolies emerge.

If OpenAI, Google and Microsoft have already won the AI race as we know it, then China’s best move would not be to compete — it would be to make winning meaningless.

Billions Flowed Into New Leveraged ETFs Last Year. Now They’re in Free Fall

Several popular leveraged exchange-traded funds, which use borrowed money to amplify their bets on one or more asset, have erased most of their value in a matter of weeks. Among the worst performers: A fund that offers investors twice the exposure to shares of MicroStrategy, the software company-turned-bitcoin collector, has plunged 83% since touching its November high. Another ETF, which offers similar leverage on Tesla, is down 80%.

Leveraged ETFs emerged last year as one of Wall Street’s favorite roller coasters, as investors sought out ways to take bigger risks during the stock market’s rally and money-management firms launched a bunch of new funds that capitalized on this demand. Assets under management in leveraged ETFs jumped by 51%, to $134 billion, in the 12 months ending Jan. 31, according to Morningstar.

Funds that offer leveraged exposure to broad stock indexes have been offered in the U.S. for more than a decade. But leveraged single-stock ETFs, like those linked to MicroStrategy and Tesla, were first approved by regulators in 2022.

The funds are designed for short-term traders and shouldn’t be held for long periods, investment firms said.

Morningstar analyst Jeffrey Ptak is concerned not all investors fully appreciate how quickly or severely leveraged funds’ performance can veer off course. “These products have become very popular, to a worrisome extent,” he said.

The relatively new class of leveraged single-stock ETFs has taken investors on an even wilder ride. The three largest single-stock funds give holders leveraged exposure to Nvidia, Tesla and MicroStrategy—a trio of stocks popular with the day-trading crowd.

The MicroStrategy funds offer the starkest example of the speed with which fortunes can be minted and then lost with single-stock funds. Defiance ETFs and Tuttle Capital Management launched competing products in August and September, and both became overnight hits, collecting billions in investor cash as they posted eye-popping gains.

So far, investors haven’t been deterred, opting to buy the dip.

The biggest MicroStrategy fund, known by ticker MSTU, has posted almost $500 million of inflows year-to-date, including $312 million over the past month, according to FactSet.

This week’s fun finds

What This Jelly Blob Tells Us About Water Quality

In the fall, TRCA monitoring teams found a slimy ball of jelly on some of their equipment: a bryozoan colony. Also called ‘Moss Animals’, these jelly-like blobs are made up of thousands of microscopic invertebrates that live in a colony.

Bryozoans are filter feeders, eating plankton, algae, and bacteria. They clean the water as they feed. Their presence means the water quality is good. So, seeing one in the new mouth for the Don River is a sign that efforts to clean up the Don River are working.

Bryozoans are quite common and can be found on every continent except Antarctica. In freshwater, they form colonies during the warmer months, attaching to things such as docks, buoys or sticks. People usually notice them in the fall, when the colonies are biggest, and equipment is being taken out of the water before the winter.

This week's interesting finds

This week in charts

Historical market corrections

U.S. vs. global stocks

European vs. U.S. equities

Fund flows to European equities

Value vs. growth indexes

G7 gross domestic product (GDP) by country

Small businesses

Manufacturing production and employment

European defense spending

Investors avoiding the dip

S&P 500 Index returns vs. analyst projections

Investors should be wary of analyst ratings

Analyst ratings on stocks are a regular feature in financial news coverage. Upgrades, downgrades and price target changes can often create volatile one-day price movements and attract investor attention. 

However, investors should be wary of these headline-grabbing stock reports from experts at large firms. The long-term investment implications might not be what they expect. In fact, following sell-side analyst advice may lose you money.

My firm analysed the investable information to be gleaned from analyst ratings, changes in ratings and price targets. Is there much value in these? The short answer is — there is not.

The S&P Capital IQ analyst rating summary score for the sell-side analyst recommendations is between one and five and measures how loved or hated a stock is by the sell-side community. We found that the best-performing stocks over the past 25 years are those in the lowest quintile.

In addition, over the past 24 years, if you bought the stocks rated most highly by the sell-side analysts and shorted the stocks with the lowest number of buy ratings, you would have lost money — about 30 per cent cumulatively, with meaningful volatility.

What about change in a data point, not the level of it? That is often more important in equity analysis. A fair follow-up question could be: what if analysts change their minds?

If something is shifting enough to induce a change to an analyst’s rating, that outlook might matter. Hence, we studied the month-over-month change in analyst ratings and found that this metric was not an effective predictor of subsequent return. Over the past 20 years, stocks recently upgraded by analysts did not outperform those with recent downgrades.

In addition to using the S&P Capital IQ score, we used another common institutional investor approach, looking at the buy, hold and sell ratings on Bloomberg. We defined “buy percentage” as the number of analysts with a “buy” recommendation on a stock divided by the total number of analysts covering a stock. We then looked for stocks newly in favour and those “incrementally loved”, as indicated by an increased number of buy ratings, and compared their subsequent stock performance with those with the most month-over-month downgrades.

