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 Friday morning to you. Welcome to the last trading day of the week. North American futures are mixed, after trading higher earlier this morning, suggesting a relatively flat open.
The S&P/TSX composite index has been on a five-day losing streak, tumbling 2.6 per cent so far this week amid collapsing gold and energy prices. The price of gold has declined nearly 4 per cent during the first four trading days this week, with further losses again this morning. Oil is down 5 per cent this week and slightly higher this morning. The overall downtrend for these commodities remains intact, and this will continue to negatively weigh on the performance of the resource-heavy S&P/TSX composite index and the Canadian dollar.
It was an active day in the Canadian market with seven companies reporting earnings on Thursday. Valeant Pharmaceuticals, Rogers, Loblaw, and Precision Drilling all reported better-than-expected results.
Valeant was a stand out yesterday and was the top performing stock in the S&P/TSX composite index. The company delivered earnings per share of $2.56 beating the street's expectation by 10 cents. In addition, management raised its 2015 revenue and earnings forecasts. This sent the stock soaring over 9 per cent.
Holding stocks that deliver better-than-expected results is the way to make money this summer in this rather lacklustre stock market. And that's tricky to do, because stock winners do not necessarily point to other stocks that can gain in the same sector. All boats do not rise with the tide. For instance, Rogers delivered financial results that were better-than-expected, sending the share price higher by just under 4 per cent on Thursday. However, its telecom peers did not rise with the tide. Telus, my top pick in the telecom sector, advanced just 0.34 per cent on Thursday, while BCE declined 1.17 per cent. If investors want to make money, stick with the winners - those stocks that deliver solid financial results, beat the street's expectations, and whose outlooks are positive.
While oil prices are at their lowest levels in months and gold prices are at the lowest levels since 2010, I still think it is premature to be bottom fishing in the resource space, and don't see catalysts for stocks in these sectors. For instance, Precision Drilling reported second-quarter results on Thursday that were better than expected; however, the stock price increased less than 1 per cent. In addition, global mining giant, Anglo American, announced that it will cut its workforce by 6,000 people. Mark Cutifani, the Chief Executive Officer, stated that, "it is a very tough environment" for global miners. While many resource stocks may appear inexpensive, I do not see any near-term catalysts on the horizon. Furthermore, with this lower commodity price environment will put pressure on companies' free cash flow generation.
Turning to the U.S. market, it has been a relatively mixed earnings season. Amongst the latest winners, on Thursday after the close, Amazon reported better-than-expected results and is soaring in the premarket today. Shares of Starbucks climbed to a record high in extended trading after reporting solid results of their own with 7 per cent same store sales growth.
Major European markets are relatively flat today. The euro zone July flash manufacturing Purchasing Managers Index (PMI), an indicator of business growth in the manufacturing sector, was just slightly below expectations at 52.2 versus expectations of 52.5. Germany's July flash manufacturing PMI was 51.5, just shy of expectations of 51.9.
Major Asian markets ended the week on a negative note with the Shanghai Stock Exchange composite index down 1.3 per cent and the Shenzhen Stock Exchange composite index closing down 1.3 per cent as well.
Ray Dalio, founder of Bridgewater Associates, the largest hedge fund firm in the world, is the latest well-respected investment professional to express concerns surrounding the recent price decline in Chinese equity markets. He is worried negative implications on wealth and investors psychology.
Indeed today, we had yet another negative data point released out of China. The July Flash Manufacturing PMI fell short of expectations at 48.2 versus expectations of 49.7. This reading was the lowest level in the past 15 months and is also the fifth consecutive month that PMI was below 50, providing further evidence of a Chinese economic slowdown. In order to stimulate economic growth, the People's Bank of China will likely maintain its course in cutting interest rates and relaxing the required reserve ratio.
After a few weeks of steep declines in the Chinese equity markets, Chinese markets have rallied sharply over recent weeks. The Shenzhen Stock Exchange composite index has gained over 23 per cent since July 8, clearly showing that volatility remains elevated and indicative of speculative investing. I do not believe the worst is behind us and believe a Chinese market meltdown could resurface. That is one reason why I recommend investors use rallies in stocks during this second-quarter earnings season to take some profits off of the table. In addition, we have the upcoming U.S. Federal Reserve set to pull the trigger and raise interest rates, which will negatively impact commodities, stocks, and put further pressure on the Canadian dollar.
