“The stock market’s nightmare may be far from over.”
“The stock market looks like it is due for more pain.”
“The huge ‘blackout’ that may be deepening market turbulence.”
When financial markets hit a rough patch, you can always count on the media to stoke investors' fears. It took me all of three minutes to find these scary headlines on major financial websites. No wonder investors panic when markets tumble.
Well, today, in an effort to balance the fear-mongering that rears its head every time the Dow drops a few percentage points, we’ll be discussing the flip side of market anxiety: opportunity.
If you aren’t planning to sell your stocks any time soon, and if you have money to invest, you shouldn’t fear a market pullback. Rather, you should welcome it as an opportunity to buy great businesses at lower prices. Most Canadians are still in the wealth-accumulation phase of their lives – about 83 per cent of the Canadian population is aged 64 or under – and for these people a market setback is actually a gift.
As Warren Buffett said in his 1997 letter to Berkshire Hathaway shareholders:
“If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall,” Mr. Buffett wrote.
“This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.”
For dividend investors, in particular, there is a tangible reason to welcome lower stock prices: When prices fall, dividend yields rise, which means every new dollar invested (and every dividend reinvested) generates more income than it otherwise would. As long as the company’s long-term outlook remains positive, its stock price should ultimately rebound, generating a capital gain to go along with that higher yield.
So where should investors be looking now? One beaten-up sector that offers attractive valuations is the power and utilities space, analysts say. Rising interest rates have clobbered many power and utilities stocks, but “we feel strongly that numerous attractive opportunities have arisen where high-quality, low-risk business can be had at bargain valuations,” Raymond James analyst David Quezada said in an Oct. 12 note titled “Why the sky is not falling (and you should be buying).”
Mr. Quezada’s “top pick” is Algonquin Power & Utilities Corp. (AQN), whose shares have dropped nearly 6 per cent in the past two months and now yield about 5.1 per cent. Supported by a $6.4-billion capital spending plan, Algonquin has one of the highest earnings-growth rates among North American utilities, yet its price-to-earnings multiple of about 15 (based on 2019 estimates) offers a “meaningful discount” to other mid-sized U.S. utilities that trade at P/Es of 17 to 20. (Disclosure: I own Algonquin shares personally and in my model Yield Hog Dividend Growth Portfolio. View it online at tgam.ca/dividendportfolio.)
Among independent power producers, Mr. Quezada said Boralex Inc. (BLX) and Innergex Renewable Energy Inc. (INE) have been “unduly punished … and now represent exceptional value.” Boralex and Innergex, which yield about 3.7 per cent and 5.7 per cent, respectively, have both suffered double-digit drops amid rising rates and concerns about weaker-than-normal wind speeds in France. But Mr. Quezada said it’s not unusual for wind speeds to remain above or below the long-term average for long periods of time and noted that both companies expect to grow their EBITDA (earnings before interest, taxes, depreciation and amortization) at a compound annual rate of more than 20 per cent for the two years through 2019.
Another company on his buy list is Northland Power Inc. (NPI). Even as the company has been winning offshore wind contracts in Taiwan and expanding its wind-power operations in the North Sea, the shares have dropped about 17 per cent in the past three months. The stock now yields about 5.8 per cent and trades at an enterprise value-to-EBITDA multiple of about 10 – “a level it has only briefly touched a handful of times since late 2009 and has been shown to represent a strong valuation support level,” Mr. Quezada said.
Other analysts also see attractive values in the sector. Rising interest rates could continue to pressure stock prices in the near term, but “the most recent pullback could represent a good longer-term buying opportunity, particularly in stocks where valuation appears inexpensive, and growth remains relatively robust,” Jeremy Rosenfield, an analyst with Industrial Alliance Securities, said in an Oct. 9 note to clients.
Companies that Mr. Rosenfield rates “strong buy” and which have solid expected growth in earnings, cash flow and dividends include Algonquin, Innergex, Boralex and utility operator Emera Inc. (EMA). Emera’s shares have skidded about 20 per cent in the past year and, after a dividend increase in August, now yield about 6 per cent. (I own EMA personally and in my model portfolio.)
This isn’t meant to be an exhaustive list. Plenty of other dividend stocks – including telecoms, pipelines and real-estate investment trusts – have also dropped recently, even as their businesses continue to chug along. Instead of getting scared by market turbulence, long-term investors might want to start making a shopping list.