Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
CIBC strategist Ian de Verteuil believes domestic utilities and communications stocks will be able to withstand higher interest rates and bond yields.
“The traditional ‘bond proxies’ – Utility and Communications stocks – have performed well this year, reflecting the defensiveness of their business models. A major question is whether they can continue to perform well should interest rates continue to power higher. Our analysis in this report suggests that we still have some room for rates to move higher before the headwind on ‘relative yield’ becomes material for Utilities and Communications. Furthermore, it seems an even more aggressive rise in rates can be partially mitigated without need for much higher dividend yields, given historical long-term relationships… Preferred names in the Utility space are Hydro One and ATCO. Both have modest payout ratios (more flexibility to raise dividends even if earnings are not stellar) ... and, in the case of ATCO, not extended on valuation. Within the Communications space, we favour the cablecos – Rogers, Quebecor and Cogeco – as their valuations are more in line with longer-term averages. "
“CIBC: “Utility And Communications Valuations Should Be Able To Withstand Higher Rates”” – (research excerpt) Twitter
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So much for Morgan Stanley getting more bullish. Monday I noted a more optimistic stance from the firm’s global strategist Andrew Sheets, but today U.S. equity strategist Michael Wilson published a report where he saw little cause for a market rally in the short term,
“Outside of a peace agreement in Ukraine, it’s difficult to construct a case for more than a bear market rally... Higher inflation and slower growth are now the consensus view but that doesn’t mean it’s fully discounted. The more equity prices rise, the more hawkish the Fed will be. Meanwhile, falling PMIs suggest at least 10 percent downside while a recession would mean even greater risk. Sustainable rallies will require growth rates to bottom, something we don’t foresee until later this year… Going into 1Q earnings season, we made the call that disappointing reports and newsflow from corporates would take earnings revisions breadth negative over the coming months. We are making progress on that trend as earnings revisions breadth for the overall market dipped into negative territory last week—meaning that there are more downward than upward revisions for the overall market … "
“MS (Wilson): “Outside of a peace agreement in Ukraine, it’s difficult to construct a case for more than a bear market rally”” – (research excerpt) Twitter
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BMO chief equity strategist Brian Belski is all-but pounding the table on Canadian materials stocks.
“There is very little fundamentally that we do not like about the Canadian Materials sector. In fact, after nearly a decade of operational discipline, profit margins and profitability are near record levels and well above historical averages. Furthermore, cash generation has been strong as the sector continues to display consistent capital spending discipline resulting in the most robust distribution growth on record. We believe this trend can continue even as earnings growth decelerates and commodity prices soften. Indeed, on fundamentals alone, the Canadian Materials sector checks all our boxes - valuations are below historical averages, operating metrics are firmly above historical averages, cash generation is near record levels, cash is being returned to shareholders, debt to equity is well below historical average and capital spending remains moderate showing strong cost discipline. ... Furthermore, according to our work, the Canadian Materials sector’s strong exposure to gold stocks adds a level of tactical defense against periods of broad equity market weakness "
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Diversion: “Gas prices have never been higher — but Canadians still aren’t jumping on public transit” – CBC
Tweet of the Day: “Another banner quarter for U.S. companies as nonfinancial corporate profit margins ticked up, remaining near the highest levels in seven decades, and labor’s share of income continued to fall” – Twitter
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Scott Barlow