Full episode: Market Call for Thursday, July 30, 2020
Darren Sissons, vice-president and partner at Campbell, Lee & Ross
Focus: Global and technology stocks
Reflecting on the March 23 market lows, it would be easy to assume COVID was a short-term blip with no lasting effects. Currently, market prices do not reflect the long-term underlying performance to any great degree for many sectors. FAANGs and web-enabled big tech which have benefitted enormously during lockdown typically have share prices reflecting a continuing fundamental outperformance forever, as implied by current valuation multiples. Meanwhile out-of-favour sectors such as energy, real estate and retail are priced as if their businesses will cease to operate or will remain extremely impaired. Both views are likely incorrect.
Given the above, trading volatility has probably been the most rewarding trade in the last three months. Traders both professional and amateur have locked in great gains, especially on long cyclicals trades such as shipping or technology or via shorting REITs and oil. These long and short trades were largely driven by the mantra “don’t fight the Fed” and the fear of missing out.
Central bank stimulus has effectively established a market floor for security prices. Fiscal payments to citizens such as CERB have limited the economic downside near term. Central bank policies will remain accommodative, but fiscal payments will end. Investors now need to decide whether to continue trading near-term volatility and/or to begin locking positions down in deeply out-of-favour sectors that will generate strong recovery gains over multiple years.
Traders and investors should be mindful of the U.S. dollar’s historical trajectory following deep U.S. recessions. Given an absence of a social welfare net of any significance, the U.S. tends to experience deeper recessions vis-à-vis its trading partners. The U.S. dollar therefore tends to weaken into recessions and remains weak through the initial recovery phase. Allocating fresh capital to the U.S. now (or relatively recently) carries the risks associated with both the 2020 U.S. election cycle in November and the relative COVID economic fallout in 2021 versus its major trading partners.
Overall, our thesis remains the same. First, this too will pass so do not panic. Second, be opportunistic: Use market sell-offs to upgrade portfolios by adding high-quality franchises priced at a discount; use upward market surges to eliminate positions that no longer make sense.
Algonquin Power & Utilities (AQN TSX) Most recent purchase price $17.74
Algonquin Power is a renewables-focused utility which marries sustainable growth and prudent asset management. Given a growing dividend currently yielding 4.7 per cent, the company is well positioned to outperform in a near-zero interest rate environment. A recent $1 billion capital raise has offered new investors a discounted entry point. The new capital will be used to fund additional renewables growth moving forward. Key 10-year operating metrics include the annualized dividend, revenue and net income growth of 15, 33 and 13 per cent respectively. The 10-year annualized total return is 10.3 per cent.
Alibaba (BABA NYSE) Most recent purchase price $258
Alibaba is an asset-light business model that benefits from a defensive moat and operates in a structural growth market. Additional positives include a substantial valuation discount versus U.S. peers, so global fund flows will be a catalysts; and the pending IPO of Ant Financial (its financial arm Alipay), which is expected to be priced at US$200 billion or 30 per cent of Alibaba’s current valuation. Key five-year operating metrics in Canadian dollars include: 1) No dividend yet; and 2) revenue and net income grew at an average annualized rate of 46 and 32 per cent respectively over the last five years. The annualized 5-year total return in Canadian dollars is 26 per cent.
LVMH Moet Hennessey (MC EPA) Most recent purchase price €399
LVMH is the leading global luxury goods house. The 2019 US$16 billion acquisition of Tiffany is expected to close in October 2020. It will be additive to the company’s luxury stable of designer brands. During recessions, luxury tends to outperform as the wealthy and near wealthy continue to buy the category. Key five-year annualized operating metrics in Canadian dollars include a dividend, revenue, net income and total return of 16.7, 12.2, 17.5 and 22 per cent respectively. Common shares can be purchased in the U.S. under the ticker “LVMHF.”
PAST PICKS: JULY 26, 2019
Equinor ASA (EQNR NYSE)
- Then: $18.31
- Now: $14.94
- Return: -18%
- Total Return: -13%
Infosys (INFY NYSE)
- Then: $11.48
- Now: $12.88
- Return: 12%
- Total Return: 14%
Thai Beverage PCL (Y92 SGX)
- Then: SGD 0.84
- Now: SGD 0.64
- Return: -23%
- Total Return: -21%
Total Return Average: -7%