The Globe and Mail - 08.04.2020

WEDNESDAY,APRIL8,2020 | THEGLOBEANDMAIL O B11

EYEONEQUITIESDAVIDLEEDER

INTERFOR(IFP-TSX)
CLOSE$6.77,UP6¢

MULLENGROUP(MTL-TSX)

CLOSE$4.48,UP43¢

PASONSYSTEM(PSI-TSX)

CLOSE$6.20,UNCHANGED

PEOPLE(PEO-TSXVENTURE)

CLOSE$7.60,DOWN3¢

DECIBEL(DB-TSXVENTURE)

CLOSE7¢,UNCHANGED

Earnings uncertainty stemming
from the impact of the spread of
COVID-19 prompted Raymond
James analyst Daryl Swetlishoff to
adjust his valuation methodolo-
gy for Canadian forest-products
companies, leading him to lower
Interfor Corp.to “outperform”
from “strong buy.”
Target:His target for Interfor
shares dropped to $9.50 from
$16.50. The consensus on the
Street is $13.75.

Though its macro outlook re-

mains “uncertain,” Industrial Al-

liance Securities analyst Elias Fos-

colos raisedMullen Group Ltd.to

“speculative buy” from “hold,”

citing its “survivable balance

sheet, and a resilient business

model that is attributable to di-

versification and cost manage-

ment.” “We believe that the stock

has become sufficiently discount-

ed to justify upgrading,” he said.

Target:Mr. Foscolos maintained

a $6.50 target. Consensus is $8.21.

Mr. Foscolos also raisedPason

Systems Inc.to “speculative buy”

from “hold,” believing it possess-

es a strong enough balance sheet

to “survive a downturn of pro-

longed duration.” “We believe the

stock has the potential to deliver

solid returns at the current price,”

he said.

Target:He kept an $8.50 target,

which falls below the $12.75 con-

sensus.

Pointing to “uncertainty with the

unemployment outlook and du-

ration of the pandemic,” Desjar-

dins Securities analyst Gary Ho

felt compelled to lowerPeople

Corp.to “hold” from “buy.” Mr.

Ho said he remains in “favour its

solid management team and re-

cession-resilient business mod-

el,” however he was surprised by

the timing of its $20-million equi-

ty raise.

Target:Mr. Ho cut his target to

$8.50 from $12. Consensus is

$10.83.

Canaccord Genuity analyst Kim-

berly Hedlin loweredDecibel

Cannabis Company Inc., former-

ly known as Westleaf Inc., to

“hold” from “speculative buy.

“The reduction is largely due to

DB’s premium value proposition

in the context of a weak economy,

along with expected licensing de-

lays, both of which could create

challenges in gaining market

share,” she said.

Target:Her target slid to 15 cents

from 55 cents. Consensus is 35

cents.

WHATAREWELOOKINGFOR?

Companies in one of the hardest
hit sectors in the current CO-
VID-19 shutdown – consumer dis-
cretionary – through a lens of
strong labour and supply chain
management practices.

THESCREEN

Using FactSet’s Universal Screen-
ing, we created a universe of
stocks from the GICS consumer
discretionary sector, representing
the largest Canadian- and U.S.-
listed companies selling nones-
sential consumer goods and ser-
vicesÝ 77 companies fit these cri-
teria.
We then used labour manage-
ment scores from MSCI ESG Re-
search, a leading provider of envi-
ronmental, social andgovern-
ance data, reports and ratings, to
compare the recoveries of our
universe, from the recent lowest
point of the markets on March 23
to the present. Supply chain man-
agement and employee well-be-
ing are two components of the la-

bour management score, where

the highest score is 10.

MOREABOUTFACTSET

FactSet is a leading global finan-

cial data and technology compa-

ny. Our superior suite of content,

analytics and workflow solutions

covers the entire portfolio life cy-

cle and offers actionable insights

for asset managers and invest-

ment professionals around the

world.

WHATWEFOUND

Companies that scored the best

in terms of labour management

practices had more volatile stock

prices than their peers. They also

had lower credit ratings, which

may help explain why they ini-

tially dropped so dramatically

during the first half of March.

When we looked at performance

later in the month ÀMarch 23-

April 6Á, we then saw a sharper-

than-average rebound. The entire

consumer discretionary sector in

Canada and the United States ex-

perienced a recovery of 14 per

cent over the specified time peri-

od, while the top 10 companies in

our table saw an average increase

of 22.3 per cent. The bottom 10

stocks in our universe returned

only 9.4 per cent.

What explains this differenceÌ

It is hard to say with so many fac-

tors in play, such as solvency, but

labour management is under in-

creased scrutiny. There is increas-

ing focus today on how compa-

nies treat staff and how able they

are to deal with interrupted sup-

ply chains. Those that do well on

both fronts could therefore be

seen as being well-positioned to

benefit when consumer demand

begins to rebound from a combi-

nation of employee Àand custom-

erÁ loyalty – i.e. rewarding good

behaviour – and effective stew-

ardship of supply in the long

term.

