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Retail participation in the stock market is proving to be demonstrably procyclical, as amateur traders buy high and sell low, says Stephen Arpin, a portfolio manager with Beutel Goodman Investment Counsel.

Arpin said while barriers to retail stock trading have fallen in recent years, there’s no substitute for experience, research and a solid understanding of market dynamics.

“In general, when the market is down, retail volumes decline. And when the market rises, they improve,” he said. “This does not indicate that retail investors are making successful investment decisions.”

The removal of frictional trading costs has democratized the markets and made investing more accessible, he said, and that trend seems likely to continue. But he added that market entry has never been the biggest barrier to profitability for amateur investors. The real problem is a lack of resources, professional research, analysis and strategy.

“What you’ll see with retail investor behaviour around both mutual funds and investing in the market is that they tend to be buying the tops and selling the bottoms,” he said.

Indeed, bargain-hunting can be difficult for amateur investors. And while growth investing has been rewarding of late, many investors have been lured into paying high multiples for perceived security, Arpin said.

He believes value investing is poised to make a comeback as the most restrictive pressures of the pandemic lift.

“Historically, value investing has been able to create a lot of additional performance for investors and we think that will return as some of the pressures from the pandemic lift,” he said.

In energy, for example, Arpin likes Calgary-based TC Energy Corp., which has an attractive valuation and appears ready to pivot as the new U.S. administration implements a tough stance on pipelines. While the cancellation of the Keystone XL pipeline plan eliminated one lower-cost option for oil distribution, natural gas remains an abundant energy source that doesn’t face budget-busting transportation costs.

“The removal of uncertainty around Keystone XL means the company will primarily be weighted to natural gas transmission with optionality around the use of hydrogen as a fuel source,” he said. “North American natural gas is globally low-cost and will be required for many years.”

Canada is also strong in financials, he says. Canadian banks and insurance companies have seen a substantial de-rating over the past few years, but profits remain resilient — particularly for companies with an existing footprint in the U.S.

“The Canadian banks trade at attractive valuations, and they have attractive dividend yields with sustainable pay-out ratios. They’re more diversified into capital-light businesses such as wealth management and have very strong competitive positions,” he said. “Our largest holdings — TD and RBC — have excess capital, which can be used for strategic acquisitions or share buybacks.”

He also believes Canadian insurers are attractively valued, with strong Canadian franchises.

In general, he’s avoiding the overheated I.T. sector, but has found a couple of strong contenders.

Toronto-based Rogers Communications Inc., for example, represents good value in the telecom space, with a strong position in 5G, he said. It should benefit from improved roaming revenues when the pandemic ends.

He also likes the cloud-based information management platform OpenText Corporation, headquartered in Waterloo, Ont.

Generally speaking, though, he believes high-tech valuations are “very aggressive” and have benefited from pandemic-driven growth, rather than long-term fundamentals.

“We believe there’s better value in other areas of the market, particularly for companies which have solid free cash-flow generation and strong franchises, but have faced temporary headwinds from the pandemic,” he said.

Among his picks are CCL Industries Inc., a Toronto-based speciality packaging and labeling firm, and CAE Inc., a Montreal-based high-tech trainer for the civil aviation, defence, security and healthcare industries.

In keeping with his preference for value investing, he said both companies were underestimated during the worst months of the pandemic.


This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.

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