Portfolio manager Mike Vinokur says his choice of Teck Resources and Taylor Morrison Home Corp., is based on long-term scarcity of the goods they produce.
The combined uncertainties of summer wildfires in British Columbia and the resurgence of the Taliban in Afghanistan, to say nothing of the latest COVID wave, may have stopped some bulls in their tracks.
Toronto portfolio manager and MV Wealth Partners of Aligned Capital Partners co-founder Mike Vinokur, however, remains unruffled and has kept his clients well-invested, preferring to focus on the growth potential of a recovering economy.
“Generally speaking, the media always find a reason for why the market went up or the market went down, but . . . the market’s going to do what the market’s going to do,” he tells Investor’s Digest.
For example, stocks suffered greatly after the Sept. 11 attack. That said, conditions were already bearish given the dot-com boom that preceded it. “One could argue a recession would have happened whether Sept. 11 happened or not,” says Mr. Vinokur. Spending to overhaul domestic security in addition to the War on Terror and nation-building efforts in Afghanistan and the Middle East thereafter, on the other hand, arguably spurred the economic growth that followed, he adds.
In a similar vein, the portfolio manager brushes aside worries about inflation (along with interest rate increases to control it), describing it as a natural consequence of manageable temporary scarcity.
“Lumber prices went up a lot after the pandemic, and since then they’ve crashed,” he notes, underlining that the price hikes did not occur because there was not enough lumber to serve demand outright, but rather there was not enough available when demand was very high (thanks to new construction and renovations during COVID) and there were not enough people to harvest, process, and ship it (due to pandemic restrictions).
Commenting on interest, he says: “Should rates rise, credit will not necessarily be unavailable” since “interest rates are the cost of money.” As such, if the long-term interest rate is rising, that means the price of capital is going up due to greater demand, which the portfolio manager argues will encourage banks to lend more money since it is more profitable. Such business activity will in turn be received positively by the markets.
He says his main concern looking ahead is the potential return of pandemic rules this fall. “That may continue to have ramifications for many adjacent businesses,” says Mr. Vinokur, as well as the people who staff and service them, such as cleaners in hotels, taxi drivers, prep cooks and so on.
2 best stocks to buy now
Mr. Vinokur points out that both of his “best buy” selections, Teck Resources Ltd. (TSX—TECK.B; NYSE—TECK) and Taylor Morrison Home Corp. (NYSE—TMHC), are based on long-term scarcity of the goods they produce.
The portfolio manager highlights mining stock Teck for “being extremely cheap” at just 8.5 times next year’s earnings per share based on the US$3.20 consensus. At the same time, its copper (another hot commodity) production is due to nearly double with the completion of the Quebrada Blanca project in Chile, slated for 2023. He also praises its forward-thinking executive team (led by CEO Donald Lindsay, in place since 2005) and US$6 billion in cash.
“They want to build a Canadian titan that’s not going to fall at the whim of the commodities market,” says Mr. Vinokur.
“We are very bullish on commodities because we think there has been a stark under-investment in many commodities over the last 10 years,” he says. “Demand has just risen much further and much faster than supply can provide.”
Aside from copper, Teck also has steel-making coke and coal, zinc, and oilsands operations.
Taylor Morrison is a mid-sized home builder working in 11 US states that mainly builds single-family houses. Mr. Vinokur says that after the subprime mortgage crisis in the late 2000s, construction fell far short of demand year after year, explaining that although 1.1 million to 1.2 million new households are formed in the US annually, only around 600,000 new homes were being built. This was not an issue when there were too many existing homes already and not enough buyers, but now, Mr. Vinokur says, “That inventory has been eaten into and all these home-builders are going full-out to catch up with demand.”
As a sign of its management’s business savvy, Taylor Morrison has managed to reduce its net debt-to-capital ratio from 47 per cent in the first quarter of 2020 to the low 30s by the end of this year. At present, it trades at only 4.5 times next year’s expected earnings and, the portfolio manager points out, “the earnings estimates keep going up”.
This is an edited version of an article that was originally published for subscribers in the September 3, 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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