How to Navigate the Tariff Situation (Part 2)

It has not been a month since I wrote my original piece on tariffs, but the situation is evolving so quickly that I feel I must provide an update. Last week, the ‘‘Liberation Day’’ tariff announcement tipped the US stock market into a sharp correction.

As was the case a month ago, the question on everyone’s mind probably remains: What should I do?

The situation is extremely complex and fluid. Currently, there are no right or wrong answers, only right or wrong probability-weighted guesses.

Let’s look at what we know (the facts), what could happen (the assumptions), and what to do about it (the plan).

The Facts

1. President Trump seems pretty serious about the tariffs. After a few back-and-forths on the tariff implementation with Canada and Mexico, I suspected that Trump was using tariffs as a negotiating tactic without any serious intention of implementing them. Following last week’s announcement, it’s now clear he’s serious, not only with his neighbours.

2. Tariffs will create significant disruptions to global supply chains. Companies will strive to adapt and relocate manufacturing to countries where the impact is lessened, especially considering that various countries have different tariff rates.

3. Tariffs will lead to inflation in the US. Although this may be considered an assumption, I believe everyone would agree with this. The uncertainty is how much inflation.

4. US stock valuations remain somewhat elevated. Even after the recent pullback, the forward P/E ratio on the S&P 500 is ~18-20. It’s essential to note that the market is currently trading above its historical average of 16 times earnings. The last few days might seem like the end of the world, but valuations are still very far from crisis levels.

The Assumptions

1. Tariffs could be around for a while. While some countries appear ready to negotiate with the US, tensions with other countries, such as China, are mounting. I wouldn’t be surprised to see some deal announcements shortly. That said, it seems reasonable to think that some tariffs will remain in place for the foreseeable future.

2. The US Federal Reserve (the ‘‘Fed’’) won’t save the market in the short term. Fed chair Jerome Powell mentioned last week he’s adopting a wait-and-see approach regarding the impacts of tariffs on the economy. It is way too soon to act. If tariffs indeed lead to strong inflation, the Fed will likely struggle to lower interest rates (which would have been positive for the stock market).

3. Earnings forecasts could be too high. Assuming tariffs lead to inflation and a slowdown in the US economy (and likely everywhere, quite frankly), it’s not out of the question that S&P 500 forward estimates could come down. I already mentioned the market is trading at 18-20 times forward earnings. What if those earnings end up being 5% lower? 10%? 20%? The market could be more expensive than it currently looks.

4. Companies and consumers are likely to delay some purchases. The tariff situation is so fluid that things can change quickly. Everybody hopes that deals will be made and things will return to somewhat normal conditions. I suspect many companies have front-loaded inventory purchases to avoid supply chain disruptions and will delay non-critical expenses until we gain more clarity. This could lead to an economic slowdown in the months ahead.

The Plan

1. Know what you own. As Todd Wenning wrote in his excellent piece this weekend, ‘‘re-underwrite the portfolio.’’ The world is potentially much different this week than a week ago. Reassess your holdings and determine which companies could present additional risks or unattractive risk/reward profiles at their current valuations.

2. Adjust. Don’t change everything. Adjust. We’re operating with imperfect information here. Everything you do is based on educated guesses. If you have a firm conviction in some of your assumptions, change your portfolio accordingly, but don’t bet the farm on one specific outcome.

3. Get rid of losers (if necessary). This is just a reminder that selling a stock should be based on your outlook for said stock. Is the risk/reward profile attractive? Is it cheap fundamentally? Is the chart looking good? Whatever your strategy is, rely on it. The only reason being up or down on a position should be an input in your decision is for tax purposes. If you’re down 20% and it’s a dog, sell it. Don’t wait to be down 50%.

4. Focus on simple businesses. This is my personal bias and why I love investing in microcaps. Most microcaps only have one or a handful of products or services, which makes the analysis much simpler than a large conglomerate. These days, it’s fairly easy to assess supply chain and tariff risks for microcaps because most of them only manufacture or source products from one or two countries.

