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Friday’s TSX breakouts: When an earnings miss translates into a potential buying opportunity

It is a quiet day in terms of news announcements.

There are no major economic reports released today, and only three companies in the S&P/TSX composite index are scheduled to report their fourth-quarter earnings: Air Canada (AC-T), Enbridge Inc. (ENB-T), and Enbridge Income Fund Holdings Inc. (ENF-T).

On the commodity front, the price of oil is down slightly, while gold and natural gas prices are relatively unchanged.

Briefly recapping Thursday's stock market returns, major North American equity markets were relatively unchanged.

In the U.S., the Dow Jones Industrial Average inched up 0.04 per cent, the S&P 500 index lost 0.09 per cent, and the Nasdaq composite index declined 0.08 per cent.

Turning to Canada, the S&P/TSX composite index increased 19 points, or 0.12 per cent. There were 135 securities in the TSX Index that advanced, 111 securities declined in value, and three stocks closed the day unchanged.

The TSX Index is up 3.77 per cent year-to-date.

On today's TSX Breakouts report, there are 71 stocks on the positive breakouts list (stocks with positive price momentum), and just nine stocks are on the negative breakouts list (stocks with negative price momentum).

The security highlighted today just surfaced on the negative breakouts list with the share price tumbling 5 per cent on Thursday. The price weakness may represent a potential future buying opportunity for longer-term investors. The company is Sun Life Financial Inc. (SLF-T).

A brief outline is provided below that may serve as a springboard for further fundamental research.

The company

Toronto-based Sun Life Financial is an international financial services company that provides insurance, investment products and services through its global operations. As at December 31, the company's assets under management stood at $903-billion.

After the market closed on Feb. 15, the company reported lower-than-expected fourth quarter results. Underlying earnings per share (EPS) came in at 91 cents, below the Street's forecast of 97 cents. The earnings miss sent the share price plummeting 5.1 per cent the following day.

Return on equity was 12.2 per cent in 2016, down from 12.8 per cent realized in the prior year.

Amongst the potential tailwinds that may lift the stock price are higher interest rates and tax cuts. On the fourth-quarter conference call, Colm Freyne, the chief financial officer, addressed U.S. President Trump's pledge to lower the corporate tax rate stating, "We certainly would see a benefit from a reduced U.S. corporate tax rate."

One notable headwind for the company has been redemptions. MFS reported net outflows of $12.6-billion (U.S.) in 2016. On the conference call, Michael Roberge, the co-chief executive officer of MFS Investment Management, addressed this issue, stating, "The challenge the industry currently has isn't a sales problem, it's a redemption problem." He believes some of this weakness is due to investors moving to a passive investment strategy.

The company trades on the Toronto Stock Exchange and New York Stock Exchange under the same ticker, SLF.

Dividend policy

The company pays its shareholders a quarterly dividend of 42 cents per share, or $1.68 per share yearly. This equates to an annualized dividend yield of 3.4 per cent.

Management is committed to its dividend, announcing two dividend increases in 2016. The payout ratio was 43 per cent in 2016, suggesting there is room for future dividend hikes. Management has a targeted payout ratio of between 40 per cent and 50 per cent over the medium-term.

Financial forecasts

The Street is forecasting EPS of $4.09 in 2017, up from $4.03 reported in 2016. The consensus EPS estimate jumps to $4.42 in 2018. Management's medium-term goal is to achieve underlying EPS growth of between 8 per cent and 10 per cent.

Analysts have trimmed their earnings forecasts for 2017 and 2018 after the company reported disappointing fourth quarter results. At the beginning of the week, the consensus EPS estimates were $4.13 for 2017 and $4.48 for 2018.

Six months ago, in August 2016, the consensus EPS forecasts were $4.00 for 2017 and $4.32 for 2017. In other words, there has been relatively minor revisions to earnings in recent months.

Valuation

According to Bloomberg, the stock is trading at a price-to-earnings (P/E) multiple of 12.2 times the 2017 consensus estimate, in-line with its three-year historical average multiple of 12.4 times.

To put this in perspective, looking at its peers, shares of Manulife Financial Corp. (MFC-T) are trading at a P/E multiple of 11.5 times the 2017 consensus estimate. Great-West Lifeco Inc. (GWO-T) is trading at a P/E multiple of 12.8 times and Industrial Alliance Insurance & Financial Services Inc. (IAG-T) is trading at a P/E multiple of 11.9 times. The S&P/TSX Financials Index is up 5.8 per cent year-to-date.

The consensus one-year target price for Sun Life is $54.35, suggesting a modest single-digit potential price return of 9 per cent over the next 12 months. Individual target prices range from a low of $51.50 (at Veritas Investment Research) to a high of $56 (at Desjardins Securities, BMO Capital Markets, Credit Suisse, and Cormark Securities).

Analysts' recommendations

There are 16 analyst whom cover the company, 6 analysts have "buy" recommendations, and 10 analysts have "hold" recommendations.

Revised target prices

Several analysts revised their target prices slightly lower after the company reported weaker-than-expected fourth quarter earnings results. Mario Mendonca, the analyst at TD Securities, trimmed his target price to $55 from $57. John Aiken from Barclays reduced his target price by $1 to $54, and Sumit Malhotra from Scotia Capital, similarly cut his target price by $1, taking it down to $55.

Insider transaction activity

There has been no insider transaction activity in 2017.

