Magnifi Communities

Stocks finally halted their selloff at the midpoint of last week, with the major indices all up at least 2% on the day. On that day, the iShares Russell 2000 ETF (IWM) was up over 3%, marking an outperformance from small cap stocks. A trader appears to have used the opportunity to place a 10,000-lot

It is official: we are in a bear market.

What should we do now?

Sell stocks? Assume the fetal position and hide under the kitchen table with a death grip on a bottle of cheap tequila? Get a medical cannabis card to ease the pain of losing money? Buy gold and silver? Hide all our cash in a mason jar buried under the shed? Watch the financial and news media to get advice?

Too many people will go down one of more of these paths as the bear market sinks its teeth into their portfolios.

But history suggests that if you are still in the accumulation phase of life, you should probably start buying stocks. Warren Buffett is one of the richest men in the world because he mastered the skill of buying aggressively in bad markets.

I suspect this particular bear is going to hang around for a while. It will take the Federal Reserve some time to wrestle the inflation dragon back into its cage, and rates will go higher and stay there for longer than most traders active today have ever seen.

There will be some of those rip-your-face-off bear market rallies along the way, but in the meanwhile, we should have plenty of time to build significant positions in good companies at great prices.

Keep an eye on two particular groups of people here for ideas about which companies to buy. One is the activist investors that take positions in companies they think are undervalued and then push the management and board to make changes that can push the stock price higher.

The other is insiders. Managers and directors know more about the businesses they run than anyone else—so when several of them are buying stock in their own companies in the open market, it is a bold statement about what they think of the companies’ current valuations.

Following insiders in the 2020 sell-off helped me spot the opportunity in Matador Resources (MTDR) right before the natural gas company went on a run that took shares above $65

I have recently noticed that the officers and directors, including the CEO, have been buying shares of Hanesbrands (HBI), manufacturer of underwear and athletic clothing. The company may see some slowing in sales thanks to a weak economy, but there is little to no chance it will go out of business anytime soon.

If markets get bad enough, the company might even see a sudden increase in demand for one of its product lines!

Hanesbrands includes a fantastic collection of companies with household names. Hanes, for instance, is the leading manufacturer of men’s underwear, with twice the market share of its two closest competitors combined.

The company owns Champion, the company that invented the hoodie 80 years ago and still dominates the market, as well as Playtex, Bali, and Maidenform—three of the most dominant women’s undergarment manufacturers—and Bonds, the dominant men’s underwear company in Australia.

Hanesbrands also owns most of its production and supply chain facilities. In addition, it has local manufacturing in more than three dozen countries worldwide. Almost 80% of the more than two billion pieces of clothing Hanesbrands sells globally each year are produced in company-owned factories.

Seven different insiders have been buying shares in the open market this month.

The stock is trading at less than seven times sales and under $0.50 on the dollar of sales. That’s cheap for a company that is a leader in its industry.

The recent decline has made the shares a high-yielding stock, with a dividend yield of over 7.5%. Moreover, the payout ratio is just 0.47%, so I can see no danger of a dividend cut on the horizon. Hanesbrands has also been buying back stock over the past few years and still has $575 million to buy under the current buyback plan.

It is a bear market. The stock will probably move against you after you buy it.

You can buy in stages if you prefer. Buy a little now and add on every move down.

You may get frustrated because the stock won’t move higher, even though the business is clearly worth more than the current price. But that’s the nature of bear markets. Make this one work for you and not against you and scale into a decent-sized position in this market leader. The bear market will end at some point. When it does, I suspect patient-but-aggressive investors will be able to cash in their Hanesbrands positions for several multiples of the current stock price.
It’s raised its dividend 37.5% on average, could be acquired, benefits from rising interest rates, trading at massive discount, and pays an 8% yield. This is my top pick for income during a rough market.Click here for details.

There are two big forces at work that show why the inflation beast will not be easy to tame for the Federal Reserve.

First, although overall consumer demand is slowing, it still remains strong in many sectors. Second, many supply chain woes are still resolved.

