Timely analysis by Morgan Stanley’s equity and thematic strategist Adam Virgadamo uncovered a group of U.S. companies that were not only insulated from COVID-19 upheaval but are emerging from the pandemic with larger profit potential and attractive valuations relative to history.
The research report, Life After COVID: Seeking Alpha in Structural Change, begins with a chart plotting the valuation (using the enterprise value to sales ratio relative to the benchmark) and 2021 revenue estimates compared with pre-pandemic levels for all stocks in the Russell 1000 index. (I posted the chart on social media here, but there are no stock names included)
The bottom right hand quadrant of the chart filters out companies with the biggest expected increase in sales relative to 2019, and also valuation levels that are now more attractive relative to the index than the historical average. (I posted this chart, with stock symbols, here.)
Mr. Virgadamo combed this quadrant for the best investment opportunities and came up with 11 companies he calls ‘underappreciated COVID-economy beneficiaries’. These stocks, in no particular order, are The Charles Schwab Corp., Domino’s Pizza Inc., CVS Corp., McKesson Corp., Amazon.com Inc., Paccar Inc., Charter Communications Inc., Netflix Inc., Knight Swift Transportation Inc., U.S. Xpress Enterprises Inc., and Procter and Gamble Co.
It’s not difficult to see why Amazon.com and Netflix are exiting the pandemic in stronger positions as online shopping and media streaming have become ingrained consumer habits. Charter Communications and Domino’s fit here for similar reasons.
Truck maker Paccar was a bit of a surprise but Morgan Stanley sees a multi-year recovery and expansion in road traffic. Transportation logistics firms Knight Swift and US Xpress are forecasted to benefit from related trends.
Mr. Virgadamo’s work here is both straightforward and compelling, to the point I’m surprised it’s not the tenth report like it I’ve seen. The process, designed to find stocks representing attractively valued companies that have gained competitive ground during the pandemic, and are poised for faster growth because of it, provides valuable research opportunities for long term-focused investors.
-- Scott Barlow, Globe and Mail market strategist
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Stocks to ponder
Artis REIT (AX-UN-T) This real estate investment trust is a long stretch below the $17 level where it traded in 2013. Yet, the Contra Guys believe this REIT has the best potential in the beaten-down sector. They explain why.
Mullen Group Ltd. (MTL-T) Shares in the Alberta-based trucking company spiked this week after announcing an acquisition that analysts expect to be one of a handful this year to help drive its expansion plans. The stock is up more than 200 per cent in the last year and some analysts believe it’s still a buy. Brenda Bouw reports.
The Rundown
We have to stop blaming clients for the service failures of online brokers
Investors have been complaining for months about long waits to speak to a live representative on the phone, and about temporary website outages. A response from advisers you’ll have seen if you follow this issue on social media: You get what you pay for. Well, Rob Carrick sets the record straight on this.
Biden’s stimulus, upward revisions to U.S. economic growth add to market’s bullish sentiment
The passage of Joe Biden’s stimulus plan is sending a jolt through Wall Street, with one prominent forecaster declaring the stage is now set for the fastest U.S. expansion in more than 60 years. As Ian McGugan reports, this is all great news for stock investors.
Big-name investors bet bond sell-off has further to run
Some of the world’s biggest investors are slashing exposure to government bonds on expectations that the debt sell-off is just getting started, and without too swift a rise in borrowing costs, most central banks will not intervene. Dhara Ranasinghe of Reuters reports.
U.S. dollar snapback may jolt post-pandemic recovery
A pause in the U.S. dollar’s steep downtrend shows signs of morphing into a more robust rebound, posing a threat to post-pandemic economic recovery and investment flows into emerging markets. Saikat Chatterjee of Reuters reports.
Others (for subscribers)
Expected returns for all the stocks on the S&P/TSX SmallCap Index
Wednesday’s analyst upgrades and downgrades
Wednesday’s Insider Report: A pair of Big 5 bank CEOs land million dollar paydays
Number Cruncher: Seven U.S.-listed bank stocks that demonstrate bullish insider sentiment
Number Cruncher: Ten Canadian-listed silver mining and exploration companies
Tuesday’s analyst upgrades and downgrades
Ask Globe Investor
Question: I live in Canada and I was holding shares of United Technologies Corp., which in April, 2020, merged with Raytheon Corp. to create a new company called Raytheon Technologies Corp. As part of the transaction, United Technologies spun off two of its businesses, Otis Corp. and Carrier Corp., to shareholders. On my T5 slip from my broker, I have significant tax exposure because of this “stock dividend.” My question is: Since I have not sold my Carrier and Otis shares, can I defer the gain to a future time when I do sell them?
Answer: If you go to the “Investors” section of Raytheon Technologies’ website and click on “Merger Resources,” you’ll see a link to “Canadian shareowners’ tax information on the Carrier and Otis spin-offs.” This will take you to a Canada Revenue Agency web page that lists the Carrier and Otis spin-offs as being eligible for tax deferral.
That’s the good news. The bad news is that if you make this election, there is some work involved to get that tax deferral. You’ll need to attach a detailed letter to your tax return (which, according to the CRA, can’t be filed electronically in such cases). You will also need to calculate the adjusted cost base of your Carrier and Otis shares to determine your capital gain when you eventually sell. For more information – and some sample ACB calculations – google “CRA foreign spin-offs.” You may want to seek the advice of an accountant to help you through the process.
--John Heinzl
What’s up in the days ahead
Renewable stocks have produced big returns over the last year or two, while traditional energy equities slumped badly. But lately those trends have reversed, with energy stocks soaring. Will ESG investors stick with renewables even as they watch oil and gas stocks take off? David Berman will examine the issue.
Click here to see the Globe Investor earnings and economic news calendar.
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Compiled by Globe Investor Staff