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Providers of telecommunication services
Daniel Ouellet, portfolio manager and senior asset manager, Ouellet Bolduc Group, Desjardins Securities
Daniel Ouellet, portfolio manager and senior asset manager at Ouellet Bolduc Group, Desjardins Securities, says he is looking closely at the securities of telecommunications service providers in North America.
“An industry approach can enable 80% of analytical work to be done. The stock has fallen sharply, mainly due to rising interest rates, and it pays good dividends. For example, Verizon (VZ, $33.66) shares are at a 10-year low and their dividend is the best covered in the industry,” he explains.
According to him, investors should ask themselves the following questions when analyzing companies in the sector: “Are central banks close to completing the monetary policy tightening cycle? Are declines in securities in response to rising interest rates factored into current valuations? Has the financial situation deteriorated significantly? Is the dividend sustainable? If the answers to these questions are yes, yes, no and yes, the target company’s stock may represent a contrarian investment opportunity,” he says.
He emphasizes that such an analysis also applies to other sectors of the economy that are sensitive to changes in interest rates, such as public works.
American manufacturers of medical equipment
Martin Roberge, Managing Director, Portfolio Manager and Quantitative Analyst, Canaccord Genuity
Martin Roberge, managing director, portfolio manager and quantitative analyst at Canaccord Genuity, has published three contrarian investment ideas every year since 2012 to complement his core portfolio management strategy.
One of the three proposals made at the end of 2022 was to invest in US medical equipment manufacturers, focusing on the full recovery of medical procedures after the pandemic, as well as the replacement cycle after years of containment.
An exchange-traded fund that tracks the sector’s performance is iShares US Medical Devices (IHI, $44.87), but it has suffered a nearly 15% decline between the start of the year and the end of October. The portfolio manager explains that the performance of the sector was good until July. At the time, the drug Ozempic, marketed by pharmaceutical company Novo Nordisk ( NVO , $94.07 ) to treat diabetes, began making headlines for its effectiveness in the fight against obesity.
The news sent some junk food stocks down, such as McDonald’s (MCD, $258.12) and Coca-Cola (KO, $55.47), but also the medical equipment sector.
“The idea is that if the risk of being overweight is reduced, there will be fewer surgeries and therefore less need for medical equipment. Such news can prolong the suffering of a sector that is going against the tide,” he explains.
Martin Roberge also clarifies that it is risky to compare stock market sub-indices from different countries and bet on the one that offered the least good performance to guide a contrarian investment decision. “For example, the health care sub-indexes in Canada and the United States are very different,” he says. On the Canadian side, it contains securities of companies operating in the hemp industry, which is not the case with its American equivalent.
Mary Hagerman, portfolio manager and financial planner, Mary Hagerman Group, Raymond James Investment Company
Mary Hagerman, a portfolio manager and financial planner in the Mary Hagerman Group of the Raymond James investment firm, manages portfolios typically 100% invested in stocks.
But since July, it has started building a weight in bonds to take advantage of rising interest rates. “Stock markets don’t go up in a straight line, and short-term bond yields have become very attractive,” he says.
The yield curve is always inverted in the Canadian bond market, meaning interest rates on short-term bonds are higher than on long-term bonds. Government bonds with a maturity of 10 years showed a yield of 4.04% at the end of October compared to 4.67% for a two-year maturity, which is a difference of -63.2 percentage points. Still, Mary Hagerman suggests starting with longer durations, saying you have to live with the fact that investors can never be perfectly in sync with the top or bottom of a cycle.
“If central banks continue to raise interest rates, the nominal value of bonds may fall a bit until the markets get a signal that the tightening cycles are over, which I think is imminent,” he adds. Rates may remain high for a long time, but he believes now is the time to capture good returns while preparing for capital gains when interest rates eventually fall.