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Down-but-not-out stocks that could offer outsized returns

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North American stock markets have largely bounced back since the coronavirus pandemic first brought an end to the longest bull market in history, but bargain hunters can still find beaten-down companies if they look hard enough.

The rising tide for stocks hasn’t lifted all boats. Technology stocks have been doing most of the heavy lifting that has pushed Canadian and U.S. benchmarks higher.  

“The Canadian tech sector has risen more than 40% so far this year, propelling the sector to 9% of the S&P/TSX Composite Index (^GSPTSE) from just 2% five years ago,” Kurt Reiman, Chief Investment Strategist for Canada at BlackRock, told Yahoo Finance Canada.

“Unlike some traditional sectors of the stock market seeing earnings and revenue impairment from the pandemic, technology is experiencing something of an accelerant.”

Reiman says first quarter earnings that beat estimates, and only slight downward revisions in the second quarter, have made tech stocks an attractive investment. 

The TSX versus the iShares S&P/TSX Capped Information Technology Index ETF (XIT) over the last year

Slower-than-anticipated reopenings and earnings recovery could derail the rally, but Reiman says he expects global and domestic policy to limit losses.

“We therefore take an up-in-quality stance within equities at a time of high macro uncertainty, specifically focusing on more defensive style factors, such as minimum volatility and quality, which tend to outperform during periods of slow economic activity and elevated market volatility,” he said.

The shift away from traditional offices during the pandemic has helped fuel a rise in a newly dubbed group of companies called ‘stay-at-home stocks’.

“I believe we could see more relative outperformance from this area as it becomes a clear disruptive investment theme longer-term. Microsoft, Facebook, Alphabet, Costco and Citrix Systems are names in my portfolio that immediately come to mind,” Stan Wong, portfolio manager at Scotia Wealth Management, told Yahoo Finance Canada.

Canadian banks, which are in the middle of earnings season, have lagged behind tech stocks and are trading well below all-time highs, but Wong says he likes them for conservative investors looking for value.

“Canadian banks are paying very attractive dividends with the big five banks yielding between 5% and 7% dividends,” he said

“As a group, the banks are trading at a 1.1x price-to-book valuation – well below its 10-year average of 1.8x price-to-book.”

Travel and leisure stocks have been battered. As confidence in the industry returns, Wong says the sector looks interesting for aggressive growth investors who are patience and can handle volatility. He says Royal Caribbean Cruises, Booking Holdings and Wynn Resorts are examples of companies that could offer outsized, long-term returns.

Benj Gallander, president of Contra The Heard Investment Letter, looks for beaten down companies with big upside potential. He thinks the oil and gas sector, another laggard, offers brave investors big dividends and strong capital gains.

“I own North European Oil Royalty Trust and Permian Basin Royalty Trust,” he told Yahoo Finance Canada.

“Another that I own in this space is Vaalco Energy, which has been hard hit but has an excellent chance of a strong recovery as output grows over the next couple of years.”

Jessy Bains is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jessysbains.

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