The Globe and Mail - 03.04.2020

B6 O THE GLOBE AND MAIL| FRIDAY, APRIL 3, 2020

GLOBEINVESTOR

| REPORT ON BUSINESS

T

he coronavirus pandemic is

throwing a spotlight on

stocks in the U.S. health-

care sector, home to the compa-

nies that could develop treat-

ments, vaccines and improved di-

agnostics needed to tackle the

greatest public-health crisis in a

century.

Health care has held up better

than most S&P 500 sectors. Since

the S&P 500 hit a record high on

Feb. 19, health-care stocks are

down about 18 per cent as of

Wednesday, while the benchmark

index has tumbled 27 per cent.

The sector is typically consid-

ered a defensive area of the mar-

ket because some investors be-

lieve consumers will continue

buying health-care products even

during uncertain times.

Shares of pharmaceutical and

biotechnology companies have

led the pack, including those

working on potential treatments

and other ways to address the

rapidly spreading COVID-19 pan-

demic.

In particular, shares of Regene-

ron Pharmaceuticals Inc. and Gi-

lead Sciences Inc. have risen 24

per cent and 8 per cent, respec-

tively, since the S&P hit its peak.

“A lot of these companies are

working on a solution to the

problem,” said Walter Todd, chief

investment officer with Green-

wood Capital in South Carolina.

“We can debate what it means to

them ... monetarily, but percep-

tion-wise they are viewed as a

safe haven because of that.”

Greenwood Capital in recent

weeks bought shares of Regene-

ron and Roche Holding AG, a

Swiss company that has diagnos-

tics and a potential therapy for

the new coronavirus.

The purchases added to the

firm’s overweight position in the

health-care sector, although it

has pared its holdings during the

recent outperformance, Mr. Todd

said.

Health care lagged the mar-

ket’s big gains in 2019. Institution-

al investors generally held a lower

weighting in the sector relative to

benchmark indexes before the

pandemic took hold this year,

said Rebecca Chesworth, senior

equities strategist at State Street

Global Advisors.

Health care “has been one of

the most popular places to put

money in the past couple of

weeks,” she added.

The sector recently traded at

12.9 times forward 12-month

earnings estimates, compared

with 14 times for the overall S&P

500, according to Refinitiv Datas-

tream.

Pharmaceutical and biotech

stocks, including Eli Lilly and Co.

and Vertex Pharmaceuticals Inc.,

make up eight of the sector’s 10

best performers since Feb. 19, all

of which have gained or fallen far

less than the broader market.

“In general, if you are on a

drug, you are staying on that

drug,” said Teresa McRoberts, a

portfolio manager who focuses

on health care at Fred Alger Man-

agement. “So that part of their

business is pretty safe.”

Some areas of the sector have

been hit hard by the vast ripple ef-

fects of the virus, particularly

medical-device companies de-

pendent on elective procedures

that are being delayed to preserve

hospital capacity and resources

for coronavirus patients. Shares

of Zimmer Biomet Holdings and

Stryker Corp., which are in the

knee- and hip-replacement fields,

are down 44 per cent and 36 per

cent, respectively, since Feb. 19.

Shares of hospital chain HCA

Healthcare Inc. have slumped 44

per cent over that period as hos-

pitals lose high-margin elective

procedures and cope with severe

disruption from the influx of cor-

onavirus patients, said Jeff Jonas,

health-care portfolio manager

with Gabelli Funds.

Mr. Jonas, however, says those

areas could be quicker to recover

than other parts of the economy

when the pandemic recedes.

“You’re going to be more nerv-

ous about getting on a plane,

staying in a hotel, going out to

dinner in the aftermath of this

than you are about going back to

see your doctor or to get a proce-

dure done,” he said.

