Finding stocks for all cycles

Conservative balance sheets may not be in vogue after a long economic expansion with record-low interest rates and surging growth stocks. But Amber Sinha, senior portfolio manager, global equities at CIBC Asset Management, said he still gives more credit to companies that aren’t relying on low rates to take on debt.

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When the downturn eventually comes, Sinha said in a late-August interview, the winners “are those with conservative balance sheets.”

Sinha’s definition of a quality company is those with “sustainable competitive advantages and a proven track record, strong management, higher returns and a conservative balance sheet.”

To those qualities, Sinha adds a few more constraints, including stocks that aren’t overly cyclical and that are sufficiently liquid. That filtering process results in 300 or 400 stocks, he said. From there, he looks for names that are undervalued.

“There are always stocks that have price dislocations for some reason,” he said. “As long as we see a price dislocation, we see a catalyst—we see that the valuation is attractive, and that there is room in the portfolio for a company like that.”

These are the stocks that make up his team’s portfolio.

Two companies he currently likes are U.S. retailer Ross Stores and European aerospace company Airbus.

Ross Stores

Ross has “made a business out of buying stuff from retailers that didn’t sell,” Sinha said. The company then sells this merchandise at a discount.

“A lot of consumers don’t really care about having the latest fashion,” he said. “They’ll go with the fashion from last year [if] they get a decent discount.”

Cleaning up these “inefficiencies” in the apparel business is what makes Ross “a great value proposition for investors.”

He added, “It’s a great business, great management, no debt on their balance sheet [and] very high returns.”

Airbus

Airbus’ competitor, Boeing, has faced challenges in the last year after two of its Boeing 737 Max planes crashed due to flight simulator software failure, killing hundreds of passengers.

But Sinha said his investment in Airbus is “independent of what’s going on at Boeing. This is not a sell Boeing and buy Airbus type of recommendation.”

Airbus has a great product suite, Sinha said.

“They’ve gone from 0% market share to more than 50%. They’re marginally ahead of Boeing right now. It’s been a great European success story, and that success has come through a fundamentally strong aviation market, and good product development and innovation.”

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