As the COVID-19 pandemic has rattled and rolled through the global economy, putting tens of millions out of work and shaving US$1 trillion from global GDP, stock markets are trading at euphoric levels.
Such is the irrational exuberance that Bitcoin, which was at US$7,751 a year ago, is over $40,000 at the time of writing. New public offerings can’t move off the shelf fast enough. In fact, 2020 was the best year for initial public offerings since the 1990s.
Can the giddiness continue? For sure. Nobody knows how long bubbles go on until they burst. It means caution though.
Investors are making two assumptions. The first is that the era of free money will continue. So, bonds and bond-like investments make less and less sense.
| Index | 2020 change |
|---|---|
| TSX | +2.17% |
| DJIA | +6.6% |
| S&P 500 | +15.5% |
| Nasdaq | +46.9% |
| Source: Morningstar |
For example, the best five-year GIC rate I could find is offered by Oaken Financial, paying 1.8%. A $5,000 investment, which cannot be redeemed for five years, pays $90 annually for a total return of $450.
BCE’s common stock, one of my portfolio anchors, is yielding 6.12% at the Dec. 31 price of $54.43. The dividend is $3.33 per share annually. The same $5,000 buys 92 shares and $308 in annual payments or $1,540 over the five years. And there are likely to be dividend increases. No contest.
The other assumption is that a speedy vaccination program means normalizing economic conditions by midyear. Conditions are surely improving, and the Bank of Canada sees 4% real growth in 2021. That assumes gradual improvement in the first half and roaring ahead in the second. Yet it sees a 5.5% contraction for 2020, so growth of 4% means the economy still ends 2021 lower than it started in 2020.
CAE Inc. (TSX: CAE) and Walt Disney Co. Ltd. (NYSE: DIS) are good examples of the share price giddiness. Both are exceptional companies, with good long term prospects. CAE is a global leader in flight simulators and pilot training. Disney has an unparalleled film and TV library with some of the most popular titles ever screened.
Both were on the wrong side of pandemic. Nobody was flying, so fewer airlines needed CAE’s simulators to train pilots. The pandemic made it impossible for Disney to operate core businesses such as theme parks, cruise ships, and hotels.
Both eliminated their dividends in the spring. Both have laid off thousands, and both saw revenues and profits evaporate. Disney lost $2.5 billion in 2020. CAE made $60 million in its latest trailing 12-months, 81% lower than a year earlier.
Despite this, Disney’s shares rose 25% in 2020 to a new high. The revival is being attributed to the potential of its streaming services. These services have 137 million subscribers, as consumers ride out the pandemic. Disney+, launched just a year ago, has been a standout, accounting for 57.5 million subscribers to date.
Good news to be sure, but to recap: Annual revenue is down 6%, there’s a multi-billion dollar loss, the dividend was eliminated, yet the share price hit a record.
CAE’s shares slumped in the summer and took off again in October when it became apparent the year wasn’t as bad as first expected. CAE’s second quarter of 2021, reported Nov. 10, saw business at its civilian flight training centres perk up to 49% capacity. The company delivered 10 flight simulators, a little over half of those a year earlier.
Quarterly revenue fell 21.4% to $704.7 million. After extraordinary items, profit fell 54.2% to $34.2 million. Normally, that’s a head for the hills quarter.
Instead, the shares climbed steadily thereafter to close at $35.27 Dec. 31. The trailing 12-month p/e ratio is 167.9.
To recap: A steep revenue decline. Profit cut in half and dividend eliminated. Civilian flight training facilities at 50%.
CAE and Disney shares have rebounded faster than their businesses and what is needed now is evidence that the rosy expectations are coming true.
For investors, it adds up to a year of living cautiously. Shares prices will likely rise as low rates push more money into stocks. That will stretch p/e ratios. And if the recovery is delayed and the profits aren’t there, dividends may not rise – or be cut – and yields will fall.
That means sticking to the basics: Companies that may not be sexy, but with solid businesses, that sell things consumers need, rather than want. These are the things you notice if they go missing. They include the tech giants who are more and more the new utilities, food and household products, drugs and healthcare services, pipelines and electrical utilities, and telecom and internet providers.
They have well-established businesses and the scale to withstand setbacks and continue to pay dividends along the way.
(This is an edited version of article that appeared in the Internet Wealth Builder on January 11, 2021.)
Adam Mayers 
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