REUTERS

U.S.health-care

stocksshow

theirdefensive

allureinailing

market

LEWIS KRAUSKOPFNEW YORK

A

potential truce in the oil price war
between Saudi Arabia and Russia
hoisted crude futures from their
lowest levels in nearly 20 years on
Thursday, sparking a relief rally in Cana-
dian energy stocks ravaged by the corona-
virus disease pandemic.
In a series of tweets on Thursday, U.S.
President Donald Trump claimed to have
brokered a deal between the feuding oil
giants that would deliver a production cut
of 10 million to 15 million barrels a day,
which drove a 22-per-cent gain in West
Texas Intermediate (WTI) to nearly US$25
a barrel.
A cut of that magnitude could lower the
risk of a monumental global supply glut
and help prevent, or at least defer, mass
bankruptcies in the energy sector in Cana-
da and around the world. Shares in senior
Canadian producers such asSuncor Ener-
gy Inc.andCanadian Natural Resources
Ltd.rallied on the day by 7 per cent to 8
per cent.
“Cutting production significantly now
will mitigate or slow the chance of hitting
full storage and that is good for preventing
a collapse in oil to single digits,” said Rafi
Tahmazian, senior portfolio manager at
Canoe Financial in Calgary.
But while this apparent deal could buy
oil and gas companies some time, it does
not alleviate the collapse in demand for
crude oil amid a recession unlike any oth-
er in modern history.
“The only way demand is going to pick
up again is if we get on the other side of
the virus,” Mr. Tahmazian said.
With more than 50,000 dead from CO-
VID-19 and global infections topping one
million, the virus’s continuing spread has
forced vast segments of the global econo-
my to be virtually shut down indefinitely.
With far less jet fuel and gasoline being
consumed, the level of demand destruc-
tion globally is expected to be at least 15
million barrels a day and as high as 30 mil-
lion barrels a day for the month of April.

The swift and brutal repricing of the en-

ergy market generated the worst quarter

on record for global oil prices, with WTI

falling from US$61 going into 2020, to

around US$20 by the end of March.

Demand for Albertan oil essentially

vanished, as Western Canadian Select fell

to as low as US$3.82 a barrel this week.

With oil storage facilities quickly ap-

proaching capacity, Canadian producers

have started to resort to deep production

cuts of their own.

With the survival of several Canadian

producers suddenly at stake, investors ag-

gressively sold off the oil patch, as the

S&P/TSX Capped Energy Index plunged

by more than 70 per cent from its January

peak.

Then a curious rally took hold, led by

the oil sands’ two biggest names – Suncor

and Canadian Natural Resources, which

rose by 37 per cent and 45 per cent, respec-

tively, in just two trading days this week.

Trading data show an enormous level of

buying in those two stocks – about $1-bil-

lion worth in two days – rumoured to be

on behalf of a single U.S. investor. In stock

forums and on Twitter, speculation swir-

led that Warren Buffett was the man be-

hind the big trade in the oil sands.

The Berkshire Hathaway chief execu-

tive officer tends to be at his most aggres-

sive in times of market distress, and is sit-

ting on a mountainous cash hoard that to-

talled US$128-billion as of the end of last

year. Plus, the company already owns

about 15 million shares of Suncor.

“Given the immense pressure on U.S.

shale producers, investing in strong, well-

financed energy firms like SU and CNQ

would be a move consistent with Warren

Buffett’s style,” Michael Sprung, president

of Sprung Investment Management, said

of the two big producers in an e-mail.

On the other hand, it’s a rather blunt

approach to execute an order of that size

all at once and send the stock price soaring

as a result, Mr. Tahmazian said. “A sophis-

ticated buyer can take their time to build

their position.”

Whoever is behind the trade is already

seeing enormous gains. Since the start of

the week, Suncor’s stock is up by 46 per

cent, while Canadian Natural Resources

has risen 49 per cent.

The prospect of a supply cut by the Or-

ganization of Petroleum Exporting Coun-

tries and its allies, including Russia, also

extended a rally in smaller and mid-sized

Canadian energy names, which are most

at risk from a prolonged supply-demand

imbalance.

Since the S&P/TSX Capped Energy In-

dex hit a 20-year low in mid-March, it has

now rallied by 53 per cent.

SUNCOR (SU)

CLOSE: $23.95, UP $1.76

CANADIAN NATURAL RESOURCES (CNQ)

CLOSE: $19.83, UP $1.35

PotentialSaudi-Russiatruce

sendsCanadianoilstockssoaring

ProductioncutTrumpclaims

tohavebrokeredwould

lowerriskofsupplyglut,but

demandremainslowasworld

dealswithCOVID-19pandemic

TIM SHUFELT
INVESTMENT REPORTER

INSIDE THE MARKET

An oil tanker is loaded at a Saudi Aramco facility in Ras Tanura, Saudi Arabia, in 2018.