Chart watch

On Thursday, the stock price collapsed, falling 5.1 per cent on high volume. Over 10.7-million shares traded, well above the two month historical daily average trading volume of approximately 2.3-million shares.

Year-to-date, the share price is down 3.1 per cent. In comparison, shares of Manulife Financial are up 4.2 per cent, shares of Great-West Lifeco are up 6.5 per cent, and shares of Industrial Alliance Insurance and Financial Services lead the pack with a gain of 9.5 per cent.

In terms of key resistance and support levels, there is initial downside support around $48. Failing that, there is support around $46, which is close to its 200-day moving average (at $45.94). Initial upside resistance appears to be around $52, close to its 50-day moving average (at $51.72), and after that, there is resistance around $54.

The relative strength index is at 39, suggesting the shares are not oversold despite the selloff in the stock price on Thursday. Generally, a reading at or below 30 suggests an oversold condition.

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The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company's dividend policy, analysts' recommendations, and provides a brief technical analysis for a security to provide readers with more information.

If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.

Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indexes that have a minimum market capitalization of $200-million.

A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.

TSX breakouts

Positive BreakoutsFeb. 16 close
ABT-TAbsolute Software Corp $7.19
AIM-TAimia Inc $9.45
AIF-TAltus Group Ltd $33.42
ATA-TATS Automation Tooling Systems Inc $13.75
AUP-TAurinia Pharmaceuticals Inc $4.89
AVO-TAvigilon Corp $15.46
BAD-TBadger Daylighting Ltd $34.63
BMO-TBank of Montreal $101.48
BNS-TBank of Nova Scotia $81.99
ABX-TBarrick Gold Corp $26.81
BOX.UN-TBrookfield Canada Office Properties $31.48
BTB.UN-TBTB Real Estate Investment Trust $4.68
CAE-TCAE Inc $20.43
CF-TCanaccord Genuity Group Inc $5.43
REF.UN-TCanadian Real Estate Investment Trust $48.90
CAS-TCascades Inc $14.34
CM-TCIBC $116.50
CIGI-TColliers International Group Inc $58.99
CMG-TComputer Modelling Group Ltd $10.32
CNL-TContinental Gold Inc $5.66
DPM-TDundee Precious Metals Inc $3.48
EFN-TElement Financial Corp $14.08
XTC-TExco Technologies Ltd $11.59
FSV-TFirstService Corp $73.82
FTS-TFortis Inc $42.91
GSY-Tgoeasy Ltd $30.40
G-TGoldcorp Inc $23.11
GRT.UN-TGranite Real Estate Investment Trust $45.61
GPR-TGreat Panther Silver Ltd $2.86
GWO-TGreat-West Lifeco Inc $37.47
IGM-TIGM Financial Inc $41.80
IAG-TIndustrial Alliance Insurance & Financial Services $58.44
IFP-TInterfor Corp $18.11
KBL-TK-Bro Linen Inc. $43.94
KEY-TKeyera Corp $41.20
KXS-TKinaxis Inc $74.60
KDX-TKlondex Mines Ltd $7.65
LB-TLaurentian Bank of Canada $61.44
LAC-TLithium Americas Corp $1.24
LUG-TLundin Gold Inc $5.97
MEQ-TMainstreet Equity Corp $35.20
MRD-TMelcor Developments Ltd $15.89
MRT.UN-TMorguard Real Estate Investment Trust $15.50
NA-TNational Bank of Canada $58.46
NOA-TNorth American Energy Partners Inc. $7.40
NVU.UN-TNorthview Apartment REIT $21.68
NG-TNovagold Resources Inc $8.04
ONR.UN-TOneREIT $3.75
POU-TParamount Resources Ltd $18.52
PPL-TPembina Pipeline Corp $42.68
POW-TPower Corp of Canada $32.18
PWF-TPower Financial Corp $35.60
RCI.B-TRogers Communications Inc $57.09
RY-TRoyal Bank of Canada $98.68
RUS-TRussel Metals Inc $27.84
SEA-TSeabridge Gold Inc $15.65
SHOP-TShopify Inc. $79.71
SW-TSierra Wireless Inc $34.26
ZZZ-TSleep Country Canada $30.66
SRU.UN-TSmart Real Estate Investment Trust $33.22
SVI-TStorageVault Canada Inc. $1.65
TGZ-TTeranga Gold Corp $0.99
TH-TTheratechnologies Inc $4.24
TNC-TTIO Networks Corp. $3.31
TIH-TToromont Industries Ltd $47.40
TD-TToronto-Dominion Bank $69.27
UNS-TUni-Select Inc $34.26
VCM-TVecima Networks Inc $10.71
WCN-TWaste Connections Inc. $108.15
WDO-TWesdome Gold Mines Ltd. $3.73
WTE-TWestshore Terminals Investment Corp $28.09
Negative Breakouts
AGT-TAGT Food & Ingredients Inc $34.05
CAM-TCanam Group Inc $7.05
DII.B-TDorel Industries Inc $35.42
HCG-THome Capital Group Inc $26.50
MDF-TMediagrif Interactive Technologies Inc. $17.06
BCI-TNew Look Vision Group Inc $27.93
ORL-TOrocobre Ltd. $3.77
SLF-TSun Life Financial Inc $49.94
Y-TYellow Pages Ltd $11.17

Source: Bloomberg

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