For example,Whirlpool Corp.

had the biggest price rebound,

climbing 44 per cent between

March 23 and April 6. The compa-

ny bottomed on March 23 and

provided an update on business

operations the following day, in-

cluding a focus on its operating

liquidity, which may have con-

tributed to its sharp rebound. The

nature of its business – i.e. ap-

pliances where sales depend on

both a well-functioning supply

chain and consumer choice – also

points to strong labour manage-

ment practices Àwhere Whirlpool

came in thirdÁ being a potential

long-term benefit.

The company in our top 10 for

labour management that per-

formed worst wasExpedia Group

Inc., which only recovered 3.9 per

cent. This drop makes sense given

the collapse in travel.

Our conclusionÌ It is too soon

to say whether strong labour

management practices have a di-

rect effect on stock price perform-

ance as the coronavirus crisis

drags on. Factors such as liquidity

or a complete collapse in con-

sumer demand, at least in the

case of Expedia, seem to matter

more, at least right now. There are

some indications, however, that

companies that manage their

teams and supply chains respon-

sibly just might have a long-term

advantage.

The information in this article

is not investment advice. FactSet

assumes no liability for any con-

sequence relating directly or indi-

rectly to any action or inaction

taken based on the information

contained above.

Lookingforgemsinabeaten-downsector

Selectconsumerdiscretionarystocks

COMPANY TICKER

MKT.CAP.

($BIL.)*

RECENT

CLOSE($)*

LABOURMGT.

SCORE**

PRICERTN.

(%)MARCH23

-APRIL6

PRICERTN.

(%)FEB.19

-APRIL6

YTDPRICE

RTN.(%)

1YPRICE

RTN.(%)

DIV.

YLD.(%)

HasbroInc. HAS-Q 12.9 100.70 8.8 37.3 -27.1 -32.6 -17.7 3.8

BestBuyCo.Inc. BBY-N 19.4 85.07 8.6 18.7 -33.9 -31.5 -19.6 3.7

WhirlpoolCorp. WHR-N 7.3 130.81 7.5 44.0 -37.2 -37.3 -32.0 5.2

D.R.HortonInc. DHI-N 16.6 52.12 7.0 24.7 -40.4 -30.1 -15.4 1.9

Tiffany&Co. TIF-N 21.9 181.27 7.0 5.3 -4.5 -4.1 19.2 1.8

ExpediaGroupInc. EXPE-Q 9.2 74.72 6.9 3.9 -56.7 -51.1 -56.9 2.6

UnderArmourInc. UAA-N 4.6 12.71 6.6 11.5 -45.7 -58.4 -58.8 0.0

NVRInc. NVR-N 12.3 3,806.45 6.5 23.7 -32.1 -29.3 -6.2 0.0

StarsGroupInc. TSGI-T 7.6 27.98 6.3 27.5 -16.3 -17.4 10.9 0.0

GildanActivewear GIL-T 3.9 19.50 5.8 26.2 -46.1 -49.2 -60.2 4.2

*MarketcapandrecentcloseshowninCAD;percentagepricechangesinlocalcurrency.DataasofApril6.**MSCIESG,LaborManage-

mentKeyIssuescores.Source:FactSet

SHIRLEYLI

NUMBERCRUNCHER

Clientsolutionsmanager,Canada,
forFactSet

A big second-day rally in North
American stocks suddenly van-
ished by the close of trading Tues-
day, undercut by another plunge
in the price of oil and investor
concerns that markets were reco-
vering too quickly on only tenta-
tive signs of progress in the battle
against the coronavirus.
The SPP 500 closed down 0.2
per cent, and the SPPàTSC Com-
posite Index ended with a slight
gain of 0.1 per cent. Both indexes
were up as much as 3.5 per cent
earlier in the day.
The market’s gains faded as the
price of U.S. crude oil abruptly
flipped from a gain to a steep loss
of more than 9 per cent.
It dampened what had been an
ebullient day for markets world-
wide, following up on Monday’s 7-
per-cent surge for the SPP 500 and
5.1-per-cent gain for the TSC on
encouraging signs that the pan-
demic may be close to levelling off
in some of the hardest-hit areas of
the world.
Even though economists say a
punishing recession is inevitable,
investors this week have recently
begun to look ahead to when
economies will reopen from their
medically induced coma. A peak
in new infections would offer
some clarity about how long the
recession may last and how deep
it will be.
Investors could then, finally,
envision the other side of the eco-
nomic shutdown, after author-
ities forced businesses to halt in
hopes of slowing the spread of the
virus. In the meantime,govern-
ments around the world are talk-
ing about pumping trillions of
dollars more of aid for the econo-
my.
Many professional investors
say they’ve been wary of the re-
cent upsurge and expect more
volatility ahead. The SPP 500 has
rallied nearly 19 per cent since hit-

ting a low on March 23, though it’s

still down 21.5 per cent from its re-

cord set in February. The TSC is

still down more than 24 per cent

from its record high.

