Transcript: Out-of-favour stocks and sectors create opportunities
Mary Crowe of Beutel Goodman says patience in uncertainty and a focus on fundamentals is what value investing is all about
- Featuring: Mary Crowe
- September 24, 2024 September 24, 2024
- 13:01
iStockphoto/MJ_Prototype
Mary Crowe
Welcome to Soundbites, weekly insights on market trends and investment strategies, brought to you by Investment Executive and powered by Canada Life. For today’s Soundbites, we’re talking about opportunities in Canadian equities with Mary Crowe, vice-president, Canadian equities, with Beutel Goodman Investment Counsel. We talked about interest rates and volatility, and we started by asking why investors should consider an allotment to Canadian equities.
Mary Crowe (MC): We believe Canadian stocks remain an important component of many investment portfolios. There are many leading Canadian companies that provide global exposure and diversification through their business activities. These include global leaders in their fields, such as Magna International [Aurora, Ont.-based Magna International Inc.] in the automotive industry, [Calgary-based] Canadian Pacific Kansas City Limited in railways, as well as the big five banks, which are highly regarded internationally for good governance. We conducted a review of allocations to Canadian equities over the last 20 years, which suggests an allocation of 9% to 31% in Canadian equities is optimal, depending on specific investor tolerance, and can improve the efficiency of a world-focused portfolio.
Canada’s energy and financial sectors.
MC: Both the financials and energy sector have been strong performers this year. Within financials, life insurance companies have done very well in a rising-interest-rate environment, while bank stocks have underperformed. Loan losses could well increase and remain elevated, but we believe the banks are well capitalized to absorb any additional losses while falling interest rates should be a mitigating factor against further stress. Within energy, the price of oil remained relatively strong in the first half of the year. However, as we moved through the second half of the year, concerns around weakening economic growth have pushed oil prices lower. Our portfolio is underweight the energy sector, and has been for some time, as we haven’t viewed valuations to be attractive.
How interest rates have played out.
MC: Elevated inflation meant central banks had to keep policy rates higher for longer, which had several implications for the economy and the stock market. Lower rates relieve pressure on borrowers, both corporate and individual. However, central banks have the difficult job of continuing to balance the risk of triggering further inflation without tipping the economy into a recession. Interest-rate-sensitive sectors such as telecom, utilities and real estate are expected to benefit from falling rates. Banks are ultimately profitable at all levels of interest rates, but the market structure of the Canadian banking environment, the loan underwriting process, and the long-term health of the Canadian economy are more important drivers of bank profitability.
What looks attractive right now.
MC: We think there is value in consumer discretionary, industrials and financials, and in certain pockets of out-of-favour commodity sectors. In consumer discretionary, for example, we hold BRP — Bombardier Recreational Products [Valcourt, Que.-based BRP Inc.]. In financials, we hold TD [Toronto-based Toronto-Dominion Bank]. It is trading at a discount to its historical valuation, due to uncertainty around implications for the money laundering infractions and potential CEO succession. Over the last two years, TD has lost billions in market capitalization driven by these issues. But we believe the market is pricing in a Draconian outcome and represents an opportunity. TD remains a very strong franchise and generates substantial capital. In real estate, there was uncertainty in the commercial real estate market last year, and we were able to buy a high-quality franchise — Colliers International [Toronto-based Colliers International Group Inc.] — at an attractive valuation. In commodities, we hold Tourmaline [Calgary-based Tourmaline Oil], a well-capitalized, large-scale, low-cost natural gas producer that will benefit from further LNG development in Canada. The company has a better-than-average balance sheet and is trading at a discount valuation, and we believe represents an opportunity.
And finally, what’s the bottom line on Canadian equity investing in the current moment?
MC: In some cases, markets and stocks will be out of favour, and this is when opportunities can present, and bargains can be picked up. At times, entire sectors can be out of favour, but focusing on individual stock attributes can lead you to find some gems, and that is when we get excited. Looking for high-quality companies that have a strong competitive position with a wide protective moat, that have high structural barriers to entry, or companies with a dominant market position that can generate substantial free cash flow over long periods of time, that are trading at a discounted valuation can present good entry points into a stock. Although the Canadian market is currently out of favour, we don’t invest in markets. We invest in stocks. And out-of-favour markets can provide opportunities in individual names. Being patient through this uncertainty and focusing on the fundamentals is what value investing is all about.
Well, those are today’s Soundbites, brought to you by Investment Executive and powered by Canada Life. Our thanks again to Mary Crowe of Beutel Goodman Investment Counsel. Visit us at investmentexecutive.com, where you can sign up for our a.m. newsletter and never miss another Soundbite. Thanks for listening.
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