Buying out-of-favour stocks

Often, to make profits from stocks, you must think outside the box. That may require a healthy dose of politically-incorrect thinking. ValueTrend’s Keith Richards takes us there.

ValueTrend’s Keith Richards looks at some politically shunned industries to see if there are investment opportunities for the contrarian investor.

Recently, I’ve been finding value in stocks and sectors that might be considered politically incorrect. For example:

■ Air Travel
■ Oil & Gas
■ Coal
■ Tobacco

I do believe there are huge opportunities that lie in airlines, oil & gas stocks, and coal. I also like the look of some of the tobacco companies—which is another taboo industry. So—why don’t we dig into these politically shunned industries to see if there are investment opportunities for the contrarian investor.

Airline stocks

Airline revenue fell more than 65 per cent in 2020 compared to 2019. Most airline stocks lost 50 per cent or more of their value as the market re-valued the stocks. Thanks to a bailout by the Trump administration in 2020, there weren’t any major US airline bankruptcies. Passenger volumes will pick up as the economy re-opens. The question is, how long will it take for that volume to get back to pre-COVID levels? Although airlines will survive, it could be a while before they thrive. Still—they appear to be oversold from a technical perspective. I am intrigued by the sector’s potential for a quick oversold trade.

Are there any airline stocks to buy right now? We added one airline to our ValueTrend Aggressive Strategy. Air Canada (TSX—AC) formed a triangle consolidation after its meltdown. It broke out, and looks to have re-tested that breakout point, making a good entry point. We bought this stock in our ValueTrend Aggressive strategy on that test in early March. So far, it has done quite well. Other stocks in this sector worth examining include American Airlines (NASDAQ—AAL), Delta (NYSE—DAL), JetBlue (NASDAQ—JBLU) and Southwest (NYSE—LUV).

Oil & gas stocks

I’ve written enough articles in The MoneyLetter covering oil that I am sure you are aware of my bullish stance on energy. For readers who took note of my original articles back in the fall of 2020 on the energy trade, you will have profited by substantial gains in energy stocks. The case for energy is simple. The economy will recover. As it recovers, infrastructure is built, travel increases, etc. Energy is needed to facilitate this re-build. Solar energy is years away from replacing fossil fuels.

The infrastructure build in the developed worlds AND the developing nations like China and India will push up commodity demand. This in turn will cause commodity inflation, which in turn will stoke inflation generally. Furthermore, given that globally the average investment grade bond yields are less than 2 per cent, the desire to hedge against the prospect of 2 per cent greater inflation will increase over time. And the best way to hedge against infrastructure inflation is with infrastructure commodities: metals and oil, both of which, ironically enough, cause carbon emissions to produce and use. We have here, then, a self-reinforcing metals and oil grand super-cycle bull market, a paradigm shift from the past decade of commodity lethargy.

We hold an overweight position in energy stocks. We are also substantially invested in base metals and materials. You can look at the major producers like Suncor (TSX—SU; NYSE—SU), which we hold in the ValueTrend Conservative Equity Platform. You can also look to the pipelines for their turnaround potential. They will all benefit from this re-opening economic outlook.

Coal stocks

Like the energy trade idea presented in my MoneyLetter articles last October, talking about coal will rub some investors the wrong way. As did the energy trade I suggested last fall, the energy trade seemed to be at the time—this idea will strike you as ‘radical’. When I was originally writing about fossil fuels last fall, the word of the day was that carbon emissions were dead. It was all about solar, electric vehicles and clean energy. I hope it does rub some people the wrong way when I talk about coal, because that will imply I’m on the right path.