AHMED JADALLAH/REUTERS

T

he stock market meltdown over
the past six weeks has included a
sector that normally should have
provided some shelter from the
volatility: death care. Does the defensive
nature of the funeral business make the
sector an overlooked opportunity during
these turbulent times?
Houston-basedService Corp. Interna-
tionalhas seen its share price fall 27 per
cent from its high in mid-February.Hill-
enbrand Inc., which provides funeral ser-
vices under the Batesville banner, has
seen its stock price fall 38 per cent over a
similar period.
And the share price of Toronto-based
Park Lawn Corp. Ltd., which is listed on
the Toronto Stock Exchange, has fallen
nearly 50 per cent.
If there is one thing that should remain
relatively constant in good times and bad,
it’s death – yet the novel coronavirus pan-
demic is clearly weighing on the outlook
for funeral services.
There are a few reasons.
First, social distancing means that there
are now restrictions on the number of at-
tendees at funerals, which will erode reve-
nue as services become more basic. Al-
ready, Park Lawn is reporting that the val-
ue of its sales has declined by about 7 per
cent, even as the number of services holds
steady.
Second, so-called “pre-need” cemetery
sales – where people pay for their own
plots and services in advance – will likely
falter with most people stuck at home.
Lastly, mergers and acquisitions activ-
ity has ground to a halt amid limited ac-
cess to capital markets and debt financ-
ing. That’s a problem for the acquisition-
minded bigger players in the fragmented
death-care sector.
Park Lawn, for example, made six
acquisitions in 2019, valued at about
$180-million, as part of its strategy for ex-
panding into the United States. But the
company is now taking a second look at

further expansion.

“We will ... evaluate our acquisition

pipeline and we may defer certain of these

opportunities, as our immediate focus is

on preserving financial flexibility,” Brad

Green, Park Lawn’s interim chief execu-

tive officer, said during a conference call

with analysts on Tuesday.

But the case for investing in death-care

companies right now looks especially in-

teresting: They continue to function as es-

sential services and the business model is

essentially recession-proof.

And the impact from the pandemic? If

you’re wondering whether deaths associ-

ated with COVID-19 will provide an un-

fortunate boost to death-care revenue,

you’re not alone. An analyst asked this ve-

ry question during the Park Lawn confer-

ence call – but the answer is probably no.

“Our volume normally is a very stable

industry, and will remain stable,” Mr.

Green responded.

Indeed, the number of COVID-19 relat-

ed U.S. deaths so far (more than 5,100 as of

Thursday, according to Johns Hopkins

University) is tiny compared with the 2.8

million Americans who died of all causes

in 2018, according to statistics from the

U.S. Department of Health and Human

Services.

Even the recent estimate that as many

as 240,000 Americans will eventually die

from COVID-19 represents less than 9 per

cent of overall annual deaths and coinci-

des with a potentially falling death rate

from car accidents (owing to less driving

during lockdowns).

But although the pandemic is not a rea-

son for opportunistic investors to pick up

death-care stocks, it’s not a reason to

avoid them either. Analysts who cover

Park Lawn are mostly bullish about the

longer-term aspects of the death-care

business, which stands to benefit from ag-

ing demographics in the United States and

Canada.

“The key point Park Lawn investors

should consider in the midst of the indefi-

nite timeline [of the] COVID-19 crisis ... is

that death care is a long-horizon, solid-

growth, recession-resistant industry,”

Scott Fromson, an analyst at CIBC World

Markets, said in a note.

Raymond James analyst Johann Ro-

drigues pointed out that Park Lawn shares

trade at just 10 times this year’s estimated

EBITDA (earnings before interest, taxes,

depreciation and amortization), down

from an average valuation of 14 times

EBITDA over the past three years.

“For those with a time horizon that out-

lasts the virus, we believe adding to cur-

rent positions could be a gift a year from

now,” Mr. Rodrigues said.

PARK LAWN (PLC)

CLOSE: $16.66, UP 62¢

Death-carestocksaredown.

Willthepandemicchangethat?

DAVID
BERMAN

OPINION

INSIDE THE MARKET