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Jun 2, 2021

We Are All Momentum Investors Now No Bargains In A Bull Market

by Richard Morrison
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Richard MorrisonChances are, your stock market investments are probably performing better than they were in the spring of 2020. In the year or so since those miserable lows, the S&P/TSX Composite Index has staged a slow and steady climb of about 28%. In the United States, the S&P 500 index is up 43% over the past year and its long-term chart shows the characteristic parabolic curve of a market bubble.

Low interest rates are likely the catalyst. As the impact of the pandemic became apparent last year, the Bank of Canada further reduced what was already a fairly low prime rate. That meant minuscule returns from bonds, so bondholders moved to the stock market. Low rates mean corporate borrowing costs are also relatively small, and should corporations decide to go public or issue more shares, in a bull market they can be confident of a warm reception.

In Canada, the stock market rally has been led by a relatively small group of companies. Figures from the TMX Money site show that as of the end of April, shareholders of 31 relatively large companies -- those with market capitalizations of more than $1-billion — had enjoyed gains of more than 50% so far this year.

The biggest gainers so far in 2021 include eight recovering Canadian energy stocks, a few mining companies and a pair of marijuana names. Along with these are some long-term laggards that have come back to life: Bombardier Inc., Corus Entertainment Inc., Molson Coors Canada Inc. and SNC-Lavalin. Two companies that I mentioned in the January edition of Canadian MoneySaver are also having good years: GoEasy is up almost 55% so far this year, while TFI International, which surged in January, is up more than 60%.

Such rallies may be short-lived, however, as many companies that showed great promise in 2020 have plunged this year. For example, among TSX-listed companies with market capitalizations of more than $1 billion, five companies that had banner years in 2020 have lost more than 20% in 2021.

Here are three companies whose rising share prices reflect, in my opinion, justifiable optimism about genuinely improving fundamentals.

Airboss of America Corp. (BOS-TSX)

Based in Newmarket, ON, Airboss started out in 1989 with a line of segmented, puncture-proof rubber tires for the mining industry. The company has expanded to turning out rubber products for the automotive, engineering and defence industries, including making personal protective equipment (PPE), a big reason why the shares have performed so well.

After peaking at $24 in mid-2015, Airboss shares went into a long slide to a low of $8 in early 2020. The stock recovered and by early March of this year the shares were trading around $20, then doubled over the next month on a series of positive announcements.

On March 9, Airboss reported huge gains in sales and profits for 2020 over the previous year. For 2020, the company reported a profit of US$56.3 million or US$1.35 per share on net sales of US$501.5 million, up from a profit of just US$10.2 million (US$0.44) on sales of US$328.1 million in 2019. The news pushed the shares to $24. A week later, the company announced the U.S. Department of Health had awarded it a contract of up to US$576 million for nitrile patient examination gloves, lifting the shares again. The contract caused the company to update its outlook for 2021, predicting that organic sales and adjusted earnings per share would grow by 25% or more.

Pollard Banknote Ltd. (PBL)

Based in Winnipeg, Pollard prints lottery tickets, with sales of instant tickets and internet lottery services representing about 84% of 2020 revenues. Geographically, the company gets about 61% of its revenue from the United States, 19% from Canada and 20% from the rest of the world. The Pollard family has managed the company since its founding in 1907.

Pollard had a banner year in 2020, reporting record revenue of $414.1 million, up four per cent from 2019. Net income of $33.3 million was up $11.3 million or 51% from 2019. Pollard is classified as an essential government supplier, which has allowed it to operate through the pandemic. Revenues at its charitable gaming and Diamond Game units were hurt by Covid-related shutdowns, however.

Investors began taking notice of Pollard’s shares last October when the shares were about $18 and the stock essentially doubled in a little more than two months, ending 2020 at $36 and and sit at about $55 as of May.

