Kash Pashootan isn’t letting the latest market sell-off change his conviction that value stocks are the place to be right now.
“The prominent theme right now is a rotation from growth to value, which shouldn’t be confused with a move from a bull to a bear market,” said Mr. Pashootan, chief executive officer and chief investment officer at First Avenue Investment Counsel Inc., which manages about $1-billion in assets from its offices in Toronto and Ottawa.
He doesn’t see a bear market taking over in the near term and believes major sell-offs, such as we saw on Monday, further cement his view that, over all, more defensive, dividend-paying stocks will outperform high-growth names that have done well over the past year or so.
“Although we’re seeing a broad-based sell-off, we do believe that the more defensive names will succeed in this type of environment,” he said. “You have to look past the one big general sell-off.”
Mr. Pashootan’s firm has been adding more defensive, value names to his portfolios over the past year, decreasing his cash position to about 2 per cent today from around 15 per cent at this time last year. The rest of the firm’s overall asset mix includes about 60-per-cent equities, 25 per cent physical real estate (residential) and 13 per cent fixed income.
The weightings vary depending on the investment mandate; for instance, the “growth” portfolio is 20 per cent fixed income, “moderate growth” is 40 per cent and “growth plus” has no fixed income holdings. The middle-ground growth mandate has returned 11.7 per cent year-to-date as of June 30, compared with 8 per cent, which is the target return for this category, Mr. Pashootan said.
Here, Mr. Pashootan describes three stocks he believes will benefit from the market shift, including two defensive names and one growth stock expected to do well when the pandemic subsides.
This is Canada’s largest REIT focused on the mid-tier apartment market, with about 65,000 apartment units across Canada and parts of Europe. First Avenue bought this real estate investment trust in early June at $57. It closed Monday at $60.61.
“The pandemic pressured cash flow as demand for apartment units was negatively impacted by general economic uncertainty, reduced immigration, and students and young professionals working from home,” Mr. Pashootan said. This is expected to reverse in the second half of this year and into 2022 owing to recovering employment, aggressive government immigration targets, the return of students and an increasingly unaffordable housing market, he added.
“We also expect dividend growth to resume as cash flow growth returns. Its payout ratio is currently at an all-time low, leaving lots of room to grow the dividend. The REIT also has ample liquidity to pursue M&A and has a strong track record of creating value through acquisitions.
“The biggest risk for this name is long-term interest rates: A significant rise in mortgage rates would negatively impact cash flow. Also, higher long-term interest rates would drive up apartment capitalization rates, negatively impacting the net asset value of their portfolio of properties.”
Live Nation is one of the largest live entertainment firms in the world with more than 235 venues. The company also owns Ticketmaster, one of the largest ticketing services. First Avenue bought the stock in early June at US$89.
“This is one of the growth-oriented stocks on my list,” Mr. Pashootan said. “We feel it’s one of the best-positioned to participate in the post-COVID recovery story.
“We believe the company is on track for multiple years of strong growth as the economic reopening continues. The pipeline for concerts remains strong with 45 major tours expected in 2022 (versus 25 in a typical year) with pent up demand for live events very significant. Major tours typically last two to three years. This strong tour pipeline should drive double-digit annual gains over the next three years with expected earnings growth for this year and next of 60 per cent and 120 per cent, respectively.
“The risk is that Live Nation could see reduced attendance or cancelled events if the pandemic creates another wave of shutdowns,” Mr. Pashootan said.
Live Nation shares closed Monday at US$74.79, down 4.8 per cent.
PayPal is a global technology payment platform for merchants and consumers. “We purchased it in May at US$255.” The stock currently trades around at US$295.
“We believe PayPal is one of the best ways for investors to gain exposure to the growing e-commerce market,” Mr. Pashootan said. “It’s accepted at 75 of the largest 100 internet retailers – and rising. The number of PayPal users is growing rapidly.”
Last year, the number of daily active accounts grew 33 per cent on the PayPal platform, Mr. Pashootan said. “Product launches and travel rebound are expected to drive further strength in 2021-22 with both revenue and earnings per share expected to grow over 20 per cent year-over-year in each year.”
Venmo, a person-to-person mobile payment app popular with millennials, is boosting overall company growth with volumes growing at more than 60 per cent year-over-year. “We believe high rates of growth can continue.”
Mr. Pashootan says a risk for PayPal would be a failure to acquire “sufficient account penetration and platform usage,” which would intensify competition.
Special to The Globe and Mail
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