Unemployment is alarmingly high and debt is crippling much of the developed world, but this is an opportune time to go stock picking, says one veteran value investor.
Irwin Michael approaches 2011 optimistic about market conditions for shrewd equity investors, but with the caveat that waters could get rough.
Mr. Michael, president and portfolio manager of I.A. Michael Investment Counsel Ltd. in Toronto, has nearly four decades of experience in the investment industry. He began his career as a fixed-income manager and bond trader and later became a deep-value stock picker before launching ABC Funds in 1988.
His largest fund, the $518-million ABC Fundamental Value, gained 18.3 per cent for the 12 months ended Nov. 30. It boasts a 10-year average return of 9.8 per cent.
What’s your outlook for stocks in 2011?
We’ve been saying all along that we expect not only the stock market, but the economy, to saw-tooth their way higher. You’re going to have your good days. You’re going to have your bad days. Higher highs, lower lows.
With U.S. unemployment continuing to be a problem, we expect [U.S. Federal Reserve chairman] Ben Bernanke to continue to err on the side of ease a little longer than we initially expected. And quite frankly, with rates at 1 or 2 per cent, that’s one of the greatest stimulants to the marketplace. It’s almost like an aphrodisiac.
Yet people are being advised to expect flaccid yields. Is that the wrong expectation?
The longer this economic recovery takes, the more bullish we get. The longer it takes to happen, the longer we think the bull cycle will be. You’re not seeing a lot of white heat out there. You’re not seeing a lot of speculation. Companies are responsible, and in many cases they are in the best shape they have been since the Second World War.
Nonetheless, we do expect considerable volatility. It is also, by the way, a trading market. There may be opportunities to buy a stock and sell it up 20 per cent. The market may trade within a very wide band, because there is still a lot of very nervous money out there. Investors are not totally convinced. There’s still a significant fringe of negativity out there. Ireland is a problem. Does it spread to Spain, Portugal and Italy? You just don’t know. In the U.S. you have elections coming up and you don’t know what kind of political heat President Obama will be under. In Canada, it’s still a minority government. If push comes to shove there could be an election. So there are many imponderables out there that could change the face of the market place.
So how does your strategy shift in 2011?
It’s not shifting. Unemployment will be improving very slowly, so we expect interest rates will remain where they are. We are not at all comfortable with the bond market. We think bonds are long in the tooth. I mean, rhetorically, would you lend me money for 30 years at 3 per cent? So we’ve moved away from bonds. But on balance the risk reward ratio on stocks is good. However, the market will remain extremely volatile. We wouldn’t be surprised to see the odd major selloff. You may get a week or two, or even a month or two, where the market sells off.
What is it that allows you to function when so many investors are hesitant?
What gives us a little more confidence is discipline. We are sticking with fundamentals. We are looking at companies that preferably have no debt, low price-to-earnings multiples and low cash flow multiples. We look at tangible book value, we also look at net asset value. We look at companies that have hidden assets or could be in play. We look at companies that have no following by the analysts on the Street or that everyone hates. We may not buy them, but we’re going to look, because quite often when there’s a lot of negativity, you get a chance to buy a well-run company cheaply.
