Morguard Corp., whose property portfolio includes Holt Renfrew on Bloor Street in Toronto, will be a beneficiary when life and business get back to normal. The stock currently trades at a significant discount.The Globe and Mail
With Canadians holed up at home amid lockdowns to tame rising levels of COVID-19 infections, many are socking away savings as spending on vacations, restaurants and other luxuries are curtailed.
This leaves a big question for investors: Where will that spending be directed once the economy reopens, and which stocks will benefit?
Bank of Montreal estimates that working Canadians have built up $150-billion in savings since the start of the pandemic and will spend a sizable amount once the economy opens up later this year as more people are vaccinated against the coronavirus.
Similarly, Moody’s Analytics estimates that as of the end of October, Americans have saved about US$1.4-trillion more than they would have had there not been a pandemic.
Some “reopening stocks” have already rebounded strongly amid news about the vaccine and its rollout across the world, and “there’s a good amount baked into” those stocks’ prices, says Stephen Groff, a principal and portfolio manager at Cambridge Global Asset Management, a division of CI Investments Inc. in Toronto, who focuses on Canadian equities.
“There’s a good amount of the population that earned more through COVID-19, through [government] support than [had they been] working,” he says. “When you combine that with not spending, there’s no question that savings for a large number of Canadians have been higher than normal, and we’ve seen savings rates spike overall.”
As the economy reopens and more people feel more comfortable gathering in larger numbers, Mr. Groff expects Montreal-based Gildan Activewear Inc. (GIL-T) will benefit. Gildan is a huge seller of blank T-shirts and sweatshirts that are then screen-printed for events, such as concerts or charity fundraisers.
“[Gildan is] the biggest maker of [those T-shirts] in North America,” Mr. Groff says. “That part of its business has been clobbered.”
However, once people return to concerts and other group activities, “this company will definitely benefit,” he says. The stock has “come back a lot” already.
Although it fell to a low of $13.64 in the past year and is back trading close to the $35 range, it’s still down from the $50 level it reached in 2019.
Another sector that’s expected to gain as the economy reopens is travel, Mr. Groff says. Hotels, airlines, cruise lines, resorts and restaurants may recover, but it will also drive demand for energy, as will more employees who return driving to work.
One energy company Mr. Groff holds in the funds he manages is Canadian Natural Resources Ltd. (CNQ-T), “but if oil does well, then all energy companies are going to do better,” he says. The stock fell as low as $10 a share in March 2020 and has recovered to the $33 level, but is off its 52-week high of $42.
On the travel and office side, Mr. Groff likes Morguard Corp. (MRC-T), which owns hotels, retail and office properties and “would be a beneficiary of getting back to normal,” he says.
While Mr. Groff has held Morguard in the funds he manages since before the pandemic hit, it has been a weak stock lately because of COVID-19, making it a “discounted way to own the underlying real estate.”
As such, he says Morguard “should be in a better spot as COVID-19 goes away,” and people return to travelling, shopping and going to their offices.
Morguard’s 52-week high is $212 and the stock is trading now at about $115.
One travel-related stock, Air Canada (AC-T), is up from its low of around $10 a share, but is still far from its pre-pandemic level of $52, says Jennifer Radman, head of investments and senior portfolio manager at Caldwell Investment Management Ltd. in Toronto.
“That’s probably the biggest opportunity, and if we did see borders opening up, that [stock] would have a nice move,” she says.
On the restaurant side, Ms. Radman points to MTY Food Group Inc. (MTY-T), which operates brands such as Cultures, ManchuWok, Van Houtte, Country Style, among others. “There has been some of that recovery trade,” she says. The stock is trading at more than $50 after falling to a low of $14, but it’s still off its 52-week high of $62.
Mr. Groff says stocks for products that have been in high demand during the pandemic, such as those of Home Depot Inc. (HD-N), Peloton Interactive Inc. (PTON-Q) and Lululemon Athletica Inc. (LULU-Q), may decline as activities return to normal.
However, Ms. Radman expects some of those “stay-in-place” stocks, in particular housing and renovation-oriented companies, will continue to rise as consumers keep updating their homes or move to new housing.
“Those [stocks] still present an interesting opportunity,” she says.
One stock she points to is Richelieu Hardware Ltd. (RCH-T), which provides an array of home renovation products like kitchen hardware, bathroom fixtures and storage solutions. The stock is currently trading in the $34 range, up from its low of around $20, but still off its 52-week high of $41.
With activity in the U.S. housing market likely to increase, one stock that can take advantage of that is West Fraser Timber Co. (WFT-T), says Ms. Radman. In November, West Fraser announced the $4-billion purchase of Norbord Inc. (OSB-T), making West Fraser a top global producer of lumber and oriented strand board, which is used heavily in housing construction.
“That’s an interesting play because the supply of lumber has been pretty tight,” which has boosted prices, Ms. Radman says. “There’s usually a seasonally soft period coming into the winter and we didn’t see that at all this year.”
West Fraser was trading as low as $21 in March 2020 and is now back up at $76, but still off its 52-week high of $86.
The outdoor sector is another area of interest. It includes stocks such as BRP Inc. (DOO-T), formerly known as Bombardier Recreational Products, Ms. Radman says. BRP sells outdoor vehicles such as snowmobiles, motorcycles, boats, ski-doos and off-road vehicles like ATVs.
“There’s been a lot of demand for outdoor activity,” and a lot of new buyers have turned to the power sports industry during the pandemic; they’re likely to stay, making the industry’s growth more sustainable, Ms. Radman says. “These are big-ticket items you commit to.”
BRP’s stock is trading near its 52-week high of nearly $88, significantly higher than its low of around $18.