Source: Adrian Day for Streetwise Reports 04/02/2020
Money manager Adrian Day reviews non-resource stocks from around the world, noting that although he is cautious on global markets right now, with a few exceptions, some of the stocks on his list will be rated good buys on any dips.
Loews Corp. (L:NYSE, 33.70) reported a profit in the last quarter, driven by earnings at CNA Insurance and Boardwalk Pipelines, as well as investment income at the parent level. But investment income will likely disappear for the next quarter or so, while Diamond Offshore will continue to struggle and Loews Hotels will suffer from coronavirus travel restrictions.
Loews has a rock-solid balance sheet however, with more than $2.6 billion in cash, plus another $1 billion in investments (though less today because of the decline in the stock market, no doubt). It has continued its share buyback program, buying 21 million shares last year, representing about 8% of the shares outstanding at the beginning of the period. As of year-end, the book value had risen to $65.71, while the shares were trading a little over $52 a share. Book value has declined in the recent market turmoil—its largest holding, CNA Financial, has dropped nearly 30% since year-end—but so too has the share price; there remains a significant discount to net asset value (NAV) and a strong cash position.
Loews will survive, no doubt, and equally has cash available to help its portfolio companies as well as, potentially, make a new investment. It is currently trading at just 10x earnings—though it remains to be seen how much earnings will suffer from the virus-restrictions—and just off its lowest price since 2009.
Because its large holding in Diamond Offshore is vulnerable to continued weakness in the oil market, while the hotel business will suffer from the fallout of COVID-19, Loews may see further weakness. We would be buyers only on weakness.
A defensive company with innovative growth
Nestle SA (NESN:VX; NSRGY:OTC, 97.45) continues to shuffle its portfolio of food and healthcare as it moves ahead with more healthful products. For the most part, it has been selling low-margin, low-growth, highly competitive segments. It has put its U.S. ice cream into a global joint venture; it sold its European meat products company; and it sold Nestle skin health for Sfr10 billion.
On the healthful foods front, it has experimented with several alternatives to sugar in sweets and candies, but some have not been a hit with consumers in several markets. It has also moved to take advantage of its acquisition of rights to Starbucks in stores, with premium brands in the U.S.
Not cheap but defensive
Nestle completed a Sfr20 billion buyback program at the end of the year, and launched a new Sfr20 billion program. The stock outperformed over the past couple of years, and has held up well in the recent market volatility. The company has raised its dividend virtually each year for the past 20, and another increase is expected in April, though the COVID-19 pandemic may scuttle those plans. With a yield of 2.5%, it is trading now at its lowest yield for at least a decade.
Though we are not buying at these valuations, we are holding, for two main reasons: Nestle is a defensive company that can survive difficult times; and the stock is more likely to hold up than the overall market. Our experience with 2008 suggests that, even if the stock gets caught up in a global downdraft, it will recover sooner and stronger than the market.
Asian port company hit from all sides
Hutchison Port Holdings Trust (HPHT:Singapore, US$0.11) had only started to recover from the China-U.S. trade tensions than the COVID-19 pandemic slammed global trade. Not surprisingly, the distribution (dividend) for 2019 came in at the low end of guidance, while the estimated distribution for this year has been cut to $0.08–0.11 against $0.11 last year). The distribution has declined each year since 2013. One positive: The trust’s large, five-year debt repayment program is close to an end, with little more than a year to go. And while the decline in trade from COVID-19 is a negative, the company’s guidance and the stock price likely fully discount that.
The stock is trading at a significant discount to book, under 50% over the past several months, the lowest since the trust was launched; while the 12% yield is close to the high. Once the pandemic is over, global trade could rebound quickly as there will be a catch-up effect, and Hutchison stock should follow suit. While there may be more pain ahead, we are holding.
Travel restrictions hits this company
Kingsmen Creatives Ltd. (KMEN:SI, 0.20), despite revenue increasingly marginally last year compared with the prior year, reported a 94% decline in net profit, on higher costs, including bad debts, tax and the lack of one-off items from the prior year. Initiatives for 2020 looked promising until COVID-19 hit. In limiting travel and human interaction, the virus and associated restrictions have already hurt business activities, particularly exhibitions and events. For the most part, contracts for interior fit-outs have continued, and contracts exhibitions and so forth for H2 also continued.
The company, however, decided to cancel its regular final dividend (normally payable in May) “as the group wishes to retain cash for its business operations.” So, assuming the
interim is still paid in September—though it is too early to say if that will be the case—the shares are now trading at a forward yield of 5% (compared with a better-than 12% backward yield). The company, however, is well-positioned for when the virus-related restrictions are lifted. Kingsmen is a buy but without chasing it.
Top Buys
Best buys now at Friday’s closing prices include: Altius Minerals Corp. (ALS:TSX.V, 6.67); Gladstone Investment Corp. (GAIN: NASDAQ, 8.33); Lara Exploration Ltd. (LRA:TSX.V, 0.46); Ares Capital Corp. (ARCC:NASDAQ, 11.29); and Evrim Resources Corp. (EVM:TSX.V, 0.235). Other than Altius, which is at a price last since in 2009, all these stocks have experienced a rebound of some degree in the last week or so. Ares, for example, is up from a low of 7.90 on Monday, and I suspect we may see lower prices this coming week, so you should be very disciplined on limits and not chase stocks higher.
Originally posted on March 28, 2020.
Adrian Day, London-born and a graduate of the London School of Economics, heads the money management firm Adrian Day Asset Management, where he manages discretionary accounts in both global and resource areas. Day is also sub-adviser to the EuroPacific Gold Fund (EPGFX). His latest book is “Investing in Resources: How to Profit from the Outsized Potential and Avoid the Risks.”
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Adrian Day’s Global Analyst disclosures: Staff may have positions in securities discussed herein. Adrian Day is also President of Global Strategic Management (GSM), a registered investment advisor, and a separate company from this service. In his capacity as GSM president, Adrian Day may be buying or selling for clients securities recommended herein concurrently, before or after recommendations herein, and may be acting for clients in a manner contrary to recommendations herein. This is not a solicitation for GSM. Views herein are the editor’s opinion and not fact. All information is believed to be correct, but its accuracy cannot be guaranteed. The owner and editor are not responsible for errors and omissions. © 2020.
( Companies Mentioned: ALS:TSX.V,
ARCC:NASDAQ,
EVM:TSX.V,
GAIN: NASDAQ,
HPHT:Singapore,
KMEN:SI,
LRA:TSX.V,
L:NYSE,
NESN:VX; NSRGY:OTC,
)