By Barry Schwartz
That’s it? The great stock market correction that everybody and their brother predicted would happen in Canada is already over? The week of October 14, 2014 was damaging, especially for those overweight commodities but this correction ended with bang, not a whimper. One week later, the TSX recovered 6.5% percent and is now up close to 9% (including dividends) for the year. Up 9%? I think we can eke out an existence with that.
As individual stock pickers, we try not to get too fussed about a market correction. Since we don’t own an index fund or ETF, the market dropping 10% is painful but meaningless to our overall strategy. We are more interested in a stock that corrects than a stock market correction. One of the tools we use to find new investments is to screen for companies that are down at least 10% from their highs, trading at reasonable valuations, have rising dividends and net share buybacks and the potential for earnings growth over the coming years. No need for a market correction to find those opportunities.
Two stocks that we are buying for clients that have corrected this year are General Motors and Viacom. Both companies have the potential to grow their earnings substantially in 2015, accompany cheap valuations and are returning lots of cash to shareholders.
I’m not going to rehash what’s going on with GM in the headlines. Suffice to say, we believe at some point profits will trump hype. Amidst all the negative news, GM is still selling cars and trucks and lots of them. In September alone, GM’s North American auto sales were up 17% year over year. Low interest rates, low gasoline prices, an improving economy and a very old car fleet are spurring auto sales around the globe. With a potential to earn close to $5 a share in 2015, generate excess cash of at least $4B and close to 4% dividend yield, how much more downside is left here? GM’s stock is down over 25% year to date and is selling for less than seven times next year’s estimated earnings. While our thesis unfolds, investors are being paid to wait with a 4% dividend.
After reaching an all-time high in the summer when it looked like all Media companies would merge with each other, Viacom’s stock has tumbled close to 20% year to date. For long term shareholders, this is excellent news. Here’s why. Viacom is cannibal of its shares. Since 2005, it has reduced its shares outstanding by 45%! In 2013, the company doubled its share buyback program from $10B to $20B. By being able to now buy its own stock back even cheaper, Viacom has the ability to create enormous value for shareholders with time horizons longer than 10 minutes. One of the reasons for Viacom’s fall has been a softer than expected ad market for 2014. But at close to 10 times next year’s earnings, not to mention a 10% free cash flow yield and a rising dividend, we would argue that it is already priced in to the stock.
As we’ve seen this month, the market can change its mind quickly, but investors paying attention to quality investments will be rewarded for buying stocks in a correction.
*A member of the author’s household owns shares in GM and clients of Baskin Wealth Management own shares in both GM and Viacom class B
