Full episode: Market Call for Friday, January 4, 2019
Tim Regan, managing director at Kingwest & Company
Focus: North American equities
The correction of the past three months has weighed on all of our nerves. Although it could persist a while longer, we don’t yet have a functioning crystal ball. Still, we don’t think the bull market is over.
Investors exiting the market, exacerbated in part by tax-loss selling in December, have amplified the downside. The main concerns are the Trump-manufactured trade conflict between China and the U.S., rising interest rates and fractious politics around the globe. While significant, the U.S.-China discord will only slow the American economy a little: it won’t cause a recession. Similarly, interest rate increases at the current muted pace won’t stop economic growth.
These concerns are all well-known and more than counterbalanced by GDP growth that’s expected to continue at the pace of the last few years through 2020, low unemployment rates and low-level interest rates.
We feel that this is a correction and nothing more. In the short term, emotion leads to overreaction, greater volatility and uncertainty: It’s human nature. But these times provide the opportunities for tomorrow.
Meantime, the stock market is about as cheap as it’s been since 2009. The forward price-to-earnings (P/E) on the TSX according to Bloomberg is 12.8 times, while the forward P/E on the S&P 500 is 14.6 times. All this with 10-year bond yields still under 3 per cent. These levels are certainly not justified and loads of good opportunities abound.
Last bought at $71.88. Trading at under 10 times 2019 P/E. Dividend yield at 4.9 per cent.
In general, Canadian banks are very cheap. Scotia is bulking up in global wealth management and Latin America while divesting in the Caribbean. Slowing mortgage growth rates may be spooking investors, but this had to be expected and is probably a net positive for the banks.
Last bought at $45.12.Trading at under 8 times 2019 P/E. Dividend yield at 3.5 per cent.
Earlier in September, Citigroup raised their long-term guidance, which was set back at their 2017 Investor Day. They raised how quickly return on tangible capital equity (ROTCE) would grow as well as their long-term target from 14 per cent to 16 per cent. ROTCE would jump 350 basis points quicker than anticipated, 100 points from tax rates and the other 250 from additional investments and expense management. Given the long-term increases by 200 basis points, management seems to have the reasonable expectation that some of these early gains will be competed away. Citigroup is trading at 1 time tangible book value. With conservative long term expectations of 3.5 per cent growth and 13 per cent ROTCE, the bank’s intrinsic value is around $100 per share.
AMC ENTERTAINMENT (AMC.N)
Last bought at $12.24.
It’s now the world’s largest movie exhibitor with over 10,000 screens in over 1,000 theatres. Over the last two years, AMC bulked up by purchasing Carmike in the U.S., Odeon/UCI in the U.K. and Europe, and Nordic Cinema in Scandinavia. The company is majority-owned by the Dalian Wanda Group and recently issued a large convertible bond to Silver Lake, the large private equity firm. Adam Aron, who’s been the company’s CEO since 2016, has executed the current global expansion. He was previously CEO of Starwood, Norwegian Cruise Lines, the Philadelphia 76er’s and Vail Resorts.
Last year, poor box office results seemed to have caused a large selloff across movie theatre company stocks. Sentiment hasn’t recovered even though attendance rebounded this year. Box office attendance in any single year is volatile based on the schedule of movies released by the studios. Rising ticket prices and concession sales keep overall revenues growing in the low single digits. Movie theatres are a cost-competitive, out-of-home entertainment option and investment in technology, premium seating and large format screens keep the experience differentiated from home viewing. While current stock prices foretell the demise of theatre going, we believe AMC revenues continue to grow, allowing it to pay down debt and drive equity free cash flow.
PAST PICKS: SEP. 6, 2018
NORTHWEST HEALTHCARE PROPERTIES REIT (NWH_u.TO)
- Then: $11.30
- Now: $9.54
- Return: -16%
- Total return: -13%
BLACKSTONE GROUP LP (BX.N)
- Then: $35.46
- Now: $30.07
- Return: -15%
- Total return: -13%
NEWELL BRANDS (NWL .O)
- Then: $21.27
- Now: $18.86
- Return: -11%
- Total return: -10%
Total return average: -12%