The economic damage resulting from the response to Covid-19 will not be tallied for some time. The sudden collapse in business activity will bankrupt many companies and industries.
There has been no shortage of optimism in the financial markets as evidenced by the recent advances in the indexes. Most recently, markets have reacted positively to the prospects of several viable vaccines which will hopefully be available by the New Year. Over the past few years, the markets have been lead by a relatively narrow selection of stocks particularly during the the pandemic. The prospect of an effective vaccine has been reflected to some degree by a rotation into more economically sensitive sectors in anticipation of a return to a more normal economic activity. However, it may be premature to count on a quick return to so called normal economic activity let alone a continuation of frothy market conditions. Valuations are at relatively high levels with a cyclically adjusted price to earnings ratio near 32 times, although admittedly propped up by a narrow band of stocks. Fighting the pandemic has severely increased debt levels at government, business and consumer levels. This will serve to constrain growth going forward. Given this environment, we believe that stock selection will be key. While the promise of economic expansion is welcome, finding securities in companies with strong balance sheets and management at reasonable valuations will be key.
Bank of Nova Scotia (BNS-T), owned personally and by clients, Last Purchase $54.90 March 27, 2020
The Bank of Nova Scotia is attractively valued trading at a modest discount to its peers on a relative basis. Management has been very conservative in their provisioning for loan losses during the pandemic which may lead to positive surprises as economic conditions improve. The Bank remains the most internationally diversified bank with operations in the Caribbean, Central America and the Pacific Alliance . Over the past seven years, management has re-positioned the bank, exiting 20 non-core countries while extending its reach elsewhere. The balance sheet and liquidity position is strong. At current prices, the stock is yielding an attractive 5.4%.
Suncor Energy Inc. (SU-T), owned personallly and by clients, Last Purchase $37.26 August 27, 2019
Suncor is the largest integrated energy company in Canada. Management has been very focused on expense control particularly in the major oil sands projects, Syncrude and Fort Hills. The company targets an increase in free cash flow of $2 billion over the next 5 years. In terms of ESG, Suncor will selectively look for opportunities that generate at least mid-teen returns such as biofuels, hydrogen, carbon dioxide sequestration and select wind projects. GHG emmissions are expected to decline by 30% from 2014 levels by 2030. Suncor is well capitalized and at current prices, the stock yields 4.0%.
Enbridge Inc. (ENB-T), owned personally and by clients, Last Purchase $43.70 August 27,2019
Enbridge’s share price has reacted positively to the prospect of improving economic activity that may be commensurate with the deployment of the Covid-19 vaccine but we believe that it remains undervalued. As the company progresses through its $11 billion capital program in growth projects, future dividend increases are likely to follow as the result of new projects and organic growth. It is hoped that construction on Line 3 Replacement could begin near year end now that the key Section 404 permit has been granted by the US Army Corps of Engineers. At current prices, the stock is yielding an attractive 7.8%.
We believe that investment management is about managing risk, not chasing speculative returns. Like to learn more? Please contact us here>>
The opinions expressed here are ours alone. They are provided for information purposes only and are not tailored to the needs of any particular individual or company, are not an endorsement, recommendation, or sponsorship of any entity or security, and do not constitute investment advice. We strongly recommend that you seek advice from a qualified investment advisor before making any investment decision.