When investors overreact to headlines, they create volatility in the markets, says Colum McKinley of CIBC Asset Management, and manager of the Renaissance Canadian Core Value Fund.
The latest headlines out of Europe have people worrying about global growth, for instance, and their reactions have caused several stocks to sell at distressed prices.
But, in a perverse way, volatility is something we benefit from, he says. It provides an opportunity to buy good businesses for cheap.
“First, though, you must analyze companies and keep their long-term fundamentals in mind,” says McKinley. For each prospective investment, “look at how management is executing its strategies and how the target industry is evolving. Consider the long-term earnings power of the company, and estimate what type of valuation the market will pay for that future earnings stream.”
Buy now, he suggests, because volatility and low stock prices won’t last forever.
Soon, “we’ll see the reverse where people are overbidding on stocks. They’ll become very enthusiastic about a group of stocks or sectors,” meaning investors who buy now may reap high returns.
McKinley says Canada is an attractive market due to the strength and stability of our banks.
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“We went through the greatest stress test the world has ever seen in the U.S. financial crisis,” he says. “Canadian banks were able to weather that challenge quite successfully because of strong capital positions [and] structures.”
In his view, our banks will continue to deliver consistent earnings growth and attractive dividend yields of 4% to 5%. They’re also some of the most capitalized banks in the world. “Over the coming years, [banks] are going to significantly increase their dividends, as their earnings grow. They’re going to be the classic dividends growers,” which tend to outperform regular dividend stocks.
Banks today trade at 10x next years earnings, adds McKinley, whereas banks historically have traded at 12x earnings.