Pollard’s shares have won a rare strong buy recommendation from CFRA, a unit of S&P Global Market Intelligence. CFRA rates Pollard’s quality, growth, street sentiment and price momentum all as positive, while Pollard’s overall score puts it in the top six per cent of the companies that CFRA follows.

Ovintiv Inc. (OVV)

Ovintiv became the new name for Canadian oil and gas giant Encana Corp. after its headquarters was moved to Denver Colorado from Calgary in early 2020. As of the end of last year, Ovintiv’s net proved reserves were made up of 30% oil, 29% natural gas liquids and 41% natural gas. Ovintiv has about 20,000 drilling locations in its inventory. Ovintiv is focused on the Montney play that straddles the border between British Columbia and Alberta, and the Stack/Scoop resource plays in the United States.

The Canadian energy industry went into a long slump between 2014 and 2020, as reflected in the roughly 80% drop in the unit price of the iShares S&P/TSX Capped Energy Index ETF (XEG), which fell to about four dollars in 2020 from $20 in 2014. Along with falling oil prices, Canadian energy companies suffered as horizontal drilling and fracking dramatically increased U.S. production. Instead of being a gigantic customer for Canadian oil and gas, the United States became a gigantic competitor.

Ovintiv’s shares, like those of many other energy companies, were crushed in 2020 by the combination of the first wave of the pandemic, which reduced demand, and after oil prices plunged as Saudi Arabia and Russia fought to see who could offer oil more cheaply. The West Texas Intermediate price briefly fell into negative territory as producers ran out of space to store their unsold barrels.

In March 2020 Ovintiv shares were selling for less than five dollars during what turned out to be a great time to buy. The stock subsequently quadrupled to about $18 by the end of 2020, kept climbing to the mid-$30 range in March 2021, then fell back to about $30.

Ovintiv’s financial announcements emphasize debt reduction. In announcing its first-quarter results on April 28, Ovintiv said it had accelerated its debt reduction plan and forecasted its year-end 2021 total debt to be less than US$5 billion, assuming a US$50 WTI oil price and a gas price of US$2.75. The company also said it had closed the US$263 million sale of its Duvernay assets in western Alberta, with the proceeds to be used for debt reduction. Finally, the sale of its Eagle Ford assets, announced in March at a price of US$880 million, should close before the end of the second quarter, Ovintiv said.

In an April 24 report, CFRA equity analyst Andrzej Tomczyk rated the stock a buy with a 12-month target price of US$30 (about $37 Canadian). Ovintiv’s management says all excess cash flow through 2021 will flow to the balance sheet to reduce debt, Mr. Tomczyk said. The company’s revenue has grown at a compound annual growth rate (CAGR) of 15% over the past three years while earnings before interest, taxes, depreciation and amortization (EBITDA) expanded by an 11% rate through 2020, he noted. Assuming an average oil price of US$50 per barrel and a gas price of US$2.75, Ovintiv should be able to generate US$1 billion in free cash flow in 2021, allowing for further debt reduction, the report says.


As a leading indicator, the stock market reflects confidence that once everyone gets vaccinated, stores reopen and factories start humming again, corporate profits will reward investors. Unfortunately, such a revitalization of the economy is likely to push down the employment rate and stimulate inflation. Any sign of a warming economy will attract the attention of central bankers, who will nudge interest rates higher, likely triggering a stock market correction.

Until then, active traders may try to time the market and try cash out at a peak. As for value investors, over the past year it has become increasingly difficult to find stocks trading at low multiples to earnings, sales or cash flow per share. Those who refuse to invest in what they regard as overvalued markets are sitting in cash, waiting to buy when everyone else starts selling.

In my opinion, there is nothing wrong with a risk-tolerant investor taking a small position in a high-flying stock that is trading on legitimate growth in sales and earnings. The risk must be mitigated within a well-diversified portfolio, however, and the investor must pay attention and be prepared to sell to minimize losses if things go sour.

Richard Morrison, CIM, is a former editor and investment columnist at the Financial Post.