Fabrice Taylor, CFA, publishes the President's Club investment letter. His letter and The Globe and Mail have a distribution agreement. You can get a free copy here.
Please join us in a moment of silence, to mourn the passing of growth.
Although growth started life showing wholesome promise, it ended in a sad and confused state of greed, excess and debauchery. While it thrived in its early years with the support of savings and the sensible allocation of capital, it was destroyed in the end by obscene, debt-fuelled profligacy and political meddling.
Where savers and reasonable governments were once growth's friends, they turned their backs on it later in life, and the void was filled with socialists and bankers. Strange bedfellows these, at least at first glance, but united in their taste for the government nipple and their disdain for good old-fashioned hard work, they destroyed growth, which withered away, spending its final years alone in a van down by the river …
With that eulogy out of the way, we bring you a message of hope. Growth may be dead but equities are not. At least not all of them.
A well-known economist told an interviewer recently that investors should be in cash. The stock market, he argued, was dead money because there's no growth. Spoken like someone who made a pile of money working for a bank dispensing indifferent advice to the masses. There aren't many of us who can afford to live or save on 0.5 per cent interest.
Fortunately, he's wrong.
When the headlines say "stocks fell yesterday," what they're really saying is stock indexes fell. But the index tends to be made up of companies whose valuations make them very sensitive to growth, or a lack thereof. In Canada, that inevitably means commodities and real estate (bank stocks are largely a play on property values and capital markets). On any given day, some stocks go up even as the index goes down.
These days, stocks going up tend to fall into a handful of categories. This is where investors should look for ideas.
The first is a company engaged in a growing field. Economies as a whole may be stagnant or shrinking, but consumers are still spending a lot of money on certain things. The obvious sector today is smartphones. Apple Inc. is obviously the champion of this business, but if you scour enough you'll find smaller, less well-known companies doing well thanks to the move toward smarter mobiles.
Companies gaining market share are also insulated from a slowdown, since they don't need a bigger market to increase their top lines. One such company is Brick Ltd. (I own this one and recommended it here recently), which sells furniture. That's not a growth story in this kind of environment, but the company is winning customers from its rivals and the valuation looks attractive.
A variation on market share gains is the intelligent roll-up – a company that's consolidating a fragmented business and reaping the synergies. An interesting company doing just that is Loyalist Group Ltd., which is buying up the big English-as-a-second-language schools in Canada – the ones that attract foreign students with lots of money. Although small, the company is profitable and growing very quickly. ESL is a surprisingly big and lucrative business, and the roll-up economics are working extremely well (and education is practically recession-proof). The company recently raised money and self-made billionaire investor Seymour Schulich participated substantially, so they must be on to something. I bought stock yesterday.
The busted company mending itself is also a favourite. This is a company that's been written off as gone, but quietly makes a comeback. Intertape Polymer Group Inc. is one of our newsletter's biggest winners, up more than 500 per cent in about a year on the excellent work of CEO Greg Yull, who has also benefited from lower commodity prices. I own this one, but another I'm watching and waiting for is Armtec Infrastructure Inc. It's too early and risky, but it's worth keeping an eye on.
Finally, I would avoid most commodities like the plague. They are the ultimate growth stories and in case you missed the obituary, growth is dead.
One possible exception is natural gas, which seems poised for a comeback. But since commodity prices, if you agree with this thesis, are in a slump, companies that benefit from lower resource costs will do better. There are lots of those.
And of course solid yield plays should be a big part of your portfolio – because interest rates aren't going anywhere until growth resurrects.