Supply chain disruptions due to the coronavirus pandemic were expected to gradually subside as global restrictions were lifted. Yet, the supply chain situation has actually worsened because of increased geopolitical risk and ongoing lockdowns and restrictions due to China’s zero-tolerance COVID policy.

My contacts in the logistics industry tell me that supply chain problems may not be resolved until mid-decade… and with de-globalization fully underway, these some of these headaches may never be completely resolved!

In this brave new deglobalized world, you want to own sectors and companies that can prosper under these conditions.

One such sector—and one totally ignored by Wall Street—is the rail sector. Moving goods by rail is approximately four times more energy efficient (per ton-mile of freight) moving by truck. As inflation rises, the efficiency of railroads for moving freight is looking more and more attractive…and my favorite stock in the sector, Canadian Pacific Railway (CP), comes with another big plus.

Canadian Pacific Railway

Think about this…as the world continues to isolate Russia, Canada offers the best alternatives for many of the commodities and products most closely associated with Russia, including Canadian grains, potash, fertilizer, oil, coal and natural gas. In fact, even before the Ukraine invasion, CP was shipping a lot of potash for export to China.

Canadian Pacific offers the best rail network coverage from one end of North America to the other. Last December, the company completed its acquisition of Kansas City Southern Railway, subject to final regulatory approval. This acquisition creates the first rail network that spans Canada, the U.S. and Mexico—which will provide the company with a competitive market reach in the quickly evolving supply chain.

Here is just one example that Canadian Pacific has analyzed completely: in the freight markets connecting Mexico to the U.S. Midwest, each and every day prior to Canadian Pacific’s merger with Kansas City Southern, an armada of trucks set out to connect auto parts and auto assembly plants spread across the Midwest and Mexico.

These long hauls are naturally opportune situations for transport by rail. But since no single railroad connected these regions, manufacturers were forced to rely heavily on trucks. The merged Canadian Pacific rail network will be able to convert to rail shipments the 64,000 truck shipments that currently clog public highways and border crossings as they move between Mexico and the Great Lakes region.

Add to all of this the company’s sharp management.

The company’s change in fortunes began in 2012 with the appointment of railroading legend Hunter Harrison as CEO. Harrison and his successor, rail operations expert Keith Creel (who worked alongside Harrison for 20 years), have between them taken Canadian Pacific from having of the worst Class I railroad profit margins to among the best. Creel has further infused the company’s culture with precision-scheduled railroading principles, which is largely behind its progress.

CP’s Bright Future

Keep this one important fact in mind when thinking about rail stocks as an investment: the network of track and assets already in place because of North American Class I railroad companies—designated as such based on their revenue—is essentially impossible to replicate.

Sounds like a classic Warren Buffett moat to me. No wonder his Berkshire Hathaway (BRK.B or BRK.A) owns BNSF Railway.

I expect Canadian Pacific’s 2023 operating ratio to improve—volumes should have rebounded in the second half of 2022 thanks to recovering grain shipments as well as auto carloads. Pricing power should remain healthy as well. The late-2022 Canadian grain harvest is currently expected to be much better than last year’s—a key driver of carload volume recovery by late 2022 through early 2023.

Morningstar says that: “Longer term, we believe CP’s pricing power will prove sound (above rail inflation), as will its ability to neutralize diesel price shocks via surcharges.”

The publication adds: “CP is an incredibly well-run railroad with a highly talented leadership team and an excellent track record in terms of efficiency improvement over the past decade, thus we consider deal risk [Kansas City Southern] to be relatively modest. We also agree that the merger makes sense from a strategic perspective and believe the combined railroads will forge meaningful opportunities on the revenue front, thanks to adding new seamless single-line services.”

A nice summation that I totally agree with.

Canadian Pacific stock has handily outperformed the S&P 500 year-to-date, rising about 2% versus a loss of nearly 20% for the S&P 500. CP shares are a buy on any stock market weakness, on worries about the economy, anywhere in the low-to-mid $70s.
It’s raised its dividend 37.5% on average, could be acquired, benefits from rising interest rates, trading at massive discount, and pays an 8% yield. This is my top pick for income during a rough market.Click here for details.