Full episode: Market Call for Wednesday, November 18, 2020
Ross Healy, chairman at Strategic Analysis Corporation; portfolio manager at MacNicol & Associates Asset Management
FOCUS: North American large caps
We’re in a transition between the growth/momentum market which prevailed from 2009 to late 2020 and the emergence of a value motif in its place. The recent Pfizer announcement effectively sharply underlined what I was already starting to see: the fading of the “growth” story. Indeed, every week for the past 18 months now, we have been running an open series which we call FANG FRIDAY, which features the technical and fundamental analysis of those seven key market stocks, which also comprise over 22 per cent of the total U.S. market cap and therefore are critical to the outlook of the overall stock market. I have been increasingly observing of what I call “sloppy trading” among the group. In the past, notably at the tops of the 1972-1974 and 2000-2002 markets, this has all too often been a prelude to significant weakness amongst those kinds of stocks in particular and the overall market in general because it has become so heavily weighted by those growth stocks.
Not surprisingly, general market commentary sits in two camps. There is the hope that the good times are not over as signaled by the recent Dow Theory Buy signal. But the Dow, which has a very low weight in high tech-stocks, hides the increasing realization that those now-surreal values in tech may no longer be able support the absurd prices being paid. This can be very painful to investors because it actually takes hard analytical work to identify value stocks which have solid fundamentals. You can no longer just buy Netflix and Amazon and hold for years.
At this point, we run into an interesting question, namely what is the real GDP growth outlook? This is where the recovery issue now comes into focus. Some time ago, I showed viewers a graphic which shows the mathematical trade-off between what we measure as the solvency of a national economy and its potential to generate additional GDP. At $3.50 of debt per dollar of GDP, the ability of additional debt to grow GDP falls close to zero. The U.S. is now through that level. COVID-19 can take the blame for this decline, but the increase in indebtedness coupled with the collapse in GDP call into question the fundamental ability of the U.S. economy to actually rebound into the kind of strong 2021 which many expect. I don’t see it and that probably means that a lot more stimulus is coming, though that only deepens the problem.
Two kinds of events have typically ensued. The Economic Cycle Research Institute has a proprietary U.S. future inflation gage which has now made a very clear cyclical upward turn, having bottomed five months ago. Both prices and interest rates will be affected, as the recent uptick in long-term interest rates attests. This makes perfect sense given the stimulus (read: money printing) the Fed is planning to undertake now and in 2021. In that scenario, I could see that both commodity prices and interest rates are likely to move higher in 2021 and stock selection should be made with this in mind.
TOURMALINE OIL (TOU TSX)
The energy stocks are cheap. Nevertheless, if I am going to pick one stock it will have to be one which has earnings now and that analysts are comfortable with forecasting more in 2021. I like stocks with good balance sheets and are cheap. Trading at a 40 per cent discount to book, Tourmaline meets all of my criteria for a sound value stock.
ALAMOS GOLD (AGI TSX)
The depressingly poor U.S. balance sheet will only get worse in 2021. Holding gold stocks as insurance remains a sound and conservative approach to portfolio management. I like Alamos as it is cheap (1.25 times book) has a strong balance sheet, good intrinsic value and good mines.
LAURENTIAN BANK (LB TSX)
Coming through the COVID depression in 2020 with modest actual damage to their earnings save that which was imposed on them by OSFI to fortify their balance sheets, the banks should rebound in 2021 as year-over-year comparisons rebound as well. Most of the banks are well below their usual price range; that combined with good year-over-year earnings and above-average yields should allow for a good year in the market. Laurentian did have its share of issues. It has reduced its dividend and has generally tidied up its balance sheet. The stock is very, very cheap, so it will not take much to really move the stock price upwards.
PAST PICKS: DEC. 4, 2019
POWER FINANCIAL (POW TSX)
- Then: $32.52
- Now: $36.39
- Return: 12%
- Total Return: 13%
MANULIFE FINANCIAL (MFC TSX)
- Then: $25.26
- Now: $21.98
- Return: -13%
- Total Return: -10%
IAMGOLD (IMG TSX)
- Then: $4.75
- Now: $4.45
- Return: -6%
- Total Return: -6%
Total return average: -1%