Staying Focused During Pandemic - by Dan Good
News is Almost All Bad
Stock prices have taken a huge hit this quarter which isn’t a surprise considering how bad the news has been for general populations and the overall economy. As John Templeton used to say the best time to buy is before you see the light at the end of the tunnel. This would be apropos to today as the news about cases and deaths increases each day in most parts of the world. It is difficult to view this as temporary but it is. Eventually we will get through it and come out the other side. But I am afraid it will be a much different world. The strong well managed companies will survive. The highly leveraged firms without a margin of safety will not. It appears that China has taken the most drastic containment measures and they “are on the other side now”. It is ironic that the Chinese stock market is one of the best performing markets so far this year. I put a purchase order in today to add to my Mackenzie China fund.
United States is in Crisis Mode
No matter how much politicians try to support their economies with massive cash infusions and slashing borrowing costs to near zero, the cost of fighting the virus has overwhelmed the system. Our economies have slowed drastically just due to social isolation. This is not to lighten the cost to society of deaths but even Trump has mentioned it might be better to get everyone working again sooner rather than later “damn the consequences”. He retracted and it looks like April and most of May will not see America get back to work.
The Euro Zone Waits
In contrast to United Sates, much of Europe was in a recession when the pandemic hit so values there have been stretched to extreme lows. Listening to a recent conference call, Dan Dupont mentioned this was a great source of value and, being a contrarian, I moved all of my RRIF account into an international fund. The Fidelity International Fund had imploded by some 40% so I figure the risk of investing now has already been taken into account and I assume Europe is ahead of North America on dealing with the Covid virus. I am investing with a 5 year time frame so if their economies get anywhere back to “normal” investors should get some incredible gains in the future. You need loss years to make 50% the next year. That’s just how the game plays out.
Oil’s Big Comeback
If you live in Alberta you know that oil prices have dropped dramatically, falling from some $50 per barrel to under $20. I don’t know if bad news comes in threes but oil was out of favor due to the shift to sustainable energy as economies have been switching to environmentally more positive sources such as solar, wind and even hydrogen. In fact, Ballard Power, a company that produces hydrogen batteries for fleets like buses and fork lifts was the top performing stock so far this year on the Toronto exchange. Then you had the world economies slowing down primarily due to people staying home and not producing as much, and to top it off Saudi Arabia and Russia decided to get into a spat and actually increase their production (if you can trust the news). This has hammered oil prices so as to make most of the oil sands and shale production not even economically viable.
The good news is that oil has staged a rather dramatic comeback over the past week and many oil stocks have surged. Dan Dupont with his Fidelity Large Cap fund has caught this upward wave as the fund increased some 5%+ in one day last week and is adding to gains as I write. His thesis was that oil prices had gotten much too low and were at levels that were not sustainable. So he was buying a few oil sands names and this has propped his fund up and it continues to head north.
A Shift to Value
Growth type funds have outperformed value funds for many years but this out-performance may have ended. Companies like Dollarama, Bombardier Recreational Products and Canada Goose have financed their growth with the use of debt. With growth on pause if not halted altogether, the risk these Companies have taken with debt has come home to roost. For example BRP shares have dropped from their high of $75 to under $19 today. When they announced positive earnings to the end of December things looked good and the stock was up on the news. I knew the world had changed since February and shorted these shares (again) and they have lost some 28% in just over a week. I just can’t see people out on Skidoos or Seadoos just yet. Even Dollarama has dropped from over $50 to $38 as sales seem to be slowing after the initial surge in shopping (hoarding). Canada Goose has seen their shares drop from $75 to $25. Wearing a Canada Goose jacket when people are having trouble holding onto a job, eating and paying rent just doesn’t sit well.
Cash Generation is Key
The selloff in equities has made the equity market an oasis for yield hungry investors, boosting the dividend yield on the S&P 500 stocks in the U.S to its highest level since 2009. Simultaneously, the investors stampede into Government bonds has forced bond prices up and yields therefore down. Apparently, the yield gap between dividends on stocks or yields on corporate bonds and 10 year treasury bonds has hit the highest level in at least five decades.
Sage Advice from an Old Guy
I have never in my 38+ years of investing seen values like I have today. Unfortunately index investing will just not cut it as there are many illiquid securities trading as low as 25 cents on the dollar, highly levered stocks that may not survive and most securities are in between the two in value. And no the banks are not safe nor cheap.