These “incrementally loved” stocks did beat the incrementally disfavoured ones from 2001 through 2013 but have generated no additional return over the past dozen years. Recently upgraded stocks do not outperform recently downgraded stocks, so looking for changes in rating is also not a fruitful investment discipline.

As for price targets, there is a notion that if the analysts see tremendous upside to a stock, they set price targets way above where a stock is trading as a signal of their confidence that the security will appreciate. Should investors forget about ratings and changes in them, instead of just looking for stocks forecast to have big gains?

That is also not a good strategy. Stocks with lots of “upside” from the current price to the median price target might be perceived as ones where analysts are bullish. But they are often stocks that analysts had been previously too bullish as indicated by bad price momentum.

The outlook for a stock that has been down recently can be meaningfully different for one trading at highs, even if they both have lofty price targets set by analysts. Stocks with high price targets performed best from 2009 to 2016, but the signal has diminished over the past decade.

We did find modest value in the volatility of the price targets for an individual stock. Companies with the lowest standard deviation around their analyst price targets have tended to outperform those with high variability in targets. However, the metric peaked in its efficacy in September of 2022 and has not been of much use since.

But overall, relying on analyst ratings and rating changes has not been a good strategy historically — and is not today. Sell-side analysts, of course, offer insightful original industry research and quantitative analysis that is valuable to investors. But we would suggest looking beyond the eye-catching ratings and price targets.

This week’s fun finds

Turn on the water works: why emotion fuels creative brilliance

The spark of an idea is often celebrated as the ultimate defining moment for creativity. It’s the spark from which the artwork takes shape – whether it’s a painting, building or 30-second spot. But actually, the ‘spark’ is the culmination of a much deeper, more emotional process that begins long before. Creativity stems from emotions: the desire to create ‘something’, the exhilaration of possibility and the anticipation of bringing it to life.

In today’s creative climate, where commercial demands often take precedence, emotional connections can be overlooked. In the battle for attention, the process of creativity has become increasingly corporate. Business strategies and KPIs are rooted in clinical reasoning – an idea is deemed viable if supported by data and analysis. By design, creativity should consider audiences closely, investing in research and insights, but also consider emotion’s role in this process. A truly great, memorable, successful project, lies in audience connection. It’s the universal truth our industry is built upon. Lately, we’ve let the heart lose out to the head.

This week's interesting finds

 This week in charts

EV charging connectors by region

EV charging installations by region

Stock price for EV charging companies

U.S. vs. Germany 10-year yield

Value of Canada and Mexico exports plus imports

Volatility Index

S&P 500 – total put volume

S&P 500 momentum crowding

Magnificent 7

Multiple jobholders as share of U.S. employment

The Humanoid Robot

Nasdaq joins in race to offer 24-hour equity trading

The US bourse, best known as the home of many large technology companies, on Friday revealed it planned to apply for regulatory permission to extend its hours through the night. The New York Stock Exchange and Chicago-based Cboe Global Markets, the third big player among US exchanges, have already made similar applications.

At present, US equities are available for trading between 4am and 8pm Eastern time. Pre-market and post-market sessions already stretch the day beyond its core hours between 9.30am and 4pm. 

In recent years, however, online retail brokers such as Robinhood and Interactive Brokers have begun offering overnight dealing to their clients. Those operations are supported by the Blue Ocean trading platform, whose business is now being looked at by its bigger rivals.

In an article posted on LinkedIn, Nasdaq president Tal Cohen gave several reasons for the decision, including the rise of retail trading, as well as the growth of international holdings of US stocks. Both groups are more likely to want to trade outside normal US business hours.

The Nasdaq boss warned that many problems needed to be ironed out before 24-hour trading could become a reality — something that its rivals have previously acknowledged.

Issues to be addressed included the need to extend the operation of the “tape” — the record of transactions done on exchanges — to cover the extra hours. It would also be necessary to find commonly agreed ways of handling so-called “corporate actions” — for example when a company undertakes price-changing moves such as shrinking or expanding its share count or announcing dividends. 

Cohen acknowledged concerns among the companies whose shares would be traded.

This week’s fun find

Finding the Future of Packaging, in Finland

As a journalist, sometimes your curiosity gets the best of you.

… Which is how I find myself in a chilly remote forest in Finland, on a press trip to see how the company Metsä makes its fresh fiber paper products. Which, in theory, might sound ultimately boring, were it not for what I’d heard about Metsä over the years: that they take sustainable production to innovative and elaborate, if not intense, heights. That they oversee a homegrown regenerative forestry program focused on native trees and biodiversity. That they produce the most coated white kraftliners globally using 90% fossil-free energy—with a goal to achieve zero CO₂ in all their mills by the end of 2030, not unlike their massive future-forward complex in the town of Äänekoski, which produces 2.4 times as much energy as it consumes, and is entirely free of fossil fuels. That this is all being done in the private sector.

Collectively, it’s a remarkable operation on its own. But the real reason I’m here today is because I want to find out why.