Packaging up profits

This stock beats the odds in gaining during a bear market

With the stronger than anticipated 8.3% CPI inflation number for August in the U.S., markets are selling off sharply. Overly optimistic expectations of slowing inflation and a smaller 50 basis point rate hike by the U.S. Fed next month are dashed.

Why this should have been a surprise is an interesting exercise in investor psychology, as seen recently in what now looks like a bear market rally between mid June and mid August, which saw the major U.S. indexes gain 15%-20% from their lows. It seems that investors are still using their bull market play book, where each selloff was an opportunity to go bargain hunting. The belief was that market leaders of the previous move would continue to lead. This included principally the large-cap technology plays, especially the large-cap technology stocks known as “FAANG+” stocks (Facebook, Amazon, Apple, Netflix, Google and Microsoft) and also electric vehicle manufacturer Tesla and a couple of semiconductor and ecommerce plays such as Nvidia, TSMC, Salesforce, and Shopify.

Instead Apple, Microsoft, Google, and Amazon have retreated about 10% in the last month, the S&P 500 is down almost 10%, and Nvidia and Salesforce are off 29% and 16% respectively. If investors had focused on those sectors that have outperformed so far this year, then they would have outperformed. This includes sectors such as energy, which is up 45% in both the U.S. and Canada, utilities, and pipelines, both positive for the year, food retailers, railways, defence, and selected healthcare stocks, in other words sectors with good defensive characteristics that are relatively immune to rising interest rates and inflation.

Rapidly rising interest rates have resuted in an inverted yield curve, with 2-year government bond yields now well above the benchmark 10-year yields, and over 3.7% in the U.S. With central banks in Europe, the U.K., Canada, and the U.S. all raising interest rates by 75 or even 100 basis point at a time in an effort to get control of rising inflation, the likelihood a recession continues to increase. There’s still some hope that very low unemployment rates mean there is the possibility of resilient consumer spending bringing about the hoped-for “soft landing,” where the economy slows down but doesn’t actually tip into recession.

Despite all the market storms, bolder investors looking for oversold candidates can still find some opportunities. One of these is packaging and packaging machinery manufacturer Winpak Ltd. (TSX: WPK), which is up over 20% so far this year.

Winpak is a Manitoba-based manufacturer of packaging and packaging machinery. Its products are mainly used in food and beverage and healthcare applications. Its modified atmosphere packaging is used to extend the shelf life of perishable goods such as meats, poultry, and cheeses as well as healthcare products. The majority of its sales are in North America.

The share price has rebounded strongly this year on the back of a strong operating performance. It’s up 10% from a year ago and over 20% from its lows. Revenue in the second quarter (to June 30) rose 27%, to $310.3 million (the company reports in U.S. dollars). Earnings before interest, taxes, depreciation and amortization (EBITDA) were up 18%, to $58.7 million, and net income gained by the same percentage, to $34.1 million ($0.52 per share).

The smaller rise in earnings compared with revenue reflected a delay in passing on cost increases in raw materials and input, but the company was confident revenues would keep growing at the same pace for the remainder of the year. Winpak has net cash on its balance sheet.

The company pays a nominal dividend of $0.03 a quarter, equivalent to a yield of 0.27%, but pays occasional special dividends, such as a $3-per-share dividend in June 2021.

Winpak has proven itself able to pass on rising raw material and input costs to customers and is enjoying strong revenue growth even after taking inflation into account. It’s a stock for aggressive equity investors with tolerance for higher risk, especially in this environment. Speak to your financial advisor before adding this to your equity portfolio.

Gavin Graham is Chief Strategy Officer of Calgary-based SmartBe Investments. He is a veteran financial analyst, money manager, and a specialist in international investing, with over 35 years’ experience in global investment management.

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