Some of Canada’s top value-style managers are circling around decimated stock markets like excited vultures, surveying the carnage for stocks of powerful businesses with superior long-term growth prospects whose prices don’t reflect their potential
Take Larry Sarbit, fund portfolio manager and president of Winnipeg-based Sarbit Advisory Services Inc., as an example. He would be perfectly willing to let money burn a hole in his pocket; in fact, he’s been known to hoard large holdings of cash in his funds for years while waiting for attractive buys to appear.
But as fears of global recession and sovereign-debt defaults send flighty investors on a frantic dash to the sidelines and pummel equities markets, Sarbit is moving in the opposite direction. He now is 90% invested in stocks.
“I’m running out of money,” says Sarbit. “When people don’t want to own stocks, they create bargains. Fear, stress and uncertainty keep them out of the market. They sell at the most inopportune times. And that’s when we show up.”
Not frightened by market declines, Sarbit and other value investors lie in wait for them.
Sarbit specializes in the U.S. market. His expertise is available to retail investors through IA Clarington Sarbit U.S. Equi-ty Fund, sponsored by IA Claring-ton Investments Inc. of Toronto. Among Sarbit’s favourite buys are shares in Warren Buffett’s empire, Berkshire Hathaway Inc.; drugstore chain CVS Caremark Corp.; and Coinstar Inc., which operates unmanned movie-rental machines in shopping locations across the North America.
Sarbit says patience is a huge part of successful investing: “You don’t put money to work just because you have it; [you do so] when you can do something intelligent with it.”
Sarbit views himself as a “purchaser of businesses,” with an ideal holding period of decades or generations: “If we can’t find anything to buy at a reasonable price, we don’t invest; we wait. Right now, we are not waiting. There is an abundance of good businesses trading at attractive prices.”
Other well-known value-seeking managers in Canada also are finding attractive pickings. Ian Hardacre, vice president with Invesco Canada Ltd. in Toronto and lead manager of Trimark Canadian Fund, is not afraid of the stock markets’ stumbles. In 2008, when the global financial meltdown hit and it appeared that the banking system was on the verge of collapse, Hardacre dove in as prices were plunging. That strategy has paid off: as of Sept. 30, Trimark Canadian Fund has a three-year average annual return of 2.3%, according to Morningstar Canada, compared with the median return for Canadian equity funds of 0.2%.
“As bottom-up value inves-tors,” Hardacre says, “we like periods when stocks are mispriced, and this is a great time. The prices of many companies are reflecting expectations of no growth or an indefinite business decline. There are a lot of companies we have been watching a long time, and we now like the price.”
Hardacre is looking for companies whose stock prices could appreciate even in a minimal- or negative-growth economy. He’s staying away from consumer staples and utilities, which have held up better during the storm, and is heading for the unloved and abandoned, such as base metals and energy stocks, which have fallen to the point at which their prices make sense even if global economic growth declines. Hardacre has trimmed back his holdings in gold-mining companies, which had risen as bullion hit new highs last summer due to being perceived as a safe haven.
Among Hardacre’s favourites are energy-processing and transmission company Enerflex Ltd., as well as Suncor Energy Inc., which has been hurt as oil prices have sunk. Says Hardacre: “Most of Suncor’s assets are in the oilsands, which means it doesn’t have to find the oil; it just has to extract it. The company usually trades at a premium to the energy group, but that premium has evaporated.”
Irwin Michael, president of I.A. Michael Investment Counsel Ltd. in Toronto and manager of several ABC Funds Inc. funds, also views the energy sector as inexpensive. He has been looking at exploration and production firms, as well as service companies.
One of his holdings, Daylight Energy Ltd., recently was taken over by China’s state-owned conglomerate, Sinopec Group, at a premium of more than 100% to market value. The takeover has confirmed Michael’s conviction that value is ultimately recognized in stock prices. But, he adds, it’s essential to have the conviction and patience to hold on until the market or a corporate buyer recognizes the same potential.
Tye Bousada, president of Toronto-based EdgePoint Investment Group Inc., is concentrating his value-based search on companies that don’t require a strong economy to appreciate: “We think economic growth may be slower for longer than people expect. And we are looking for businesses that can grow no matter what happens in the economy, but where we don’t have pay for that growth. That means answering two questions: ‘How will the business get bigger? And why isn’t the market paying for that?’ Once we answer those questions, we have an investment idea.”
Bousada likes firms with healthy free cash flows, such as WellPoint Inc., a U.S.-based health insurance firm. WellPoint will benefit from demographic trends as baby boomers become older and sicker, he says — and disease doesn’t care about the economy.
“There’s fear in markets all around the world,” Bousada says, “and that gives us the opportunity to deploy capital broadly. People are moving to safety; but when you look for consensus in investing, you never do well. We try to visualize five years out and are looking for companies with strong balance sheets that can withstand a couple of tough years.”
Franklin Templeton Invest-ments’ Philippe Brugere-Trelat, executive vice president of the “deep value” Mu-tual Series funds in Short Hills, N.J., and manager of Mutual Discovery Fund (available to Canadian inves-tors) also takes a world view. Although he foresees slow growth in Europe and the U.S., he expects Asia to grow at a rapid pace, even if it slows slightly from the red-hot level of the past few years. However, he adds, emerging markets are richly priced, and he has concerns about their liquidity and governance.
There is better value, he says, in buying shares in large, multinational companies that derive a large portion of their profits from Asian markets but are domiciled and traded in Europe, where stock prices have been walloped. Among his favourites are car manufacturer Daimler AG and industrial conglomerate ThyssenKrupp AG.
Brugere-Trelat is keeping his exposure to European banks low, as their exposure to sovereign debt could force them to recapitalize and dilute existing shareholders. But he does see opportunity in UBS AG of Switzerland, calling it the “best-capitalized bank in Europe.”
He adds: “We like to see stocks that are cheap for the wrong reasons. Those that are cheap for the right reasons are value traps.” IE