5. Skate where the puck is going. I know this is cliché. For the better part of fifteen years, money has flowed into passive investment vehicles, primarily large-cap ETFs. Some of the victims of this shift have been smallcap stocks and actively managed strategies. If US large-caps experience a severe correction, investors panicking and pulling out of ETFs could become a significant headwind. In smallcaps, most of the money left a long time ago. For me, owning under-the-radar smallcap opportunities that are cheap (<15x earnings) seems like a pretty safe bet over the long term. It appears like a great place for capital to go next.

Current Portfolio Positioning

As you probably know by now, my full-time job is Portfolio Manager of the Rivemont MicroCap Fund. Most of my personal money is invested in the fund.

I’ve been thinking deeply about the implications of this trade war and have tried to minimize tariff exposure as much as possible. The beauty of running a highly differentiated strategy is that I don’t need to track a benchmark or own all the sectors.

Instead of the traditional sector breakdown, here’s the quick and more practical way I look at the portfolio currently:

1. Healthcare (non-discretionary): Regardless of the state of the economy, people will continue to get sick, take medication, and visit the hospital. In a few cases, well-positioned companies might even gain market share during challenging periods. For example, look at this recent announcement by Covalon Technologies (TSX-V: COV), one of the fund’s holdings: Covalon Technologies Ltd. Poised for Strong Benefit From Positive US Tariff Outcome

2. B2B software (often mission-critical): I like SaaS companies with recurring revenues and high margins. The more critical they are to their customers and the higher their revenue retention rates are, the lower the likelihood they get punished in an economic downturn.

3. Canadian cannabis (probably recession-resilient): It remains to be seen whether cannabis will be as resilient as alcohol or tobacco during an economic downturn, but I bet sales won’t plummet. Plus, you have no tariff exposure in this industry. (You can read my cannabis thesis HERE)

4. Industrial (case-dependent): This category is all over the place, but I’ve been trying to avoid products that must cross the US border. My focus has been on companies selling abroad or US manufacturers selling in the US.

5. AdTech (cyclical): Advertising budgets tend to fluctuate in line with the strength of the economy. If the economy weakens, adtech companies will likely feel the impact. Earlier this year, I mentioned illumin Holdings (TSX: ILLM) as my wildcard pick for 2025. The company has been doing all the right things and has executed flawlessly what it can control. Unfortunately, it can’t control its customer's ad budgets. The stock is off quite a bit from its high two months ago (-40% or so) as the market is pricing in a potential slowdown. I lightened up my exposure a bit here. That said, the new wildcard aspect, if you will, is that illumin has over 50% of its market cap in cash and no debt. If other industry players struggle, I wouldn’t be surprised to see illumin go on the offensive and start making acquisitions.

6. Cash: The portfolio has 25-30% in cash currently, primarily due to an acquisition that closed recently. I don’t feel any hurry to deploy that capital. With so much uncertainty and potential disruptions, I’m sure some opportunities will come out of left field due to unexpected events. The key will be patience and picking the right spots.

To close out this review, I feel the need to mention that everything I wrote here might be completely wrong a week from now due to gyrations in President Trump’s actions. I mainly pay attention to the macro picture to avoid unnecessary risks (e.g., a company getting killed due to tariffs) and identify opportunities (e.g., the proverbial baby thrown out with the bathwater).

With the current information I have, I feel like the path of least resistance for the market is probably down in the short term, which has made me adjust to a more defensive stance. The situation could change on a dime, and my stance will likely evolve as new information comes in.

In the meantime, I hope the uncertainty will create opportunities to add great businesses to your portfolio (and mine). A defensive stance can work wonders in highly volatile and uncertain environments.

Good luck out there!

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Disclaimer

This publication is for informational purposes only. Nothing produced under the Stocks & Stones brand should be construed as investment advice or recommendations. Mathieu Martin, the author, is employed as a Portfolio Manager with Rivemont Investments. This publication only represents Mathieu Martin’s own opinions and not those of Rivemont. Rivemont may own positions and transact on any securities mentioned in this publication at any time without prior notice. At the time of this writing, the Rivemont MicroCap Fund holds shares of Covalon Technologies (TSX-V: COV) and illumin Holdings (TSX: ILLM). Always do your own research and consult a professional before making investment decisions.

If you’d like to invest in small public companies, check out this post.