It was a weird week on the markets. Financial stocks continue to be in turmoil as more banks face issues. We won’t speak much on it in this piece, as we did cover it extensively last week.
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The one thing we will mention, however, is comments by Janet Yellen over the weekend signaling that larger financial institutions in the US would get preferential treatment over smaller community/regional banks when it comes to deposit protection is no doubt going to fuel more volatility in financial stocks over the next few weeks.
If you missed the comments, I’ll link to a tweet here that shows the video.
The uneasiness of the financial system in the US and the fear of a much larger recession than imagined due to the fallout also put extensive pressure on the price of oil and, thus, oil and gas stocks.
If you want to build out an energy or financial position, know there will likely be extensive volatility moving forward, as mentioned. I (Dan) plan to add to my Canadian banks over the coming months, as the drawdown has caused my allocations to dip. But, I’m not really in any rush to do so and will be dollar cost averaging into them likely throughout 2023 and beyond instead of trying to time any panic-induced dip.
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March Value Calls
In this week’s e-mail, we’ll review our Value Calls for March. If you’re new to Stocktrades, this is a release we issue every single month on opportunities we see on our current Bull List or Foundational Lists.
Let’s get right into it!
Jamieson Wellness (TSE:JWEL)
This brand new Canadian Dividend Aristocrat and Bull List stock performed exceptionally well until its earnings report in late February.
The company reported a fairly strong quarter. However, margins and outlook due to costs that are outside of its control (inflation, for example) have dragged the company down to the point where it is providing, in our opinion, an attractive opportunity for entry.
I (Dan) will likely be looking to buy a position in this company myself. I already own it inside of my Wealthsimple account, which mimics our Dividend Growth Model Portfolio. However, it’s a relatively small position, and I’m looking to add a full position to my main portfolio.
The central thesis behind Jamieson is its already dominant presence in Canada and its exponential growth potential in China. The company’s newly issued Fiscal 2023 guidance stated it expects to grow in China by 65%-75%.
The company’s acquisition of Youtheory was strong, and we expect it to produce strong results over the long term. However, there will be short-term pressures here. For one, markets do not like uncertainty, and investors get particularly worrisome in a bear market, especially when debt is taken on. Integrating a significant acquisition like this certainly takes time.
Secondly, the debt levels from the acquisition will no doubt hit the bottom line as interest rates rise. This is why the company’s earnings guidance of high single-digit to low double-digit growth came in softer than expected.
Additionally, its International sales are struggling because of the ongoing war.
Overall, however, all of these headwinds are short-term in nature. And although they may keep the stock price depressed over the short term, over the long term, we have little doubt it will get back on track.
The company is trading at a 30% discount to historical averages. Our discounted cash flow models highlight a fair value in the high $30 range, giving it a solid double-digit margin of safety. It is undoubtedly attractive enough right now for us to make it one of our Value Calls in March.
You can read our full report of Jamieson here, updated in late February when it reported earnings.
Pfizer (PFE)
It hasn’t been a great start to the year for Pfizer. The company has lost approximately 20% of its value year to date, and this is coming off a 10.42% loss in 2022 as well. When you look at the massive 66% gains in 2021, it is not surprising to see a pullback.
The company benefited from COVID-19 hype. Now that the pandemic is slowly dissipating from our lives, investors are also pulling back. The mistake in that level of thinking is the assumption that Pfizer’s success is solely based on pandemic-related activity.
Pfizer is one of the most extensive biotech stocks on the planet. It was before the pandemic, and it remains so today. The mega-cap company is arguably the best in the world at getting drugs from trial phases to market.
The company recently announced a $43B deal to acquire Seagen at $229 per share. Pfizer is expected to take on ~$31B in debt to finance the deal, which will significantly expand the company’s oncology segment.
Worth noting Pfizer has a long-term goal of adding $25B in annual revenue through what it refers to as its’ business development segment. The deal is expected to add $10B in risk-adjusted revenues by 2030. The deal looks attractive, but the debt required to finance the acquisition is bound to leave many a little uneasy.
That said, Pfizer is trading at very attractive valuations. The company is trading well below historical averages at only 10.7 times forward earnings and only 8.8 times free cash flow (FCF).
It hasn’t traded below 10X FCF over the past decade. Pfizer also has a decade high 11.6% FCF yield. The higher the ratio, the better. FCF yield measures how much free cash flow the company generates relative to its market cap.
Why is this important? The company just committed to taking on $31B in debt to fund the Seagen acquisition. Considering the company hasn’t had an FCF yield this high since the 08′ Financial Crisis, it is clearly taking advantage of its strong cash-generating position.
This is why headwinds and negative sentiment toward the company concerning the debt taken on for the acquisition are short-sighted.
If investing in pharmaceutical blue chips aligns with your strategy, it’s hard not to like Pfizer at these valuations.
Brookfield Asset Management (TSE:BAM)
Brookfield Asset Management can be a difficult company to analyze. The company was spun out of the former BAM in late fall, now called Brookfield Corporation (BN). As a result, the data available on the company is pretty spotty.
If you bull up BAM on our screener, you will see plenty of blank metrics. This is normal for spinouts or newly listed companies. Most valuation or dividend ratios are based on trailing twelve months (TTM) data. Those ratios won’t be available for BAM until it reports four full quarters as a new company.
This makes valuing the company a little more complex and confusing – but not impossible. The confusion around this spinoff caused a selloff when it initially went public. We added it to the Bull List to take advantage of this confusion.
For a company like BAM, one of the better ways to track valuation is to use fee-related earnings (FRE) – specifically price-to-FRE. It is even more relevant for BAM because it is practically a fee revenue pureplay – at least in the short term.
Before jumping into that, it is essential to note that BAM is an asset-light company with no debt. This bodes well for future growth, as the company has no high capital expenditures in this high-rate environment.
Furthermore, the company’s close association with Brookfield Corp (TSE:BN) will allow it to raise capital at attractive rates. Let’s also not forget that BAM exited the last quarter with $3.2B in cash, providing ample flexibility.
Analysts expect the company to post double-digit FRE growth (mid-teens) over the next few years. This aligns with the company’s historical FRE compound annual growth rate of 16% since 2014.
Today, the company is trading at 23.8x FRE. The company has ample room to grow, given the expected double-digit growth rate. We can’t compare against historical averages here. If we compared it to Brookfield Corporations’ valuation, that would include its stakes in the other suite of Brookfield companies. As a result, it would be an apples-to-oranges comparison.
We also can’t compare directly to companies like Apollo (APO), Blackstone (BLK) and KKR & Co (KKR) as they aren’t FRE pure plays. That said, for context, they are trading at 23.5x, 23.3x, and 19.3x FRE, respectively.
In our opinion, given its current financial status and expected growth rate, BAM deserves a premium over these companies. Even if not, and BAM continues to trade a ~23x FRE, investors could expect to enjoy mid-teen growth to go along with an attractive dividend that is likely to grow.
All in all, we believe that investors are underestimating BAM’s growth potential. The recent pullback (-12%), mainly as a result of the bank situation in the US, could be an excellent entry point for investors.
You can read our report, which was updated when Brookfield Asset Management reported earnings here
