Consumer goods stock Rogers Sugar and oil and gas stock Inter Pipeline have solid fundamentals specific to their companies and outside of general market concerns.
Today’s stock market is one for selling, not for buying, remarks Vancouver-area portfolio manager Guy Lapierre of PI Financial. “From June to now, we have pushed completely forward in our asset allocation shift to reduce our exposure to equities,” said Mr. Lapierre, who is also a vice-president and branch manager at the brokerage.
Mr. Lapierre explains that his assessment of the market is not borne of a particular event, but rather a response to “more of a trend as we keep hitting record highs”.
Taking some money off the table as stocks continue to rally is consistent with his structured approach to investing, he adds. He asserts that there is little room to be optimistic about further growth.
Pointing to the lack of appetite for WeWork Companies Inc.’s planned initial public offering (IPO) and the company’s decision to postpone it, the portfolio manager suggests the IPO market is softening because investors are waiting until after a correction. Mr. Lapierre estimates such a correction could set the markets back up to 15 per cent, with companies across the board taking hits.
Major events a cause for sell-off
While he doubts the Canadian federal election will have any impact on markets south of the border, he does note that “the market will continue to be ‘whipsawed by tweet’ (react to US President Donald Trump’s Twitter missives).” He also raises the possibility of Federal Reserve board chair Jerome Powell quitting before his term’s end, “which would be a strong negative to the bond market”.
Farther from home, catalysts for a market decline abound. Ongoing protests in Hong Kong, the spectre of Brexit (whether a deal shapes up or not, foreign companies and professionals are leaving the City in face of uncertainty), a lack of experienced leadership in the West, and high US debt to China (not to mention the countries’ trade war) could erode performance.
As such, he is treating events that affect share prices as selling opportunities instead of opportunities to pick up shares. For example, the Sept. 14 drone attacks on major Saudi oilfields disrupted about five per cent of the world oil supply.
Not surprisingly, the news prompted domestic oil stocks to climb on concerns about foreign energy supply security. It also led Mr. Lapierre to sell off the rest of his clients’ Canadian oil stocks, such as Baytex Energy Corp. (TSX—BTE; NYSE—BTE) and Vermilion Energy Inc. (TSX—VET; NYSE—VET).
“There’s no US$100 (per-barrel) oil in the future that anyone can see (due to US shale producers ratcheting up when prices rise and closing any supply gap),” he says, thus hindering Canadian energy’s long-term prospects. “They’re good businesses, but the upside pop, along with bonuses and good times and a booming Alberta economy, are just not part of our expectations.”
2 ‘best buys’ have strong dividends and growth
The portfolio manager says his two ‘best buy’ picks, consumer goods stock Rogers Sugar Inc. (TSX—RSI) and oil and gas stock Inter Pipeline Ltd. (TSX—IPL), stand apart from peers thanks to solid fundamentals. “(Their strengths) are specific to the company and outside of the general concerns we have with the market.” Both Rogers and Inter have strong dividend yields (6.5 per cent and 6.9 per cent, respectively) and “room for upside surprises”.
“Rogers Sugar is seasonal. We’re going into Halloween, which has become such a huge event,” Mr. Lapierre explains. Thanksgiving and Christmas will further sweeten sales, he says. The company has also expanded its product line, by introducing value-added, sugar-rich items such as cereal. “They’re still doing inputs in the baking industry but they’re manufacturing.”
As for Inter, the portfolio manager describes its $4-billion refinery to convert propane into acrylic acids (used in items as varied as paints and diapers) as a solid opportunity to add revenue as soon as it opens since clients would simply flare off the propane at source otherwise. Because its market capitalization is only about $8 billion, the project has weighed down on shares.
Nevertheless, Mr. Lapierre says: “We are comfortable that the dividend is secure under current revenue, as well as the capital cost for the refinery.” The company is also likely to benefit from a rush to domestic energy due to concerns about Mideast oil supplies.
Despite his overall view of the markets, the portfolio manager says he and his colleagues are investigating two other sectors for potential entry: rare earth elements (used in batteries) and the defence sector. China, Russia, and Africa supply most rare earth at present, driving interest in more secure sources. Mr. Lapierre suggests a military buildup and maintenance in light of a US defence spending hike authorized last budget and global tensions could pave the way to a favourable trade in the next three to six months.
This is an edited version of an article that was originally published for subscribers in the October 4, 2019, 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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Investor's Digest of Canada •10/24/19 •