May is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, October, March, June, December, August and February. — (With apologies to Mark Twain)
The stock market is safer than it looks.
Today’s alarming reports of a market in turmoil refer mostly to big losses from a tech bubble that has finally burst.
The startling market plunge of last Thursday, repeated on Monday, signals a full-on rout of Big Tech stocks first warned of last year.
But the entire market is not in free fall, appearances to the contrary.
Today’s market offers plenty of stocks whose projected future profits justify their current price. A brief list of such firms appears below.
Those worthwhile stocks represent companies that have a strong competitive position in a growing market, cash in the treasury and manageable debt, and a track record of consistent profits and dividend payouts.
Those are the “fundamentals” of prudent stock-picking that irrational investors in tech stocks with grossly inflated prices tended to ignore.
And while you will continue to hear about myriad causes for the current market sell-off, ranging from war in Europe to a slowdown in Chinese economic growth, there’s one main reason for the market’s sharp downturn.
A long era of cheap money has abruptly ended with rapid and large hikes in interest rates. Borrowing costs will quadruple this year and could jump as much as 10-fold by the end of next year.
A Bank of Canada key lending rate that began the year at 0.25 per cent could reach 2.5 per cent by year-end 2023.
It suddenly is no longer viable to own stock in a company whose share price has substantially eclipsed its fundamentals and whose borrowing costs are about to skyrocket.
To be sure, the tech implosion is causing damage in the broader market.
But perspective matters.
The tech-heavy Nasdaq 100 has lost over a quarter of its value since it peaked in December.
By contrast, the S&P 500, a broader index, is down about 17 per cent from its all-time high in December. Because the tech stocks are components of the S&P 500, a large portion of that drop is attributable to the tech sell-off.
And the resource-laden S&P/TSX Composite index is off just nine per cent from its peak last month. Canadian resource firms are benefiting from high world prices for energy, minerals and forest products.
Some of the Big Tech stocks have further room to fall. They include celebrity stocks like Jeff Bezos’ Amazon.com Inc., whose shares are trading at 52 times earnings. (The normal range is 15 to 30.)
Add in Elon Musk’s Tesla Inc. (106 times earnings) and Tobias Lütke’s Shopify Inc. (330).
But the tech sell-off has brought most tech giants down to Earth, including Apple Inc. (now trading at 25 times earnings), Netflix Inc. (16), Google owner Alphabet Inc. (21) and Facebook owner Meta Platforms Inc. (15).
Here are some Canadian companies whose stock proves the entire market isn’t overvalued.
The list below emphasizes reasonably priced, high-yielding stocks — a refuge for investors in unsettled times like this. They have characteristics of both income and growth stocks.
In a market craving safety, their valuations stand to benefit from money diverted to them from dicier asset classes.
These are inflation-fighting stocks, of course, although their appeal on that score won’t be most powerfully evident until inflation subsides over the next two years.
At that point they will become inflation-beating stocks, with dividend yields considerably higher than an inflation rate that should ease by 2024 to the three per cent range.
In this list, the current price of each stock appears after the company name.
Enbridge Inc. ($56), the Calgary-based energy utility, pays one of the richest dividends in the country (6.1 per cent).
BCE Inc. ($70), Canada’s biggest telecom, is also a “dividend king” with a current yield of 5.3 per cent.
Restaurant Brands International Inc. ($66), operator of Tim Hortons, Burger King and Popeyes, is aggressively expanding its international network and pays a handsome dividend of 4.1 per cent.
Dividends paid by National Bank of Canada ($89), a consistently well-run lender, currently yield 3.8 per cent, and the stock is favourably priced at nine times earnings.
Finally, industrial stocks with above-average yields for that sector: The dividend yield on shares of auto-parts maker Magna International Inc. ($75) is almost three per cent, and the stock trades at a 40 per cent discount to its all-time high last year. The stock should recover as a slumping global auto sector does.
And stock in Stelco Holdings Inc. ($42), whose revenues tripled last year in an early phase of a forecast lengthy boom in infrastructure spending, yields 2.7 per cent. Stelco is one of the market’s most affordable stocks with a price-earnings multiple of just 2.3.
These are not glamour stocks. Their CEOs do not have large Twitter followings.
More reason to check them out.