Portfolio manager Benoit Poliquin says there are bargains to be had, but they do come with some uncertainty. He names three industrial stocks as his ‘best buy’ favourites.
When Investor’s Digest checked in with veteran Ottawa-area portfolio manager Benoit Poliquin last March, he expressed optimism that contradicted many market observers, who had predicted a summer or fall recession. Nowadays, however, his positive attitude has dampened somewhat.
In an Oct. 15 interview, when reminded of his past thesis, Mr. Poliquin says: “I guess I was right and the markets were hitting all-time highs.”
Remarking on current conditions, he says: “I’m actually worried the market might melt up at the end of the year. As hard as December 2018 was, maybe we’ll see a mirror image in 2019.”
Mr. Poliquin is president and lead portfolio manager at Ex-ponent Investment Management, which he founded in 2011. He has worked in the industry for roughly 25 years and co-wrote Cherished Fortune: Make Your Wealth Your Business, a personal finance book released at the beginning of this year.
Beware year-end buying activity
Given the spurts of market volatility since March, many investors, including large-scale, institutional ones, have stayed on the sidelines in bearish anticipation of a lasting downturn, he says. Accordingly, they have missed out on price gains on the rebound. As the year comes to a close, investors, particularly fund managers and the like trying to make a quota before the end of 2019, may rush back into the market, rapidly driving up share prices.
Unfortunately, once those fund managers have made up the gains they lost by sitting on cash, they will sell the stocks, resulting in a “melt up” with plenty of room to quickly plunge again, Mr. Poliquin suggests.
For example, Netflix Inc. (NASDAQ—NFLX) was one of the worst-performing stocks on the S&P 500 in the second quarter after famously leading the pack along with other giant tech stocks in recent years. “You can hear the money leave a sector (because it comes so fast and hard),” says Mr. Poliquin.
The portfolio manager explains that he has kept his clients’ assets relatively liquid, albeit not simply out of fear. “We’ve had a lot of cash, but it’s not so much a market call ’cause we’re having trouble finding value, which is normal.”
Nevertheless, he continues, “There are some bargains, but you’ve got to be willing to accept some uncertainty around those bargains. There have been pockets of really interesting softness,” namely industrial stocks.
The portfolio manager points out that many industrial stocks had sold off on the basis of poor economic activity indicators, such as Magna International Inc. (TSX—MG; NYSE—MGA) and Linamar Corp. (TSX—LNR), despite their high quality.
Mr. Poliquin’s ‘best buy’ picks are industrial conglomerate and Post-it note inventor 3M Co. (NYSE—MMM), German chemical giant BASF SE (OTCMKTS—BASFY) and packaging products and systems firm Intertape Polymer Group Inc. (TSX—ITP). All three have similarly suffered unfairly, he argues.
“These are good companies. They’re innovators, they’ve been through many recessions before.”
Ironically, negative sentiment surrounding industrial stocks bolsters his rationale to buy, since it makes it easier for companies in the sector to exceed expectations. The portfolio manager cites US bolt and screw maker Fastenal Company (NASDAQ—FAST) as a recent example of how poor expectations have been. On Oct. 11, the stock gained 16 per cent or about US$2 billion in overall market capitalization in a day after its 2019 third-quarter figures beat forecasts.
“That’s what really changed my mind. . . . I didn’t realize how negative the expectations were,” says Mr. Poliquin.
Get paid while you wait
While an industrials rally might snap back on investors in a melt-up scenario, positive geopolitical news (combined with solid financial results), whether related to the Hong Kong protest, Brexit, negative bond yields around the world, or something else, could keep the good times rolling, he argues. “It doesn’t even have to be a resolution itself, just something that changes the narrative.”
As major industrial stocks widely held by ETFs, BASF and 3M could rise especially quickly on good results.
Meanwhile, mid-cap Intertape’s product line of packaging films, tape used for construction and related items stands to benefit from the shift from retail to direct-to-consumer sales. (It supplies Amazon.com Inc., among others.)
Mr. Poliquin concedes that his new thesis may prove incorrect and industrial stocks may fall, although the companies that he highlights have excellent prospects for turning around.
Fortunately, all three offer healthy, stable dividends if one needs to wait for a recovery before selling. Intertape’s dividend yields 4.5 per cent, BASF yields 5.3 per cent and 3M yields 2.3 per cent.
This is an edited version of an article that was originally published for subscribers in the November 1, 2019, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.
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