Investment opportunities still out there despite economic problems in Canada

It’s understandable that investors still want to shy away from the energy sector given the weakness in crude prices and the pressure many oil and gas producers are facing as a result.

On a similar note, companies with exposure to Alberta face difficult prospects due to high levels of unemployment and the uncertain outlook for consumer spending, among other concerns, in the province and surrounding region.

But while the Canadian equity market may be accurately reflecting Alberta’s economic woes, there are several businesses that appear to be dragged down unjustifiably.

“Everyone is throwing the baby out with the bath water,” said Aubrey Hearn, portfolio manager at Sentry Investments.

As a result, the lead manager of the $1.2-billion Sentry Small/ Mid Cap Income Fund, is adding exposure in Canada at the expense of U.S. names.

The macroeconomic environment has driven the portfolio’s weighting in energy-related companies to roughly 9.5 per cent, although this isn’t coming from exploration and production firms.

Hearn and associate portfolio manager Jack Hall noted that they would rather find other ways to participate, through names such as Alberta casino operator Gamehost Inc.

“It holds up surprisingly well,” Hearn said. “People still gamble even though they probably shouldn’t when they don’t have jobs.”

The manager admits that Gamehost will suffer due to the economic contraction. However, he noted that the company has an attractive competitive position since no new casinos are slated to be built in the province anytime soon.

Gamehost also has cash on its balance sheet, and an attractive dividend yield at around 10 per cent.

Another fund holding, AltaGas Ltd., is also being dragged down by negative market sentiment.

The company distributes gas, owns pipelines and other assets and, perhaps most importantly, benefits from the fact that 90 per cent of its business is based on take-or-pay contracts.

“The market doesn’t care about any of this, as all of the stocks move in the same direction,” Hearn said. “We’re looking for names like this where the stock has overly discounted the negativity.”

This outlook isn’t to say that he’s optimistic about the Canadian economy as a whole.

Hearn and his team are worried about the housing market, and doesn’t see much of a meaningful pickup in exports. However, they don’t think Canada will enter another recession, despite facing very slow GDP growth.

“The TSX hasn’t moved much in five or six years, so despite the unfavourable view of the Canadian economy, we think a more draconian view is already priced in,” Hearn said.

Before the recent rally, expectations that the economy was getting worse also dragged down small caps as a whole.

A similar situation is playing out in the U.S., as the Russell 1000 Index is trading well off its recent highs due to concerns about an economic slowdown.

That’s creating opportunities in areas like health care, which also has faced negative sentiment because of the political promises coming from U.S. Democratic presidential contender Hillary Clinton, among others.

“This generally happens every election cycle as people rally against big pharma, the big banks or big oil,” Hearn said. “But it’s going to be very difficult for her or anyone else to really overhaul drug pricing.”

He also cited some of the many other factors supporting healthcare stocks in the long term, including the aging population and emergence of new treatments.

“Normally, the sector is priced for protection, but given all the rhetoric, there are some actionable ideas,” Hearn said.

He highlighted Laboratory Corp. of America Holdings, which is trading at a relatively attractive forward earnings multiple of about 11.5x, generates a lot of free cash flow and benefits from having very high barriers to entry in its business.

Another U.S. name recently added to the portfolio is Live Nation Entertainment Inc.

Concert promotion used to be a very profitable business, but with people paying much less for music these days than they did in the past, artists are looking to live performances as a bigger source of income. Live Nation responded to these changes by merging with Ticketmaster, pursuing the aftermarket ticket-sale segment and entering the advertising business.

“They control the whole ecosystem, and in some ways have an unregulated monopoly,” Hall said.