Vancouver-area investment adviser Guy Lapierre says he is “pleasantly surprised” by the ongoing post-election rally in the United States. He is optimistic that stock market gains will continue for the next year to 18 months but he also warns: “I think there’s some cracks. We may have seen the first with the unemployment numbers.”
Guy Lapierre is vice-president, portfolio manager, and branch manager for Vancouver-based investment dealer PI Financial Corp.
He says that for the time being, he is optimistic that stock market gains will continue for the next year to 18 months without a market breakdown, but notes that he cannot see the bulls carrying on for another three to five years. “If we get another 10, 12 per cent between now and September, my anxiety level is going to increase,” he adds.
Mr. Lapierre continues: “I see some alarming signs.” Broadly speaking, those include overwhelming consumer and business confidence, infrastructure investment, and, the “cleanest dirty shirt” in the world economy, the U.S. slowly raising interest rates.
More specifically, he names the successful Snap Inc. (NYSE—SNAP) (parent of mobile app Snapchat) initial public offering at the beginning of March as one indicator that turn-of-the-millennium “irrational exuberance” has returned with a passion. The same applies to the valuation of Tesla Inc. (NASDAQ—TSLA) which in April overtook Ford Motor Co. (NYSE—F) in terms of market capitalization, before rushing past General Motors Co. (NYSE—GM) as well just days later.
“It gives me an indication of where I think the foundation will crack, setting off that market correction,” says Mr. Lapierre.
In this climate, the portfolio manager has cut back on his clients’ positions in such major winners as Apple Inc. (NASDAQ—AAPL) which has gained about 50 per cent in the last six months. In fact, across the board, 17 per cent of the assets he manages are in cash at the moment. “We could see that growing as much as 25 or 30 per cent this year as we take profits in our stock positions.”
Stick to dividend stocks with good cash flow
Mr. Lapierre suggests that easy returns will become harder to find in coming months and recommends dampening risk through asset allocation. Longer-term, he advises finding good opportunities among fixed-income investments (“one that would provide clients with a six to eight per cent return,” he insists) while sticking to large, stable, cash flow-positive stocks that pay dividends when investing in the equity market.
Returning to his earlier example of irrational exuberance, Mr. Lapierre compares Tesla to Ford, a U.S. global auto manufacturing stock he has long endorsed and continues to name a ‘best buy’.
He finds the former wanting. At present, Tesla only brings in about US$1 billion in revenue a quarter, produces 60,000 cars annually, and has no plan for profitability, he points out.
Its venerable peer, on the other hand, last notched up annual revenue of US$151.8 billion, builds six million motor vehicles a year, pays a dividend with a yield above five per cent, and made slightly less than US$6.2 billion in net income before extraordinary items in 2016. Mr. Lapierre says of Ford: “Basically they’re getting the crap kicked out of them over an 18-cent loss in the last quarter, and I attribute that to incentives.”
Ford paid out sales incentives to its dealers in the fourth quarter, giving about $10,000 to $15,000 off each truck sold, he explains. Nevertheless, the company reported combined earnings per share of $1.49 for the first three quarters of 2016.
“I know which stock I’m going to buy,” says Mr. Lapierre, though he admits: “Nobody right now is brave enough to sell Tesla short, so obviously I’m not.”
Mr. Lapierre’s second ‘best buy’, Canadian real estate stock Mainstreet Equity Corp. (TSX—MEQ), is a property management company that owns mid-market rental apartment complexes in the Lower Mainland area of British Columbia, Calgary (including the neighbouring city of Cochrane), Lethbridge, Edmonton and Saskatoon.
Since the properties pay cash flow positive rent, there is no need to redevelop them immediately, which means the prime, redevelopment-ready real estate the company owns sits undervalued on its books. In the meantime, Mr. Lapierre says: “They’re just running the company. They’re what I love—a very boring company that collects rent cheques with an appropriate level of maintenance for buildings of their age.”
(Disclosure: PI Financial has owned Mainstreet stock since the fourth quarter of 2016.)
This is an edited version of an article that was originally published for subscribers in the April 28, 2017, 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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