“The shift in our society has been exacerbated. When government funding runs out, that would be apparent,” says Guy Lapierre. “You don’t replace the income of a 747 pilot with that of an Uber driver.”
The rapid stock market rally since its collapse at the end of February and into March has clearly swept up investors far and wide, but PI Financial portfolio manager Guy Lapierre is not buying the recovery, literally.
Based in Vancouver, Mr. Lapierre is a PI Financial vice-president and branch manager as well as a portfolio manager. He says: “We were surprised by the scale and the speed of the recovery at the index level, attributed to a very small number of stocks, most of which we wouldn’t have bought in December.” Accordingly, Mr. Lapierre and his colleagues have opted not to purchase shares of the technology stocks that have led the recovery, even after prices returned to or even exceeded pre-COVID highs.
Value investing à la Graham and Buffett
Instead, the portfolio manager says he has hewed closely to the value-investing wisdom of financial stalwarts such as Benjamin Graham and Warren Buffett: “Don’t overpay for your stock.”
Mr. Lapierre elaborates: “In summary, what we are looking at are stocks that are sustainable and able to survive COVID.” This has meant focusing more on companies’ potential lowest or “floor” prices as opposed to a best-case scenario, especially since the uncertainty COVID brings hangs over any prospects of success. “Any stock we buy we would be comfortable buying at 10 per cent below current prices, even 25 per cent below current prices.”
The portfolio manager also stresses that business models that rely on expansion and growth for success are out of luck for, he predicts, the next 18 months to 24 months. “We are running into an absence of demand and until COVID is under control and we get to 80 per cent or more of normal activity, any business depending on expansion is under duress. No company is going to incur additional costs until there is a vaccine and better understanding of how to control COVID.” Mr. Lapierre points to widespread corporate cost-cutting efforts, people working from home, and lower commercial real estate usage as signs of the current economic times.
All of these effects dampen expectations for more sales or, for example, businesses improving their services and infrastructure and hiring other businesses as consultants and technical support.
Is it growth or cannibalization?
The portfolio manager says that even companies succeeding in the current economic climate, citing Amazon.com Inc. as the standout example, are merely cannibalizing the business of existing grocers, clothiers, electronics retailers, etc.
“You are seeing even legendary brands such as Coca-Cola looking at their SKUs (stock-keeping units),” notes Mr. Lapierre. The company’s efforts to streamline its product offerings and thus its operations reflect general corporate trends, he says. “If it’s not being sold, they’re not trying it, and this is one of the most powerful brands that we have.” He adds that the push to streamline was led by grassroots efforts from Coca-Cola’s clientele wishing to be supplied with fewer products and thus suffer fewer complications and fewer costs. “That’s where we see the problems on Main Street.” In line with the growing distaste for expansion among businesses large and small, the government has continued to support the basic functions of the economy, but not those parts that rely on or demand growth to succeed.
Meanwhile, the business models that had risen in the COVID context (and even in the pre-pandemic past) are pale economic engines compared to their predecessors. For example, remarking on the airline industry, Mr. Lapierre says, “We’re anticipating a 40 per cent layoff across the entire industry with dramatic effects especially for Canadians because of the distances involved. Expect plane ticket prices to double, with, at most, half of the customers.” Accordingly, he says air travel is not worth touching for at least two years.
“The shift in our society has been exacerbated. When government funding runs out, that would be apparent,” the portfolio manager says, quipping: “You don’t replace the income of a 747 pilot with that of an Uber driver.”
3 stocks to buy for a post-COVID recovery
That said, Mr. Lapierre says there are still sustainable opportunities in the vast majority of the market that has not participated in the post-COVID recovery. His “best buy” selections are Pizza Pizza Royalty Corp. (TSX—PZA), Waste Management Inc. (NYSE—WM), and Premium Brands Holdings Corp. (TSX—PBH). “What we like particularly about (Pizza Pizza) is a small, sustainable dividend, a small footprint, and primarily takeout and delivery,” he explains. It also enjoys a low cost of entry and one store location can cover a larger area in case another closes.
Waste Management has created a niche for food waste and medical waste, bolstering their reputation for getting the job done right when sanitation is viewed as vital. Finally, Premium Brands Holdings is supplying less aircraft and airports with ready-made and wrapped prepared food items, but such packaging will mean its products are more attractive to Starbucks, which it also supplies.
This is an edited version of an article that was originally published for subscribers in the August 7, 2020, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.
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