Jason Mann, chief investment officer at EdgeHill Partners
Focus: North American equities

MARKET OUTLOOK

It’s a very difficult investing environment right now, with volatility at highs not seen since the 2011 European debt crisis and the 2008 financial crisis before that. Playing defense until the dust settles means reducing or eliminating directional market risk.

In our view, some of the highest-risk stocks to own now are the most expensive growth stocks, particularly expensive U.S. tech stocks. While they’ve largely held up on a relative basis, if we do roll into a recession (which must at least be a consideration) these growth stocks will get hammered. We’ve already seen it in the cannabis sector this year, as the bloom has come off the most speculative growth stocks.

We prefer higher-quality, reasonably priced stocks with stronger balance sheets that can both weather the current storm and have good amid what’s likely to be meaningful stimulus from both central banks and from fiscal spending by governments. We see value in financials, industrials and communications services. We’re avoiding expensive utilities, and are net short energy and materials sectors.

TOP PICKS

PULTEGROUP (PHM NYSE)

We’re looking for picks that can do relatively well in the current environment, aren’t priced for perfection in terms of valuation and can potentially thrive coming out of the current environment. Homebuilders are interesting because lower interest rates tend to encourage home purchases coupled with strong current employment and good household balance sheets. The risk is that an extended recession will hurt employment and have the opposite effect. Building permits and new home sales have both been strong.

Pulte is one of the larger home builders in the U.S., with one of the best balance sheets. It also scores well for us on valuation. They pay a small dividend, but have tons of room to raise it or deploy cash to buybacks or M&A. Price momentum is also very strong, scoring in the top 3 per cent of U.S. stocks.

QUEST DIAGNOSTICS (DGX NYSE)

Quest diagnostics operates a national diagnostic testing and labs business. This is another stock that has an obvious near-term tailwind as they now offer COVID-19 testing. As the U.S. gets its act together to confront this virus, testing capacity is a critical part of that response.

Quest has grown through M&A, acquiring smaller players and consolidating, further pressuring smaller labs. While it’s a near- or short-term opportunity, the stock is not overpriced, taking a longer-term view.

Price momentum is very strong, in part because of the optimism for them in the near term. It also tends to be a lower volatility stock, reflecting their stable underlying business.

CT REIT (CRT-U TSX)

CT is the REIT spin-off from Canadian Tire. They own the retail locations, four distributions centres and mixed-use buildings. 93 per cent of their rents come from Canadian Tire, so results are very stable.

They are a “triple-net” REIT, meaning their tenant pays all the expenses of the property, including real estate taxes, building insurance and maintenance. Triple-net REITs trade at a premium due to extremely stable cash flows.

In some ways, a REIT like this should be thought of as a long-term corporate bond. Ultimately, this is in part why we like it. As interest rates fall, the value of stable cash flows increases. It pays a sustainable 4.8 per cent yield, which is attractive in the context of 3.8 per cent Canadian corporate long-term bond yields. CT’s balance sheet isn’t over-levered and looks optimal for their business.

PAST PICKS: MAY 10, 2019

ENERPLUS (ERF TSX)

• Then: $11.87
• Now: $2.89
• Return: -76%
• Total return: -75%

GIBSON ENERGY (GEI TSX)

• Then: $22.09
• Now: $18.27
• Return: -17%
• Total return: -14%

BROOKFIELD BUSINESS PARTNERS (BBU-U TSX)

• Then: $52.05
• Now: $45.60
• Return: -12%
• Total return: -12%

Total return average: -34%

WEBSITE: www.ehpfunds.com