Coal has been getting a bad rap over the past few years. Its considered ‘dirty’ energy. And dirty energy isn’t in vogue. But, then again, neither were oil and gas. But market realities countered the clean-green trade, making for a significant investment opportunity. I think coal is in that same situation. To understand the trade, let’s examine the two bigger markets for coal:

1. Electricity: While electricity production using coal is dissipating in North America, it continues to grow in India and China. As I hammered on this blog back in October: China and India are the fastest growing economies in the world. They are completely distancing themselves from the ‘clean energy’ movement. To be perfectly clear—they don’t give a damn, and have illustrated complete disinterest in joining the clean-green party. Growth matters, and there’s no incentive for either nation to go through the expense and aggravations to change their power facilities to cleaner power. Period.

2. Industrial production: Coal (coke) is used in the production of steel. Economic resurgence means increased demand for commodities like steel. Coal can also be used in production of cement, paper, aluminum, ammonia, creosote, etc. These sound like re-opening materials to me . . . and I am sure that our friends in the East will want in on this action too.

SunCoke Energy (NYSE—SXC) was bought in our ValueTrend Aggressive Strategy in mid-February after it broke its $6 neckline. The stock targets anywhere from $9 to $12 on a technical basis. Lots of reward potential, commensurate with the risks.

We also took on a position in Westshore Terminals (TSX—WTE) in March. This company doesn’t produce coal, but they ship it overseas. If overseas production increases, it stands to reason that WTE would benefit. The stock pays a dividend, too. You won’t get the upside or the downside with this stock, but it’s kind of a back-door play on coal for those who haven’t the stomach for the higher levels of risk on a pure coal play. The chart broke through its $18 neckline, which suggests a $22 target.

Tobacco stocks

One politically incorrect sector that recently caught my eye is the tobacco industry. Like the coal trade, this industry has its dark side. Both industries have declining usage in much of the developed world. Both industries have products that negatively impact the environment and/or human health. And yet—both industries continue to have a market. Particularly in China.

According to the WHO (World Health Organization, not the famous rock group!) South East Asian Region has the highest rates of tobacco use, with more than 45 per cent of males and females aged 15 years and over. But the trend is projected to decline. However, the Western Pacific Region, including China, is projected to overtake South East Asia as the region with the highest average rate among men. With economic expansion as a top priority (see my comments for both the oil and gas industry and the coal industry above), it might make sense that a growing population in China is inevitable. A cultural indifference towards the negative health consequences of tobacco usage, a potentially growing population, and the highest percentage of smokers in the world, might suggest an opportunity in this downtrodden sector.

One stock we like is Philip Morris International (NYSE—PM). The stock appears to be breaking out. The upside price potential is reasonable, but not massive. The dividend, currently well over 5 per cent, adds to that upside. I target the stock to move to technical resistance in the mid-high $90s. We own a small position in PM in our Aggressive strategy. Other stocks to consider in this sector are Imperial Brands (OTCMKTS—IMBBY) and Altria Group (NYSE—MO).

Conclusion

Sometimes, to make profits you must think outside of the box. That may require a healthy dose of contrarian thinking. To assist readers in the true art of contrarian investing, I have been working on a book on that subject—due to be published this summer. I’ll be sure to make note of it in a future article when it becomes available. In the meantime, I hope the above ideas stimulate some current contrarian investment ideas for you to consider.

Keith Richards is Chief Portfolio Manager & President of ValueTrend Wealth
Mgmt. He can be contacted at info@valuetrend.ca. He may hold positions in the securities mentioned. The information provided is general in nature and does not represent investment advice. It is subject to change without notice and is based on the perspectives and opinions of the writer only. It may also contain projections or other “forward-looking statements”. There is significant risk that forward looking statements will not prove to be accurate and actual results, performance, or achievements could differ materially from any future results, performance, or achievements that may be expressed or implied by such forward-looking statements and you will not unduly rely on such forward-looking statements. Every effort has been made to compile this material from reliable sources; however, no warranty can be made as to its accuracy or completeness. Before acting on any of the above, please consult an appropriate professional regarding your particular circumstances.

This is an edited version of an article that was originally published for subscribers in the February 2021/First Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.

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