“There’s no guarantee that the

worst is behind us, yet traders be-

lieve that at least there is some

short-term money to be made,”

said Sam Stovall, chief investment

strategist at CFRA.

Oil prices have been even more

volatile than the stock market in

recent weeks as demand has dried

up for energy amid a global econ-

omy weakened by the coronavi-

rus outbreak. Russia and Saudi

Arabia have also been locked in a

price war, refusing to cut produc-

tion sharply even as the world is

awash in excess oil.

U.S. President Donald Trump

said last week that he hoped and

expected the two sides could

agree on production cutbacks,

which helped prices spurt higher

temporarily. But investors still

aren’t convinced about a deal, and

benchmark U.S. crude oil fell

US$2.45, or 9.4 per cent, to settle at

US$23.63 a barrel.

Earlier in the trading day, stock

indexes in Europe and Asia

climbed after China, the first

country to lock down wide swaths

of its economy to slow the spread

of the virus, reported no new

deaths over the past 24 hours.

Investors also see signals that

the number of daily infections

and deaths may be close to peak-

ing or plateauing in Spain, Italy

and New York. The number of dai-

ly deaths rose in New York, the

centre of the U.S. outbreak, but

other statistics were more encou-

raging, including the average

number of people hospitalized

each day. COVID-19 has already

claimed at least 81,000 lives

around the world.

More economic misery is also

on the horizon. Economists ex-

pect a report on Thursday to show

that five million Americans ap-

plied for unemployment benefits

last week as layoffs sweep the

country. That would bring the to-

tal to nearly 15 million over the

past three weeks. Analysts also ex-

pect big companies in coming

weeks to report their worst quar-

ter of profit declines in more than

a decade.

But central banksand govern-

ments are promising massive

amounts of aid to prop up the

economy.

Japan’sgovernment on Tues-

day formally announced a 108 tril-

lion yen À$1.4-trillionÁ package for

the world’s third-largest econo-

my.

In the U.S., the White House is

seeking an additional US$250-bil-

lion for a program to help small

businesses, which was part of the

US$2.2-trillion rescue package

Congress approved last month.

There is hope that clinical data

on potential treatments for the

new coronavirus could help sus-

tain the market bounce, as inves-

tors look for signs that authorities

may be able to stabilize the pan-

demic. Highly anticipated data for

a Gilead Sciences Inc. experimen-

tal antiviral drug are expected lat-

er this month. Analysts are also

awaiting results in the near-term

for products already approved for

other conditions from companies

such as Roche Holding and Rege-

neron Pharmaceuticals.

While experts estimate an ap-

proved vaccine could be at least a

year away, progress toward treat-

ments that benefit some CO-

VID-19 patients could help inves-

tors gauge when the epidemic

could come under control and

some economic activity might re-

sume.

ASSOCIATEDPRESS,REUTERS

ANDGLOBESTAFF

StockrallyfizzlesasU.S.

crudepricessuddenlyplunge

REPORTONBUSINESS |

T

he experience of stock market crashes going back to

1987 suggests investors are going to need to stay

patient while they wait for their portfolios to recov-

er from the latest plunge.

The pandemic-driven plunge in stocks is unique – other

modern-day market crashes have been due to events in

financial markets or the economy. But looking at those

market downturns can still provide some sense of what lies

ahead for the sort of investor who holds a balanced port-

folio of stocks and bonds.

The Britain-based firm Asset Risk Consultants ÀARCÁ has

taken a look at how a Canadian-dollar “steady growth” in-

vestor with 60 per cent to 70 per cent of their assets in

stocks would have fared in six market declines – 1987, 2000,

2007, 2015, 2018 and the recent decline caused by the CO-

VID-19 outbreak.

Maximum losses in the 2015 and 2018 declines came in

around 10 per cent from peak to trough and were more or

less reversed in nine to 12 months. “In retrospect, these were

sentiment-driven declines that were reversed as the global

economy continued to expand and companies continued to

thrive,” ARC said in a recent report.

The 2000 bursting of the tech bubble and the 2007 fi-

nancial crisis were much worse. In both cases, the economic

damage that occurred at the time meant that it took the

steady growth portfolio more than three years to reverse its

losses.

ARC says the 2020 decline so far resembles 1987 in that it

hit hard and happened quickly. But recovery from the 1987

crash was relatively fast. Within two years, losses had been

reversed.

Recovery from the 2020 market crash looks like it will

take longer than that. “The consensus is that containing

COVID-19 will cause considerable economic damage, not-

withstanding the support packages being promised by gov-

ernments,” ARC said in its report. “That suggests that it may

take several years for financial markets to recover their pre-

vious peaks. We may well be only around 50 days into a

1,000-day drawdown.”

ARC says the worst course of action is to sell and lock in

losses unless absolutely necessary. It also said that rebalanc-

ing – selling better-performing bonds to buy beaten-down

stocks – should allow for a faster recovery than a portfolio

left untended.

Historysuggestsit’stime

topractisepatience,but

isthattherightapproach

amidthisuniquedownturn?

ROB

CARRICK

OPINION