Guns and oil are the focus of Toronto portfolio manager Nicole Crawford’s search for the two best stocks to buy as governments try to get markets moving again.
Sequestered in her home like so many other investors these days, Toronto portfolio manager Nicole Crawford nevertheless perceives a glimmer of light on the horizon, in spite (or perhaps because) of market irrationality since the end of February.
“I think we’re right at the height of the panic at this point . . . so everything is being sacrificed,” she told Investor’s Digest. “This is not about fundamentals. This is about running for the exits. There is no rhyme or reason.”
Ms. Crawford is founder and CEO of Navroc Investment Management Inc., which has been active since the beginning of 2017. As of the end of 2019, its balanced composite portfolio, split evenly between dividend-paying stocks and bonds, had achieved an average annual return of 7.1 per cent since inception. Holding a bachelor of commerce degree from McGill University, Ms. Crawford is a chartered financial analyst as well.
Gut feelings or a bad case of indigestion?
Signs that investors are acting based on feeling rather than logical thought include the breadth of the current sell-off, she argues. For example, the portfolio manager had expected grocers such as Metro Inc. and Loblaw Cos. Ltd. would rally due to panic buying in their stores. On the other hand, she expected utility Enbridge Inc. to hold its own because of its high dividend and very stable customer demand, set apart from health concerns. Like most of the market, all were losers on March 18. “None of that matters now. It’s just pure emotion. . . . You can’t quantify it.”
While all of the companies in her clients’ portfolios have strong balance sheets and solid brands, she says, “They’re all getting killed.”
Ms. Crawford says, “Enbridge has a yield of 8.5 per cent now. We couldn’t resist.” She adds, “If people have money, they should definitely be investing in these dividend stocks.”
Although she has taken a more optimistic tack, Ms. Crawford suggests the recent share volatility and attendant dread are understandable considering the economic backdrop.
“This is unprecedented by any means. We have these two black swans hitting the market (COVID-19 and the oil price war between Russia and Saudi Arabia).”
Nobody could see this coming
Offering some consolation to investors whose savings have rapidly diminished in recent weeks, she also points out that earnings growth projections and many other metrics early in 2020, including rising share prices, justified staying in the market far more than pulling out completely.
“Nobody would have seen this coming. This is like a once-in-a-lifetime event. We’re in this uncharted territory and really, we don’t know what will happen.”
In addition, the speed of the decline has been spectacular. Whereas stocks recently plummeted from all-time highs to pre-Great Recession lows in just a couple of weeks, the same drop in 2008-09 took a year, Ms. Crawford observes, though she has treated those drops as an opportunity.
“This market has tanked so quickly we’ve been deploying (cash) as it’s been going down. I’ve never seen anything like that.”
Governments will do whatever it takes
Since the stock market typically anticipates events two to three quarters in advance, she says, “We’re probably seeing the worst-case scenario. Eventually people will come to terms with this and life will return to normal.” Based on the trajectory of COVID-19’s spread in China, Ms. Crawford predicts that by June or July, “We should be seeing a deceleration.” She adds with a laugh, “God, if China can get it under control, I would hope that we can, too.”
“The next three months are going to be really critical. We need to see more positive news headlines. Once the medical community gets a better handle on this virus and they understand it, then maybe we’ll see some rationality coming back.” By then, she also expects Saudi Arabia and Russia will have resolved their conflict. “I think Saudi can handle it, easily, but I don’t think Russia can.”
Ms. Crawford expresses confidence that governments are “willing to do whatever it takes” in terms of stimulus and interest rate cuts to get markets moving upward again.
“It’s really a gift. I don’t think we’ll see this in another lifetime.”
Accordingly, her “best buy” selections are defence manufacturing stock Lockheed Martin Corp. (NYSE—LMT) and oil and gas stock Valero Energy Corp. (NYSE—VLO).
The portfolio manager picks Lockheed Martin because the defence business is unlikely to decline, even if other economic sectors shrink. Her penchant for Valero is based on its extremely low valuation (trading at six times earnings) and 10 per cent dividend yield, plus its potential to rise when people start travelling again.
(Disclosure: Ms. Crawford owns shares of both Lockheed Martin and Valero Energy.)
This is an edited version of an article that was originally published for subscribers in the April 3, 2020, 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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