History suggests Canadian investors will have something to celebrate next month.
August has a track record of providing positive returns. The S&P/TSX composite index, as detailed in the accompanying table, has enjoyed gains during the month for 11 of the past 15 years.
And over the past five years, which excludes the 2008-09 recession, the trend is even more impressive: The TSX rose for four of the past five years. Only in 2011 did August deliver a negative return.
But put these seasonal factors aside, and the outlook becomes less cheery.
Take gold, for example. Precious metals stocks have consistently outperformed during August, boosted by anticipation of increased demand for the metal from the approaching wedding season in India. But I would suggest avoiding gold stocks this time around. There are reports that the Chinese, who have become a rising source of demand for gold, are doing less buying amid an economy that's losing its forward momentum. Easing geopolitical tensions, low inflation, and a strengthening U.S. dollar ahead of a possible Federal Reserve interest rate hike are also factors not favourable for gold this year.
The concerns about China extend well beyond the gold sector. As Tim Cook, the CEO at Apple Inc., indicated on the tech giant's third-quarter earnings conference call last week, recent volatility in Chinese equity markets could create some "speed bumps" in the road ahead for markets and the corporate sector that relies on Chinese consumption. The Chinese economic slowdown and the impact of the extreme stock market volatility are concerns that may become magnified in the months ahead as more Chinese economic figures are released.
Broadly, the S&P/TSX composite index is trading at a price-to-earnings multiple of 14.6 times the consensus 2016 earnings estimate, slightly above its 10-year historical average of 13.2 times. While that's not tremendously expensive, certain stocks are. Given the lack of companies reporting strong revenue growth, investors are paying up for companies delivering solid growth, especially those in non-resource sectors that fall outside of the beaten-down energy and materials sectors.
Instead of chasing stocks, investors may wish to consider taking partial profits off the table if a stock rallies on solid earnings during this second-quarter reporting season, especially if a stock's valuation is near the upper end of its historical trading range. There could later be a chance to buy back shares on a pullback in the market.
And if you want to play the seasonal game, consider placing bets on certain sectors that have performed well in August in recent years. Interestingly, sectors that delivered the strongest August returns over the past 15 years were similar to that of the past five years. They include materials, information technology, telecommunications, and the health care sectors.
A few of my top picks within these sectors are CCL Industries Inc., Telus Corp., and Concordia Healthcare Corp.
CCL Industries is a specialty packaging company and a global leader in producing labels. The company has an impressive track record for reporting positive earnings surprises, reporting better-than-expected earnings for the past seven consecutive quarters. The stock pays investors a yield of just under 1 per cent. My only hesitation is with the stock's high valuation. The stock is trading at a consensus 2016 enterprise value to earnings before interest, taxes, depreciation and amortization multiple of 10.8 times, a premium to its one-year average of 9.2 times.
Telus is an industry leader with the lowest wireless churn, or customer loss rate, compared to its peers, Rogers Communications and Bell. Telus's postpaid wireless churn has been below 1 per cent for the past seven consecutive quarters. Telus pays shareholders a very attractive annual yield of 3.8 per cent. Last quarter, the company reported solid operational results, exceeding the Street's expectations.
Concordia Healthcare has a growth-by-acquisition strategy and the pipeline for further acquisitions is robust. Year-to-date, Concordia is the top performing stock in the S&P/TSX composite index and I anticipate the stock's strong performance will continue.
Jennifer Dowty, CFA, Globe Investor's in-house equities analyst, writes exclusively for our subscribers at Inside the Market. E-mail any stock suggestions that you want profiled to jdowty@globeandmail.com.
Jennifer Dowty