Reasons for optimism in 2022

Although prices of all manner of assets are dropping as interest rates rise to combat inflation and credit tightens, there are still reasons for optimism in 2022, argues Toronto portfolio manager Mike Vinokur.

2_stocks_to-buoy_your_portfolio_in_2022

2 stocks to buoy your portfolio in 2022

“I think that Canada is in a reasonably good place economically speaking,” he says in a June 14 interview with Investor’s Digest. “Barring a very steep economic recession, Canada will be reasonably OK.” He points out that the most expensive goods one typically acquires in a lifetime, homes and vehicles, remain in high demand because of severe undersupply, a bulwark against sluggishness.

Whether renting or owning, there is a clear ongoing shortage in housing stock, which in the case of the United States, Mr. Vinokur traces back to the subprime mortgage crisis and insufficient home construction since. As for vehicles south of the border, 17 million are required to keep the U.S. fleet at the same level, but only 13 million vehicles were manufactured in the last year and the year before that. He predicts that prices for those should keep up with demand, “which should bolster not only good-paying jobs but also GDP growth.”

Very strong employment numbers in Canada (even compared to the country’s “go-go” years) and the U.S. also imply higher wages (due to scarcity of labour) and consumer confidence.
Ongoing demand worldwide for commodities such as grain and oil bode also bode well for the Canadian economy, which is in a position to supply them, as long as there are enough workers to do so.

Commodity prices to remain elevated in the short run

“There’s going to be potentially a huge opportunity in the resource space,” he says. Mr. Vinokur predicts that commodities prices will remain elevated for another year or two. However, if prices spike up unacceptably and “demand falls off a cliff”, this could of course lead to a rapid loss of confidence and willingness to take on risk.

“I’m a little surprised at the hawkishness of the Fed and the Bank of Canada,” Mr. Vinokur remarks of recent interest hikes, though he adds that his surprise comes with a “grain of salt” given the pressure on central bankers to keeping inflation at a manageable level for consumers. The portfolio manager expresses concern that the central banks will act too strongly to counteract their previous accommodation; already, bond markets have become far more volatile.

On the other hand, he adds that if liquidity were “sapped from the system” after the third quarter and companies are unable to finance or refinance themselves, as was the case in 2008, the risk is not as great now as back then since companies were able to do much of their refinancing over the course of the pandemic, when rates sat at extremely low levels. (Increases are also being applied to relatively lower rates.) “The banking system itself, at least in North America, is reasonably liquid and solid,” says Mr. Vinokur. Still, he warns that by 2023, global reserves of petroleum and grain may become largely exhausted and “Things might be quite different.”

2 best buys for your portfolio

The portfolio manager names two “best buy” recommendations: Stelco Holdings Inc. (TSX—STLC) and Ally Financial Inc. (NYSE—ALLY). He says of Stelco, “I’ve never owned Stelco before because Stelco has always had a storied history of going bankrupt and needing restructuring.”

“It’s a very boom-bust type of business,” he concedes, but asserts that since its last reorganization in 2016, “This is a much-different animal and is making much, much more money now,” Mr. Vinokur stresses. The company holds between $15 and $20 per share in cash on its balance sheet at present.

Its current dividend is $1.20 per share per year, although it trades at a very low multiple of “something like four times (earnings) and that’s before including the cash. The portfolio manager says he sees room for the regular dividend to grow, as well as for Stelco to buy back shares and issue special dividends.

Ally Financial boasts a full range of services. Its businesses include mortgages, car loans, investment advice, credit cards, and insurance. “It’s basically a full-blown virtual bank, if you will,” says Mr. Vinokur. “I think it’s an easy story to understand.” The company trades at tangible book value, which he calls “very cheap” given a return on equity of about 15 per cent.

“Warren Buffett recently took a big position in it in the first quarter,” he notes, when the stock cost about 30 per cent more.

The portfolio manager says Ally’s capital return prospects are appealing thanks to its healthy cash generation. Ally also pays a dividend of US$1.20 per share a year. Mr. Vinokur concludes, “Over the next three years, these securities should do much better than where they are today.”

Mike Vinokur is a portfolio manager at and co-founder of MV Wealth Partners of Aligned Capital Partners.

This is an edited version of an article that was originally published for subscribers in the July 1, 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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