Oil and gas exploration and the emergence of a new coronavirus make for strange bedfellows in Contra the Heard’s Benj Gallander’s choice of his two current best buys.
While stock markets attracted more and more capital, driving prices ever higher, Benj Gallander and his colleagues at Contra the Heard took a step back in 2019, an approach he says they will continue in 2020 as the risk of recession looms. “It’s not as if we’re avoiding the market. It’s just that we’ve decided to be somewhat prudent,” he says, by trying to buy less and sell more.
Since 1995, Mr. Gallander has served as president of Contra the Heard in Toronto, an investment letter available online at contratheheard.com and also published as a print quarterly. In addition, he pens the Contra Guys column for The Globe and Mail with Contra’s vice-president Ben Stadelmann (the publication’s other co-founder).
Mr. Gallander manages the “president’s portfolio” at Contra. Including 2019’s results, he has achieved an average annualized return of 18.4 per cent over the last 10 years.
At present, the president’s portfolio consists of 21 stocks. The portfolio has historically been made up of 15 to 25 stocks, Mr. Gallander points out, “so we’re certainly invested”.
He adds, however, that due to Contra’s concerns about a coming recession and a possible market blow-off, “Last year for the portfolio, we didn’t buy any stocks. That has never happened before.”
Economy healthy but little room to grow
Today’s economic circumstances actually appear relatively healthy, the investment writer says, but he argues there is little room to grow from here. Interest rates are already very low worldwide, and quantitative easing has continued to push up public debt while inflating stock prices, leaving governments and central bankers few options to counteract an economic setback or negative market sentiment. “These are the times to actually pare back, and that unfortunately wasn’t done,” says Mr. Gallander. “When things go bad, the government has less ammunition in the tank, so to speak.”
Meanwhile, unemployment is also already very low, so the impact of higher employment (and, accordingly, more consumer spending, particularly among lower-income earners) would be limited. “They’re pretty much tapped out,” Mr. Gallander says of Canadian consumers. Falling indicators such as the price of copper and the Baltic Dry Index (a proxy for worldwide bulk dry goods shipping) suggest rough economic waters ahead as well.
Mr. Gallander suggests investor attitudes in the long bull market since the global financial crisis in 2008-09 are excessively optimistic, pointing to a recent high-profile US$7,000-per-share price projection for Tesla Inc. (currently trading at about US$750 a share) by 2024 as an example. “Once you start hearing things like that, you’re getting into bubbly craziness. It’s nonsensical. I feel that we’re moving from a very high number. To do as well as we did last decade would be very, very difficult.” It will be harder to eke out top returns from mutual funds and ETFs that are more diversified and thus more exposed to overall market tendencies, he adds.
2 best stocks to buy now
Even so, Mr. Gallander expresses confidence that Contra’s cherry picking can yield winning stocks. At present, he says oil and gas is “probably the most interesting sector out there.” Many energy companies warrant major interest and are ramping up operations in 2020 but are still being penalized for low oil and gas prices, according to the investment writer. As such, his first ‘best buy’ selection is North European Oil Royalty Trust (NYSE—NRT).
The US-based company collects royalties from the sale of natural gas, sulphur and oil extracted from its properties in northwestern Germany, which have more than a decade of production left in them. Local subsidiaries of multinational oil companies Exxon Mobil Corp. and Royal Dutch Shell PLC are responsible for operations and pay out the royalties, so North European’s overhead is extremely low while its payout ratio (to investors as dividends) is very, very high. “It just depends on what comes out of the ground and what the price is,” says Mr. Gallander.
His second ‘best buy’ selection, protective gear manufacturer Alpha Pro Tech Ltd. (NYSEAMERICAN—APT), is a timely pick tied to the emergence of a coronavirus. “Every time there’s a contagion scare, the stock price goes nuts, which is what it’s been doing,” said Mr. Gallander. The company produces medical masks and other equipment such as protective overshoes. It reached peaks during the H1N1 and SARS scares of the past. As more coronavirus news comes out, the investment writer says: “Based on historical data, there’s a good chance it will climb and quite quickly once again.”
Alpha Pro’s trading volume over three days in 2015, when H1N1 was still a news-maker, was higher than all of its shares outstanding. That year, its profits ballooned year-over-year, from US$1.5 million to US$9 million.
This is an edited version of an article that was originally published for subscribers in the February 21, 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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