A funeral and burial services company and a trucking and related logistic services company are portfolio manager Guy Lapierre’s current ‘best buys’.
Retail investors who still believe in big-name stocks such as Tesla Inc. and similar technology-based, disruption-oriented assets such as cryptocurrencies and solar energy stocks are better off sitting on cash.
So proclaims portfolio manager Guy Lapierre. Mr. Lapierre is a vice-president and branch manager at PI Financial based in Greater Vancouver. He says: “I see those classes as representing the greatest vulnerability in the broad market.”
By and large, names like Tesla Inc. and Shopify Inc. have already run to extremely high prices on speculation during the pandemic (for example, after peaking at about US$180 a share in February 2020, Tesla rallied from a COVID low of about US$85 per share the following month to more than US$400 by August 2020 and has skyrocketed even further since, sitting above US$700 a share in the first week of August 2021) that on-the-ground results could never justify, the portfolio manager asserts.
“Elon (Musk) and Tesla have yet to generate a profit from manufacturing a car,” says Mr. Lapierre. He adds that at these extremely-high valuations, almost all holders are inclined to sell and few to buy, including Mr. Musk with regards to his Bitcoin holdings and Tesla shares (who, the portfolio manager predicts, will gradually sell both off). “The wealth has been made a long time ago and they’re not going to buy more.”
“The whole market is going to drop”
The portfolio manager heaps far more praise on the electric vehicle efforts of such global auto companies as Ford Motor Co. (“Ford is literally knocking it out of the park” by offering its tried-and-true truck lineup in electric versions like the Ford Lightning) and Volkswagen AG (“They are literally going to produce more EVs by 2025 annually than Tesla has ever sold”), partly because they have avoided potentially bad publicity in favour of perfecting the relevant technology for mass production. However, Mr. Lapierre expects panicked stock sales to be contagious, or at least to stifle investment elsewhere. “The whole market is going to drop so I do not subscribe to the idea that when Tesla is crashing, the people who would otherwise buy Tesla are going to buy Ford.”
Aside from the imminent collapse of pandemic tech darlings, higher interest ahead (which Mr. Lapierre considers inevitable) threatens ongoing growth. Most at risk are those working in what he refers to as the 40 per cent of the economy still hobbled by COVID, including travel, hospitality and entertainment and those who have borrowed on record-low interest rates to make large purchases in the hopes that they will stay down. “(For) the weak parts of the economy and the households that are vulnerable to that, the interest rates are going to be impossible to cope with.”
“Rude awakening” coming
The portfolio manager predicts a “rude awakening” when 10-year yields on US Treasury bills normalize. Rather than central bankers increasing the prime rate, he argues that they will greatly reduce their bond buying and holdings, forcing prices down by September or October. This in turn will make it harder to secure mortgages, thereby reducing real estate prices and prompting interest rates in the bond markets to rise accordingly. Mr. Lapierre notes, for example, that Japan’s largest pension fund, which is also the largest single holder of US Treasuries, has reduced their share from 48 per cent of the fund portfolio to 35 per cent.
Those higher interest rates will then lead to a retreat in equities, which had long been propped up by low bond yields.
The portfolio manager accordingly warns investors to steel themselves for a bumpy road ahead this fall.
That said, despite increasing the percentage of cash in his clients’ portfolios to reduce risk exposure, Mr. Lapierre points out: “We remain conservatively invested in terms of our asset allocation while enjoying stocks that are profitable. We’ll let those run.”
2 current “best buys”
Ranking among his ‘best buys’, then, are funeral and burial services company Service Corp. International (NYSE—SCI) and trucking and related logistic services company Mullen Group Ltd. (TSX—MTL).
Service Corp. has gained more than 30 per cent year-to-date, in line with a predictable glut in earnings since services previously delayed by COVID are now taking place. The company operates more than 1,500 funeral homes and 400 cemeteries across the United States, Canada and Puerto Rico.
Mullen Group offers a good yield and sits at an attractive price compared to past highs. “It’s a cyclical stock at the bottom,” says Mr. Lapierre. The company’s roster of experienced employees results in better driving for clients, plus it is well-exposed to booming sectors of the economy like construction.
The portfolio manager also continues to endorse ‘best buys’ named here previously, including Visa Inc. (NYSE—V) and Apple Inc. (NASDAQ—AAPL), since the expansion of their business does not rely on the pandemic subsiding.
This is an edited version of an article that was originally published for subscribers in the August 20, 2021, 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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