Ross Healy, chairman, Strategic Analysis Corporation; portfolio manager, MacNicol and Associates Asset Management

FOCUS: North American large-cap stocks

MARKET OUTLOOK:

We very recently entered a confirmed bear market in the U.S. While the Nasdaq has been in a brutal correction mode since late last year, an overall bear market has only very recently been confirmed by the S&P 500. At the top of last October, the NDX sold at 10 times book and its intrinsic values were a mere 50 per cent of its average prices then, but the NDX is still more than 25 per cent too high. That does not mean that it will be suitable for purchasing again, as historically prices in bear markets only bottom when they offer good upside and potential again. In other words, look for the Nasdaq to bottom somewhere around a 70-80 per cent decline from its peak.

A few of you will remember that I forecast the same thing in early 2000. Some of you thought I was nuts then, but not two years later. Be very wary of stocks with poor value.

In the S&P 500, there are many companies – the buy-back stocks – that have been left out on a limb: no equity, extreme valuations in price/book, and an intrinsic value sense. These will need to return to earth before this bear market will be over and that will be painful for their shareholders.

But all is not necessarily lost. In Canada, the TSX is selling for only 1.5 times book versus nearly four for the S&P 500 and close to eight times for the NDX. So there are stronger values here and it will be interesting to see how they hold up in a U.S. deluge.

Overall, what do I see looking forward? This bear market will take its time, just like in 2000-02 (and by the way, 1972-74). Lots of nice trading rebounds, but lots of really nasty surprises lie ahead.

Adjust your thinking accordingly.

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TOP PICKS:

Crescent Point Energy (CPG TSX)

The stock sells for 4.5 times earnings and one times book. I still like the oils for now and expect that the cheap oils should do well.

Agnico Eagle Mines (AEM TSX)

The combination of AEM and Kirkland Lake is a sound and solid one, which should do well as a business, but also well in the market – as I expect all gold shares will in the period ahead.

Canadian Western Bank (CWB TSX)

Canadian Western Bank is a cheap bank in areas of Canada that are enjoying a renaissance thanks to the energy business. If you don’t buy these kinds of stocks at a discount to book value and at a low P.E., it may be a bit speculative, but save for the COVID-19 pandemic when oil prices temporarily went negative this is almost as cheap as CWB has ever been.