‘Things just went down too far, too fast’
WHY PMC’s NORMAN LEVINE IS TREADING CAREFULLY
Easy money courtesy of the l oose monetary policies of central banks around the world continues to find its way into equities. That’s particularly true for U.S. stocks, which are among those that benefited from a rather hefty short covering rally since the middle of February.
This has many investors once again concerned that valuations may be too high.
One person that shares this view is Norman Levine, managing director at Toronto- based Portfolio Management Corp., which has about $550 million in assets under management.
He has higher- than- average cash positions in his segregated client accounts as a result. While those cash weightings are still far below the mid- 30- per- cent range seen in the 2007-2008 period, Levine noted that they haven’t been this high since.
Whereas he usually likes to have cash positions in the mid to low single-digit range — always having some on hand in case an opportunity presents itself — these portfolios now have cash weightings in the mid to upper teens.
“Things just went down too far, too fast, so there has been this massive short covering rally,” Levine said. “But new money really wasn’t coming in, so now that’s starting to roll off again, and I think we’re heading back down for a while.”
He noted that markets rarely make a V-shaped turn as they did in 2009. Instead, both stocks and commodities usually move sideways — sometime violently — before they decide to go back up again.
“The volatility made valuations somewhat more attractive, but not low enough to tempt us back in,” Levine said, highlighting another challenge in the down trend in U.S. earnings.
While lofty valuations in the U.S. market make it difficult to find attractive names, the situation has also made parts of the Canadian equity market relatively more attractive, and will likely be where Levine starts buying again.
While his client portfolios have been underweight energy and completely out of the mining sector, Levine expects to add some oil exposure if crude prices come back down again.
For now, however, he’s been targeting names elsewhere, including Enbridge Inc.
“It got thrown out with the bath water and labelled an energy stock, but it’s really an infrastructure stock,” Levine said. “The valuation was good, and the dividend is going to keep moving higher.”
In the U. S., a long- term holding that is among the multinationals finally bene- fiting from a move downward in the U. S. dollar, is PepsiCo Inc.
Rather than being a soft drink c ompany, Levine noted that it is really a snack food company — where most of its growth comes from.
“They get so much of their sales from outside the U. S., so that’s held them back just like Procter & Gamble, Colgate and others,” Levine said. “But the easing of the U. S. dollar is starting to help.”
Unlike its competitors, he noted that PepsiCo actually has organic sales growth ( about four per cent last year), its valuation is a fraction of Coca- Cola’s, and its exposure to sugared soft drinks is relatively lower than the competition.
“You’re going to get earnings improvement because the currency is going their way,” Levine said. “If the valuation gap remains as big as it is, there is always the breakup scenario some activist investors have been pushing for.”
Another one of Levine’s holdings is SNC Lavalin Group Inc., which he admittedly was a little early on, buying when scandal first hit the company a few years ago.
The thesis was simple: the previous management team and its projects were the problem.
“We viewed it as an opportunity because investors dumped the stock based on the past, not the future,” Le- vine said. “Now it’s starting to work for us, as the company continues to win major infrastructure projects both in Canada and around the world, and has increased its presence in oil and gas, but in areas like LNG, which is unaffected by the price of oil today.”
SNC also has various infrastructure concession projects such as the 407 toll highway in Toronto that Levine thinks will be sold in the coming years, which will allow it to make further acquisitions in the engineering and construction space.
He also highlighted an energy name, ARC Resources Ltd., which is roughly two- thirds natural gas and one-third oil.
The primary reason Levine continues to hold this name is management’s ability to continuously cut costs as commodity prices fall. He thinks that sets ARC up to be a big winner when commodity prices improve meaningfully.
“Their margins are being kept intact, and they’ve cut their dividend to a sustainable level so that the balance sheet is in good shape,” he said.
“If they eliminated the dividend, we wouldn’t care, since we rather that these companies stay in business, than give us a few cents back.”