Jennifer Dowty
Jennifer Dowty, Chartered Financial Analyst, writes exclusively for Globe Unlimited subscribers. The Before the Bell report is updated throughout the premarket to reflect latest developments.
Good Tuesday morning to you. North American futures are pointing to a mixed start to the trading day.
Nasdaq futures are positive suggesting this index may set yet another record high today with Yahoo, Apple, Microsoft, and GoPro all expected to report earnings. The Dow and S&P 500 index futures are hovering near unchanged, and S&P/TSX index futures are relatively neutral at the moment.
It was an ugly start to the week for the S&P/TSX composite index, which tumbled over 200 points on Monday, led by weakness in gold and energy stocks. The strength of the U.S. dollar against major currencies is negatively impacting commodity markets.
Gold broke through the $1,100 per ounce level yesterday, after being range bound for much of 2015, trading in the $1,150 (U.S.) per ounce to $1,200 range. Concerns about the lack of Chinese buying, easing political risks, and the rising U.S. dollar all weighed on the yellow metal. My recommendation to investors: Stay out of the gold sector. Without any inflationary pressures, I see no near-term catalysts for this sector. Technically, the long-term trend is weak for gold; it has been in a downtrend since late 2012. There is support at $1,085 (U.S.) per ounce, then $1,050.
Energy is another sector that I remain bearish on. On Monday, the price of oil cracked the U.S. $50 level intraday. The United Nations Security Council approved the Iran nuclear deal on Monday, and the European Union has also given their seal of approval. The U.S. Congress has yet to approve the tentative deal. An oversupplied oil market has been my main concern, and it is just a matter of time before more oil from Iran is anticipated to flood the market. Furthermore, I expect energy companies to report rather cautious or muted outlooks when they report their second-quarter results. Again, it is too early for investors to be accumulating energy stock in my opinion.
In earnings news, after the close on Monday, CN Rail reported strong second-quarter results despite facing industry challenges. CN Rail reported adjusted earnings per share of $1.15, above the consensus estimate of $1.05, representing 12 per cent earnings growth year-over-year.
The company's strong operating ratio was the main takeaway from the earnings results. This ratio is simply the company's operating expenses as a percentage of revenues. A lower operating ratio is positive. The company's operating ratio dropped 3.2 per cent to 56.4 per cent from 59.6 per cent last year. This was a record level for the company for the second-quarter. Operating expenses declined mainly due to lower fuel costs and lower labour expenses.
I recommended buying shares of CN Rail on June 14, when the stock price was $73.01 as the stock was inexpensive, trading below its three year historical average. However, given that the stock price is up over 8 per cent since then, I am recommending investors wait for a dip to accumulate more shares. CN Rail represents an excellent core holding in a diversified portfolio for long-term investors given its diversified exposure to numerous markets, solid management team that is committed to containing expenses and returning capital to shareholders through its quarterly dividend that I expect will increase over the years. The current yield is 1.6 per cent. I anticipate analysts will be revising their earnings forecasts for the year up, and increasing their one-year target prices given the better-than-expected second-quarter results.
Today, we have three companies reporting in the S&P/TSX composite index. CP Rail reported results at 830 a.m and adjusted profit was right in line with Street expectations though revenues slightly missed. Two stocks in the forest products sector will report financial results after the market closes, Canfor and West Fraser Timber. In the lumber space, my top pick is Interfor as this company has significant exposure to the improving U.S. housing market. Roughly three-quarters of the company's proforma 2014 volumes were sold into the U.S. market. The company continues to expand in the U.S. southeast region where costs are low and log supply is abundant. Interfor will report second-quarter earnings next week, on July 30.
Major European markets are trending sideways today. The German, French, and London indices are relatively flat, with moves of less than half a per cent. Positive Greek headlines have been replaced by negative headlines, which has calmed the markets. Greece has put its 7.16 billion euros bridge loan to work, repaying 4.2 billion euros to the European Central Bank and 2.05 billion euros to the International Monetary Fund. Today, the Greek parliament will vote on additional reforms.
