Don’t rule out value stocks

Canadian markets are in the midst of the second-greatest divergence between value and growth stocks in financial history.

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So says Colum McKinley, vice-president of Canadian Equities at CIBC Asset Management. He manages the Renaissance Canadian Core Value Fund.

The most significant divergence occurred back during the tech-telecom bubble, he adds. But, “if you look over the last year, as of September 30^th, the MSCI Canada Value Index is down 15.5%, [while] the MSCI Canada Growth index is down 0.6%.”

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If you look out over longer periods, value stocks have outperformed, however. “This is a unique period of time where investors that continue to maintain their exposure to value-oriented funds can benefit over the long term—much like they did coming out of the tech-telecom bubble,” says McKinley.

Currently, he notes, “we’re seeing good quality businesses being mispriced in the marketplace and we’re going to take advantage of this volatility.” For example, CN Rail is trading at a discount to the Canadian market, when it was once at a significant premium.

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It’s key that the company has grown its earnings fairly consistently over time, says McKinley. “[It has] been able to drive operating efficiencies [and] profitabilities for CN Rail are at near record levels. So the company is generating net margins, fully taxed in the high 20% range. That’s an incredible level of profitability.”

The volatility in the railway’s stock price has worried investors, he adds, but clients can look beyond such near-term cyclical challenges. “We’ve used that as an opportunity to add to our exposure to CN Rail.”

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