Stormy clouds of a recession are brewing. However, below are two stocks that are considered recession-proof due to their “brand power” by portfolio manager Benoit Poliquin.
Should the forming clouds of recession deliver on their dark promise, some parts of the economy will get drenched, but others promise to stay (mostly) high and dry. “We’re looking for companies that have pricing power or they solve a problem that you can’t get away from,” says Benoit Poliquin, president and portfolio manager at Exponent Investment Management in Ottawa, in an April 21 interview with Investor’s Digest of Canada. Mr. Poliquin is also a member of the CFA (chartered financial analyst) Institute as well as a certified financial planner (CFP).
He notes that the yield curve on bonds (that is, the interest rates for bonds of increasingly lengthy maturity dates depicted along a curve) in the U.S. and Canada as of March 30 had sharply steepened compared to a year ago, and even since the end of 2021. In the case of the United States, the interest rate on 10-year bonds dropped lower than that on two-year bonds, an “inversion” of the curve (since short-term investors will profit more than longer-term ones) that typically precedes a recession.
Central banks’ stated intention to stop buying bonds and enact policies of quantitative tightening, along with rate hikes (investors generally anticipate seven to eight increases to the Bank of Canada overnight rate before it settles, according to Mr. Poliquin) may well have the intended effect of cooling asset price increases, but the portfolio manager says of the transition, “It’s probably going to be clumsy and messy…My biggest concern is the Canadian real estate
market.” Nevertheless, he adds, “If recession is avoided, it’ll probably be because central banks have managed to pull off a soft landing…I think that’s entirely possible.”
Looking ahead, Mr. Poliquin asserts that “inflation is the highest-probability event, and economic slowdown is the second-highest probability.” In this climate, he prizes strong brands because they translate into pricing power. The portfolio manager also highlights “underowned” assets, solid businesses that are not as sought-after as their actual market significance suggests.
“L’Oreal is probably my highest-conviction name, simply because makeup sales don’t really change,” the portfolio manager says of his first “best buy” selection.
L’Oreal SA trades on the Euronext Paris exchange; there is also a L’Oreal ADR (OTC—LRLCY), or American depositary receipt. It is the world’s largest cosmetics firm. Mr. Poliquin points out that as a rule, people do not cut down on buying beauty products because they are viewed as “small luxuries” to reward themselves with, even in tough times.
The portfolio manager’s second big-brand “best buy” is Walt Disney Co. (NYSE—DIS). He underlines its “ultimate pricing power” (thanks in no small part to its brand power), pent-up demand for its theme parks (travel is also underowned), and dominant media franchises as reasons to buy, but adds that the stock is sitting around fall 2020 levels (prior to the adoption and known effectiveness of COVID vaccines) “like the last 18 months never happened.”
This is an edited version of an article that was originally published for subscribers in the May 6, 2022, 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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