Ryan Modesto, CFA, is CEO at 5i Research, a conflict-free investment research provider for retail investors offering research reports, model portfolios and investor Q&A, which is available to try for free. 5i Research provides content under an agreement with The Globe and Mail, which receives royalty compensation.
We have been receiving many questions lately from members about the escalating trade wars between Canada and the United States and the stocks and sectors they will be affecting. What initially seemed like bluster is becoming a reality in the wake of the U.S. issuing not only a 25-per-cent tariff on US$50-billion worth of goods from China but a recent additional proposed 10-per-cent tariff on US$200 billion worth of goods. Talk from President Donald Trump aimed at the Canadian dairy and automotive sectors now seems more of a risk than ever before.
What is an investor to do? There is no right answer here, especially when speculating on political developments outside of anyone’s control, let alone what has been a bit of a volatile political environment as of late.
The best answer is likely the most boring one: Diversification. If a portfolio is exposed to companies across the world and in other asset classes (fixed income, cash), any impact from a trade war will be mitigated.
Trying to jump in and out of stocks or sectors based on events like this is unlikely to prove fruitful. Opportunistically, an investor may be better served to ensure that they simply have a bit of cash available to take advantage of opportunities that arise as concerns around tariffs grow (some of which we address below). For investors’ approaching retirement, times like this provide a good reminder to ensure that your exposure to more volatile equities are appropriate and that you can withstand a 10 per cent (or more) decline in prices while not having your lifestyle materially affected. With that, let’s look at a few names on the move thanks to trade war concerns.
Magna International (MG-T)
Magna deserves a lot of credit. The company and industry are one that continually get written off in a world of high-tech and high-margin businesses. It is also a space that is at the wrong-end of various “themes” such as driverless car/Uber disruption, “peak-auto” and now trade wars. Magna, however, has not seemed to listen, being one of the better-performing companies on the TSX, buying back a large number of shares over many years and increasing the dividend on a regular basis.
Why Magna International is on the move
Magna is now getting attention over automotive tariff fears and is seeing shares slide a little with these concerns. What gets missed with Magna, and other companies in this space, is that the valuation is already pricing in a lot of these risks. To what degree tariffs are “priced in” is anyone’s guess but for a company trading at 8.8 times earnings over the next 12 months and just shy of six times cash flows and paying a 2-per-cent dividend yield, we think an investor would be hard pressed to find a company that offers a better mix of quality and value than Magna. To be fair, just because MG looks cheap, it does not mean it cannot go down as trade fears escalate, and tariffs will have an impact on profitability in some form. This should be the expectation, but for a long-term investor who can look past the current presidential cycle and values, dividend increases and share buybacks, Magna could be a company to take a closer look at.
Western Forest Products (WEF-T)
Western Forest is a forest products company operating in British Columbia. The company holds no debt as of the most recent quarter and pays a 3.5-per-cent dividend yield with a payout ratio below 50 per cent and the dividend was recently increased by 12.5 per cent.
Why Western Forest is on the move
Western Forest seems to be receiving pressure for the same reasons as Magna − tariff concerns. The lumber industry has been one that is constantly in battles over tariff rates, so this should not really be something that is new to the company but of course more trade restrictions are rarely a good thing for companies. Similar to Magna, shares for WEF are already pricing in some degree of risk here at 9.75 times earnings over the next 12 months even in the context of climbing lumber prices. What might grab an investors’ attention if shares of WEF continue to decline amidst trade war fears is that only 25 per cent of its revenue come from the United States as of the 2017 year-end.
NFI Group (NFI-T)
NFI is a Canadian-based bus and motor coach manufacturer. The company has an inclination for smaller acquisitions that vertically integrate the business so they can optimize and perfect processes and offerings throughout the manufacturing process. Previously called New Flyer, the recent name change is intended to better reflect the group of businesses that the company has now become.
Why NFI Group is on the move
If you have not yet caught on to the theme here, it looks to be tariff and trading concerns that are the main cause of the weakness recently, along with an earnings release that was lighter than markets may have expected. NFI has typically traded at cheaper valuations, and a choppy quarter here or there is not unusual for a company like this. However, with a P/E of 13.5 and a 3.6-per-cent dividend yield along with a management team that has been a long-term value creator, we think further weakness on trade concerns for NFI Group might present more of an opportunity for a patient investor.
The one thing investors can be confident of as these trade war stories develop is that volatility is likely to increase. Additional volatility is not ideal for most investors but this also creates opportunities for those who can look out a few years. Companies will no doubt feel these impacts, but the ones with strong balance sheets that have seen this before will probably be able to weather this storm and the many other storms that will undoubtedly come in the future.
Disclosure: The writer holds no positions in the above-mentioned stocks. In order to remain conflict-free, employees of 5i Research cannot trade in Canadian stocks.