Asian markets continue to steam ahead. The Shanghai Stock Exchange composite index advanced 0.6 per cent, and the Shenzhen Stock Exchange composite index closed higher by 1.6 per cent. The Shenzhen is has now rebounded by over 20 per cent since July 8. The volatility in Chinese markets continues and the trend is positive – for now.
The Bottom Line: It is all about earnings in the weeks ahead. Avoiding torpedo stocks, those stocks that miss earnings expectations. This is one of the best ways to improve your portfolio returns.
Now, here is a round-up of major news and headlines.
MARKET DATA:
Futures
S&P 500 +0.1 per cent; Dow -0.1 per cent; Nasdaq: +0.2 per cent
Equities
Hong Kong's Hang Seng +0.52 per cent
Shanghai composite index +0.65 per cent
Japan's Nikkei +0.93 per cent
London's FTSE 100 +0.09 per cent
Germany's DAX +0.05 per cent
France's CAC 40 +0.11 per cent
Stoxx 600 -0.20 per cent
Commodities
WTI crude oil (Nymex Sep) -0.02 per cent at $50.43 (U.S.) a barrel
Gold (Comex Aug) -0.11 per cent at $1,105.60 (U.S.) an ounce
Copper (Comex Sep) +0.83 per cent at $2.50 (U.S.) a pound
Currencies
Canadian dollar at 76.96 (U.S.), +0.0004
U.S. dollar index -0.137 at 97.892
Bonds
U.S. 10-year Treasury yield 2.38 per cent, +0.0018
ECONOMIC INDICATORS:
U.S. releases industrial production and capacity utilization revisions.
STOCKS TO WATCH:
Canadian National Railway Co. late Monday reported stronger than expected second-quarter earnings and said it continues to expect double-digit growth in earnings per share for the full year on Monday, even as shipment volume slipped. Several analysts had expected Canada's biggest railway to cut its full-year earnings forecast as weak coal and grain volumes weighed on revenue. It beat the Street by 10 cents per share.
Canadian Pacific Railway reported Q2 adjusted EPS of $2.45 vs. the Street estimated $2.46. Revenues were slightly below expectations.
Chesapeake Energy Corp said on Tuesday it would suspend dividend payments, starting in the current quarter, to save up to $240 million a year.
United Technologies reported adjusted profit per share of $1.81 (U.S.) vs. Street estimates of $1.71.
Earnings include: Allegheny Technology, Apple, , Baker Hughes, Canadian Pacific Railway, Cathay General Bancorp, Chipotle Mexican Grill, First Bancorp, GoPro, Harley-Davidson, Kaiser Aluminum, Lockheed Martin, TD Ameritrade, Tempur Sealy International, Travelers Companies, Verizon Communications, Yahoo.
Miles Nadal, one of Canada's most richly rewarded CEOs, has abruptly resigned from MDC Partners Inc., the Toronto-based advertising conglomerate he founded three decades ago. The publicly traded company also revealed late Monday Mr. Nadal will return $10.6-million (U.S.) in past retention payments and $1.9-million in expenses, in addition to the $8.6-million he agreed to repay last spring, upping the amounts payable to the company to more than $20-million.
French food group Bonduelle SCA is in discussions to team up with Centerview Partners in a bid to acquire General Mills Inc's Green Giant frozen and canned vegetable business, according to people familiar with the matter, Reuters reported.
Fortress Paper CEO Chad Wasilenkoff is stepping down from that role to become executive chairman.
ANALYST ACTIONS:
Canaccord Genuity upgraded Canadian National Railway to "buy" from "hold" and raised its price target to $84 (Canadian) from $77.
QUOTE OF THE DAY:
"If you are distressed by anything external, the pain is not due to the thing itself, but to your estimate of it; and this you have the power to revoke at any moment." - Marcus Aurelius
Jennifer Dowty