April 4, 2020
Source: Winnipeg Free Press
By: Joe Schlesinger
Stocks are on sale, some would argue. Others might contend a highly overvalued market is now just slightly overvalued.
What is certain is stocks are down from their peak just a few weeks ago, and what direction markets will go remains as uncertain as ever.
Still, current conditions have presented bargains for bargain-hunters with a time horizon looking past what could be many weeks to a few years of slower economic activity and likely very volatile stock markets.
“It’s a tough one because from our perspective we’re finding not across-the-board bargains, but selectively, we’re finding situations where there are pretty big names and their price has been beat up quite a bit,” Hardev Bains, a portfolio manager with Lionridge Capital Management Inc.
The Winnipeg money manager is a value investor, who seeks companies with strong business fundamentals that may be overlooked by the majority of investors. It’s a common, tried-and-true investment strategy among money managers.
And indeed, they are active as a handful of good companies are on sale — some more than others.
Of course, it can be considered crass to be talking about profits in the midst of a pandemic when many have lost their jobs, or are sick and even dying.
But the panic COVID-19 has sent through financial markets offers a slim silver lining for individuals whose personal wealth has suffered greatly during the last few weeks.
“If you’re taking a long-term view, there are stocks worth owning out there at current prices,” Bains notes.
Take your pick: big banks, energy, airlines, big tech and just about everything else are down from highs several weeks ago.
Bains argues, however, the markets are still over-valued by certain metrics, including the market capitalization to GDP ratio (basically dividing the value of all stocks by gross domestic product). For example, the metric for the S&P 500 is still higher than the peak in 2007 before the financial crisis.
So stocks still aren’t all that cheap, Bains says.
Then again price — like beauty — is in the eye of the beholder.
Portfolio manager Eden Rahim with Next Edge Capital, based in Toronto, says from a top-down perspective the market still looks overvalued because the FANG (Facebook, Apple, Netflix and Google) stocks had such lofty share prices. Their prices have come down, as have Tesla, Microsoft and other high fliers. But they haven’t come down as much as other stocks.
“There are large segments of the market that are at multi-year valuation lows on a relative and absolute basis,” says Rahim, who manages the Next Edge Bio-Tech Plus Fund.
“When the market has been cut by a third, there would be a lot of really good companies with some defensive qualities that are worth buying.”
Rahim’s wheelhouse are medium- and small-cap biotech companies. The life sciences sector, which includes makers of medical equipment, insurers in the U.S, big pharma and biotech, has not been immune to the downward trend of the market.
Even biotech, which is showing its quality developing drugs and diagnostics to fight the pandemic, is undervalued relative to the broad index of the S&P 500.
“The sector has been out of favour for awhile,” he says.
In some ways, drug-makers have been a value trap, Rahim adds. They’ve appeared cheap in the last few years only to fall further in price.
But these companies — which include Gilead Sciences and Merck & Co. Inc. — are poised for a recovery. Rahim says the reason is due to their cyclical nature, and likely the result of their role in the pandemic.
COVID-19 “is on a head-on collision course with biotechnology,” he says. “This is a biological crisis, and 12 years ago, it was a financial crisis.”
The sector is stepping up, making for “a tremendously intriguing time” for investors. Yet those expecting to invest in the next company to develop a COVID-19 vaccine or anti-viral shouldn’t expect that therapeutic to be a money maker. Pandemics generate business for these firms, but not necessarily profits, he says.
Despite the widely held view big pharma is in it for profit — which is true of any business — its work in pandemics flows more through a humanitarian vein of corporate behaviour.
Rahim points to Merck as an example.
“The Ebola vaccine was actually developed by the good scientists at the National Microbiology Lab in Winnipeg,” he says. “They created that vaccine and licensed it to Merck, which commercialized it and made it available at cost.”
The same goes for an antiviral also developed for Ebola virus, remdesivir, that now shows promise as an early stage treatment for the novel coronavirus. Its maker Gilead rescinded orphan drug protection (after some criticism) so it can be widely manufactured and distributed, he says.
“This will be on a cost basis a billion-dollar drug for Gilead that they won’t make a dime off of.”
Even so, its share price rose a few weeks ago based on early use, which showed poor results in treating people with severe disease but potential before patients are on ventilators. Rahim adds vaccines will be a much longer process for biotech companies, and as mentioned, likely not wildly profitable.
“The diagnostics tests are probably where the biggest commercial opportunity is — other than companies that manufacture HAZMAT suits and ventilators.”
Even here investors need to be wary of early stage companies that have little substance but make announcements that appear promising even though they are a long way off from producing a commercially viable product.
“It can be the wild, wild west out there,” Rahim says.
Indeed, the same can be said for the stock market in general as investors lurch between fear and greed.