Portfolio manager Mike Vinokur says: “I think that there are still some very interesting buys in the home-building sector in the US.”
The world (including Canada) is almost certainly worse off following Russia’s invasion of Ukraine, but North America’s economies are the likeliest safe harbour for investment capital fleeing the chaos of war.
Toronto portfolio manager Mike Vinokur is co-founder of MV Wealth Partners of Aligned Capital Partners. Discussing the invasion in a March 2 telephone interview he says the West’s sanctions against Russia threaten to backfire (or at least cause economic pain) on both the supply and demand levels given the country’s economic significance. “It’s a double-pronged issue. Because of all the ESG initiatives that have been going on for several years . . . there has been a lack of investment in upstream oil and gas,” explains Mr. Vinokur. Instead, investments in renewable energy were favoured, but those technologies are still unable to meet the world’s needs.
For a while, the lull in demand from COVID softened the blow of inadequate conventional energy supply, but the problem “has come home to roost” as economic activity (such as plastics manufacturing or air travel) resumes and expands, the pandemic encourages personal transportation use over public, and houses in winter need heat. Russia’s recent actions have resulted in a global distaste for engaging with the country, but as one of the world’s largest oil and gas producers, it has the upper hand, Mr. Vinokur argues.
“We’re between a rock and a hard place,” he remarks, adding that OPEC (of which Russia is an ally) may have more potential production capacity but has expressed reluctance to hike its organizational daily production quota past the increase of 400,000 barrels in March it had already planned. (It has since agreed to continue that hike in April.) “That (Russian) energy needs to go somewhere and there’s going to be, more than likely, a buyer willing to take it on,” says Mr. Vinokur, even if it is at a discounted price.
Falling ruble limits buying power
Meanwhile, the collapse of the ruble has severely limited the buying power of Russia’s roughly 145 million would-be consumers. The closure of the country’s stock markets has further cut investors off from their assets. Mr. Vinokur observes: “If you are searching for liquidity, you have an issue, potentially.”
In light of uncertainty, central bankers’ previous plans to increase interest rates may give way to a more tempered, wait-and-see approach. “This escalation of hostilities between Russia and Ukraine gives the cover that perhaps they needed to raise rates not as many times,” says the portfolio manager.
He says that he now anticipates two or three interest rate increases by the Bank of Canada this year, rather than four or five. (The bank indeed raised its benchmark rate by 0.25 percentage points to 0.5 per cent on March 2.)
Furthermore, the portfolio manager underlines that domestic markets have remained relatively strong despite volatility in recent months, which he attributes to the economy’s heavy commodities exposure. While Mr. Vinokur stresses the unfortunate circumstances that led to the situation, he predicts that the Canadian and US markets will be viewed by war-wary investors as bastions of resilience and safety, geographically distant from the conflict.
Mr. Vinokur also expresses optimism that the pandemic will remain under control (using tools such as antiretroviral drugs) in Canada and the US enough to allow economic re-openings to play out. Accordingly, Mr. Vinokur says, “I think that there are still some very interesting buys in the home-building sector in the US.”
2 US home-building stocks to buy
The portfolio manager named his first “best buy” selection, Taylor Morrison Home Corp. (NYSE—TMHC) in an interview with Investor’s Digest last August. At the time, he noted that since the US sub-prime mortgage crisis in the late 2000s, new home construction had been only about half of what was necessary (600,000 units annually) to account for new household formation (1.1 million to 1.2 million a year). Taylor Morrison is a medium-sized builder of mostly single-family homes operating in 11 states.
His second “best buy” pick is PulteGroup Inc. (NYSE—PHM). “Both are extremely cheap in my view, very well-run, have great balance sheets, and I’m very excited about the demand-supply equation in the US at this time,” he says. PulteGroup, previously working under the name Pulte Homes, is active in 23 states. One of the largest home construction companies in the US, Pulte reported home sales revenue of US$4.2 billion for 2021’s fourth quarter, along with adjusted net income of US$2.51 per share, up 38 per cent and 64 per cent year-over-year, respectively.
The portfolio manager says he is keeping an eye on Canadian energy producers (particularly upstream oil-and-gas companies) as well, highlighting their much-tightened balance sheets and leaner operations against a backdrop of rising prices. Nevertheless, he advises waiting for a pullback from current conflict-related speculation before buying in.
This is an edited version of an article that was originally published for subscribers in the March 18, 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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