Ross Healy, chairman, Strategic Analysis Corporation; portfolio manager, MacNicol & Associates Asset Management

FOCUS: North American large cap stocks

MARKET OUTLOOK:

Market commentaries generally fall into two camps. The first camp feels that the market may be a bit high, and while a "healthy" correction of maybe 10 per cent might be in order, looking out, it is essentially onwards and upwards now that global economies are reopening and the COVID pandemic is becoming manageable in more parts of the world. The second camp believes that valuations are so high that a savage bear market lies in front of us as the shear weight of excessive optimism comes crashing down. In addition, given how high the market has come since the lows of March 2000, once a bear market gets under way, it will be very hard to stop.

For my part, I suspect that many investors have lost track of just how expensive the S&P 500 actually is. Consider the S&P 500 is just 15 per cent away from the same peak valuation (in price/book terms) that it reached in early 2000. This implies a market target of very close to 5000 for that index. After that, I, for one, would be very surprised if it can rise any further, low interest rates or not. What happens then is the million-dollar question.

I suspect that the Fed cannot really afford a major market sell-off given the fragility of the recovery to date. The resultant decline in consumer confidence, the already miserable level of capital spending, plus the usual corporate belt tightening would crush the economy.

I don’t think that the Fed has a clue as to what to do. Facing a sky-high stock market, powerful inflation, and a slowing economy following the initial COVID rebound, Powell chose to sound hawkish and do nothing to give himself maximum leeway – although maximum leeway to do what, remains to be seen.

TOP PICKS:

Alamos Gold (AGI NYSE) is not only extremely cheap, trading down at its book value, but also has a superb balance sheet, and has succeeded in greatly expanding its high-quality gold mining reserves – which is one of the critical outlook factors in an industry where expanding production has been increasingly difficult.

Alibaba (BABA NYSE) has suffered a major fall from grace as Jack Ma fell into disrepute with Chinese leadership, but may be coming back again. The shares have now fallen to a valuation level (about 4 times book) which has tended to mark the usual low for ‘fallen’ growth stocks. Growth appears to be continuing, however, and this is a great opportunity to buy a cheap growth stock. Note, however, that the shares must hold above the US$200-05 level or the market will be signaling much deeper concerns and challenges – and much lower prices. Invest accordingly!

ARC Resources (ARX TSX) We continue to like the Energy sector and, for one, ARC Resources offers surging upside potential, a decent yield with lots of room for increases, and a strong balance sheet. I would remind viewers of my forecast in early March 2020 with Anita Sharma, in which I recommended an ETF of junior Canadian oil stocks – if one even existed (which it did not). Of course, back then, no one would have bought such a package! Average gain is in excess of 800 per cent since then and the oil stocks are not finished yet!

PAST PICKS: July 17, 2020

Manulife Financial (MFC TSX)

• Then: $19.14
• Now: $24.40
• Return:  27%
• Total Return: 34%

Pembina Pipeline (PPL TSX)

• Then: $33.66
• Now: $39.65
• Return: 18%
• Total Return: 27%

Alamos Gold (AGI NYSE)

• Then: $10.40
• Now: $7.81
• Return: -25%
• Total Return: -25%

Total Return Average: 12%

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Company Website: Strategicanalysis.ca

Blog: The Occasional Contrarian