Market volatility, while intimidating, can be a signal that it’s time to look for investment opportunities. But, which companies and investments should you consider?
Colum McKinley, VP of Canadian equities at CIBC Asset Management and manager of the Renaissance Canadian Core Value Fund, says the answer lies in prudent and detailed analysis.
“The key is to look at individual businesses, and use a very strong team of analysts,” McKinley says. “They’ll perform in-depth fundamental analyses of companies in order to determine their long-term earning power.”
While negative press may harm a company’s image over the short term, it won’t necessarily affect its long-term earnings potential. In McKinley’s view, many of the situations that result in slews of toxic headlines are caused by short-term problems, which in no way reflect on the long-term value of a company in question.
“Investors can take advantage of situations where companies face short-term cyclical problems or short-term operational problems,” says McKinley. “What we’ve found over time is the market tends to easily overreact [and investors can benefit when the market stabilizes once again].”
McKinley’s firm recently added SNC Lavalin to its portfolio, for example, despite recent, unproven allegations that SNC’s employees paid bribes. The firm stresses these employees conducted work that was out of their scope of authority and not in accordance with the procedures of SNC-Lavalin. “The company dismissed a number of employees, and held an internal investigation, which helped determine the appropriate controls that needed to be put in place.”
SNC Lavalin’s stock prices may be down now, sitting at around $36.00, but McKinley is confident this will change. The current price is mainly comprised of concessions held by the company, such as their partial ownership of Highway 407.
“Historically SNC’s traded at 14-to-15 times earnings,” says McKinley. “The company currently trades around 8 times.” The broader market may be concerned about this near-term challenge, but for investors who do their research, there’s a value opportunity to take advantage of.”
Not every company trading below its true value is worth investing in, however. Good analysis is key to knowing the difference; consider the normalized value of any prospective company, and make a good judgment call on whether or not your prospect is a good bet.
Talks with industry professionals about debatable companies can also help clear up any unanswered questions.
“If a company is a leader in its market place and continues to win contracts in competitive markets, [it’s worth it],” says McKinley. “Over time, fearful investors always move beyond near-term problems and focus again on longer-term earnings power.”