Jonathan Pinsler is senior vice-president, portfolio manager, of TD Wealth Private Investment Advice.
By most accounts these are unusual times. Lots of prognosticators are putting more credence now more than ever on what may happen in the future given the speed of disruptions taking place globally. Stepping back, the world of equity investing has always put emphasis on what the future will be. This is something which investors have always had some control but not complete control.
Aside from some short-term fluctuations in a company's share price, a business through time will still be valued by discounting future expectations of cash flows to the present using a discount rate. The challenge currently for investors is that historical data needs to be scrutinized and questioned much more carefully while assessing forward-looking prospects given the significant setbacks in global economic conditions and possibilities on a new normal.
While every crisis is different, a worldwide pandemic requires a dosage of knowing your historical facts on the statistics of investing in equities (the S&P 500 has been up 75% of the time in calendar years since 1945) while keeping your emotional intelligence in check (this is not always easy). One needs to understand their investment objectives and time horizons. As a recent example of emotion (and perhaps logic at the time) that could have had dramatic impact on results, if an investor reduced exposure to equities meaningfully in March’s sharp and violent sell off, they would have missed one of the quickest recoveries in history. Obviously there still lots of possibilities in the near term but optimism does tend to prevail over time.
Certainly, there are many industries (and workers) that have been severely impacted by the crisis. In every crisis, there are opportunities to invest in great companies that will come out on the other side with a brighter future.
Businesses that can still do well in a pandemic environment have become leaders on the performance scorecard so far this year - technology, food retail, and healthcare. Sectors that are not performing as well have more uncertainty in this type of environment - financials, real estate, travel and leisure, energy, etc. At the risk of being a cliché, I believe the right approach in time will be to a have balance of sectors and appropriate diversification of companies. Stock prices of companies that are expected to do well can have excessive valuations that can become too risky and stock prices of companies in sectors that are not performing may reflect too much pessimism.
What wholesome winning attributes would one look for to be well-served if they were looking to invest in a company?
A company that has a history of top-line revenue growth and bottom-line profit growth combined with growing their dividends with a conservative payout ratio (the percentage of earnings paid to the shareholder) is a great starting point. Many of the Canadian bank stocks, utilities like Fortis, and telco’s like Telus and BCE fit this criteria. In my opinion, there’s no need to look at data going back more than 5 years. The expression, ‘what have you done for me lately’ is applicable here as I believe that emphasis should be tilted toward 1- and 3-year growth. While I anticipate that investing in companies that reward shareholders by paying a dividend is still very important for long-term success (especially in Canada), I’m convinced that a small bifurcation should include companies that don’t pay a dividend as part of a revised thought process today. CGI Group is a name that comes to mind in Canada or Alphabet in the U.S. In order include companies that are not paying dividends in a portfolio, these companies would need to have exceptional revenues and earnings today and historically.
Lessons learned from well-known stoics when it comes to investing should be applied; be as unemotional and data-driven as possible. Emotions are often unstable while data is more factual in nature. It’s necessary to avoid thought on what one has no control over, focus on things you have some control over like proper process and investment philosophy. By adhering to this, an investor will increase the likelihood of making good decisions with a higher probability of good outcomes.