Next week, 66 companies have confirmed that they will be reporting earnings results. It will be a busy week with over a quarter of the companies in the S&P/TSX composite index reporting: four companies report on Monday, 8 on Tuesday, 18 on Wednesday, 28 on Thursday, and 8 on Friday.
Now, here is a look at major markets and news.
MARKET DATA:
Futures
S&P 500 -0.1 per cent; Dow -0.1 per cent; Nasdaq: +0.1 per cent
Equities
Hong Kong's Hang Seng -1.06 per cent
Shanghai composite index -1.28 per cent
Japan's Nikkei -0.67 per cent
London's FTSE 100 +0.15 per cent
Germany's DAX -0.01 per cent
France's CAC 40 +0.38 per cent
Stoxx 600 +0.23 per cent
Commodities
WTI crude oil (Nymex Sep) +0.43 per cent at $48.65 (U.S.) a barrel
Gold (Comex Aug) -1.54 per cent at $1,077.50 (U.S.) an ounce
Copper (Comex Sep) -0.46 per cent at $2.37 (U.S.) a pound
Currencies
Canadian dollar at 76.65 (U.S.), -0.0004
U.S. dollar index +0.269 at 97.384
Bonds
U.S. 10-year Treasury yield 2.27 per cent, +0.0055
ECONOMIC INDICATORS:
(945 a.m. ET) U.S. Markit Flash Manufacturing PMI index for July.
(10 a.m. ET) U.S. new home sales. Consensus is looking for a decline of 0.9 per cent to an annualized rate of 541,000.
STOCKS TO WATCH:
Anthem Inc said on Friday it would buy Cigna Corp in a deal valued at $54.2 billion, creating the largest U.S. health insurer by membership. Anthem said it will pay $103.40 in cash and 0.5152 of its shares for every Cigna share held. The deal - the biggest ever in the health insurance industry - comes three weeks after Aetna Inc agreed to buy Humana Inc for $37 billion and is part of an industry-wide consolidation following the roll-out of the Obama government's healthcare reform law. The deal is valued at $183.36 per share based on Anthem's Thursday close of $155.21.
American Airlines Group Inc. reported second-quarter net income of $1.7 billion. On a per-share basis, the Fort Worth, Texas-based company said it had profit of $2.41. Earnings, adjusted for non-recurring costs and pretax expenses, were $2.62 per share. The results topped Wall Street expectations. The average estimate of nine analysts surveyed by Zacks Investment Research was for earnings of $2.58 per share.
Encana Corp. is expected to announce staff cuts on Friday following sharply weaker financial results as the company copes with the extended skid in oil prices. Early Friday, the company posted a loss attributable to shareholders of $1.61-billion (U.S.) or $1.91 per share for the quarter ended June 30. That compared with a profit of $271-million or 37 cents per share a year ago. Revenue fell to $830-million from $1.59-billion. The loss was steeper than the Street expected. Shares are down 3 per cent in the U.S. premarket.
Amazon.com Inc shares surged more than 17 per cent in premarket trading as the online retailer posted an unexpected quarterly profit, pushing its market value above that of Wal-Mart Stores Inc, the world's largest retailer. Combined with a bullish forecast for the third quarter, upbeat comments from company executives on Amazon's Prime delivery service and rapid growth in its cloud computing service, Amazon delivered the kind of results Wall Street is looking for.
Starbucks Corp reported higher quarterly profit late Thursday as new food, drinks and technology helped the world's biggest coffee chain attract more customers. Sales at Starbucks shops open at least 13 months were up 7 percent globally in the latest quarter, with an estimated 23 million more customer transactions than in the year-earlier quarter as various sales-boosting projects took hold. Same-store sales jumped a bigger-than-expected 8 percent in the Americas unit for the fiscal third quarter ended June 28.
ANALYST ACTIONS:
Canaccord Genuity upgraded Exco Technologies to "buy" from "hold" and raised its price target to $18 (Canadian) from $17.
B. Riley upgraded Amazon to "buy" from "neutral".
Deutsche Bank upgraded United Continental to "buy" from "hold" and raised its price target to $72 (U.S.) from $63.
QUOTE OF THE DAY:
"To believe in the things you can see and touch is no belief at all; but to believe in the unseen is a triumph and a blessing." - Abraham Lincoln
Jennifer Dowty