The relief rally appears set to extend for yet another day.
Keep in mind, we are in the fourth quarter, the seasonally strongest period of the year. Many institutional money managers are scrambling to report strong performance this year, which has been a challenge, and these investors only have a few weeks remaining in 2016 before market action becomes quiet during the December holiday period. With the U.S. election concluded, an acceptance speech by president-elect Donald Trump that was not hostile and talked about unification, combined with a gracious concession speech by Hillary Clinton , the markets have regained positive momentum. The S&P 500 Index is just 1 per cent away from closing at a new all-time record high.
Furthermore, the U.S. third-quarter earnings season is largely complete. As of Friday, 85 per cent of companies in the S&P 500 Index have reported – and the results are encouraging. Investors are finally seeing earnings growth. As of Nov. 4, the blended earnings growth rate for the S&P 500 Index is 2.7 per cent, this is the first time that we have seen earnings growth, instead of earnings contraction, since the first quarter of 2015. This is also helping drive equity markets higher.
Speaking of earnings, today, there are 20 companies in the S&P/TSX composite index are scheduled to report quarterly financial results, among them are Alamos Gold, Algonquin Power & Utilities, Boardwalk REIT, Bombardier, CAE, Canadian Tire, Cott, Crescent Point Energy, Dream Office REIT, Enercare, Extendicare, Manulife Financial, Milestone Apartments REIT, New Flyer Industries, NuVista Energy, Parex Resources, and Stantec.
Let's briefly recap what happened on Wednesday.
The S&P/TSX composite index climbed 103 points, or 0.70 per cent to close at 14,760. There were 151 securities in the TSX Index that advanced, 90 securities declined in value, and six stocks closed the day unchanged. Sector strength was mixed with six sectors closing in positive territory and five sectors, closing in negative territory. Interest sensitive sectors (utilities, telecom, and real estate) were under pressure given the spike in bond yields.
The S&P/TSX composite index is down 0.19 per cent month-to-date, up 0.23 per cent quarter-to-date, and up 13.45 per cent year-to-date.
On today's TSX Breakouts report, there are 30 stocks on the positive breakouts list (stocks with positive price momentum), and 55 securities on the negative breakouts list (stocks with negative price momentum).
Discussed today is a security that appears on the positive breakouts list. The stock was the second best performing security in the S&P/TSX composite index on Wednesday, soaring 13 per cent on high volume. Steel related stocks rallied on expectations of rising steel prices with Mr. Trump's pledge to spend $500-billion on infrastructure. Commodities related to infrastructure spending are rallying sharply. For instance, the price of copper is up 3 per cent today.
With the fast and furious rally for commodity related stocks, valuations may become overextended, and taking some profits off the table may be a prudent move for investors to consider. The security highlighted today is Russel Metals Inc. (RUS-T).
A brief outline is provided below that may serve as a springboard for further fundamental research.
The company
Russel Metals is one of North America's largest metals distribution companies. The company's three core business segments are steel distributors, metals service centers, and energy products.
After the market closed on Nov. 8, the company reported its third-quarter financial results. Revenues were $639-million, down from $773-million reported during the same period last year, and short of the Street's expectations of $680-million. Earnings per share came in at 26 cents, up from 21 cents reported last year, and a penny below the consensus estimate of 27 cents.
As reported in the recent Management's Discussion and Analysis (MD&A), management anticipates, "Steel price and margin pressure experienced at the end of the 2016 third quarter should bottom out in the fourth quarter."
Dividend policy
Russel Metals pays its shareholders a quarterly dividend of 38 cents per share, or $1.52 on a yearly basis. This equates to an annualized dividend yield of 6.5 per cent. Management has maintained its dividend at this level since mid-2014.
The company's earnings payout ratio is above 100 per cent. Management stated in its latest MD &A that, "We currently have a basket of approximately $207 million available for restricted payments...This basket is available for dividend payments greater than $0.35 per share which, at the current dividend rate, utilizes approximately $7 million per annum of the restricted payment basket."
Valuation
The stock is trading at a high valuation.
According to Bloomberg, the stock is trading at a price-to-earnings (P/E) multiple of 17.8 times the 2017 consensus estimate, above its three-year historical average of 13.9 times, and above its prior peak multiple of roughly 17 times during this period.
On an enterprise value-to-EBITDA basis, the stock is trading at a multiple of 9.7 times the 2017 consensus estimate, above the three-year historical average of 8.5 times, and above its previous peak of approximately 9.5 times during this period.
Analysts' recommendations
According to Bloomberg, there are seven analysts whom cover this stock, one of which has a 'buy' recommendations and the remaining six analysts have 'hold' recommendations. Firms providing research coverage on the stock are as follows: BMO Capital Markets, EVA Dimensions, GMP, Raymond James, RBC Capital Market, Scotia Capital, and TD Securities.
The average one-year target price is $22.25, implying the shares are fully valued. Target prices range from a low of $21 to a high of $25. Individual target prices provided by six firms in numerical order are: two at $21, $21.50, $22, $23, and $25.
The Street is forecasting EBITDA of $138-million in 2016, rising to $170-million in 2017. The consensus earnings per share estimate is 92 cents in 2016, rising 42 per cent to $1.31 in 2017.
Earnings forecasts have been revised down since the beginning of the year. On January 1, the consensus EBITDA estimates were $168-million for 2016 and $184-million for 2017. The earnings per share estimates were $1.30 for 2016 and $1.41 for 2017.
Chart watch
This small-cap industrial stock, with a market capitalization of $1.4-billion, is a strong performer in 2016. Year-to-date, the share price has soared 45 per cent, and on Wednesday, the stock price rallied 13 per cent on high volume. Nearly 700,000 shares traded yesterday, well above this two-month historical daily average trading volume of approximately 214,000 shares.
The shares appear to be forming a bullish inverse head-and-shoulders pattern, a break above $25 would confirm this pattern.
The shares have initial overhead resistance between $24 and $25. A move above $25, could see the share price rise to around $27.50.
There is initial downside support around $21, near its 200-day moving average (at $21.17) and its 50-day moving average (at $20.97). Failing that, there is support at $20.
The relative strength index is at 73, suggesting the shares are in overbought territory. Generally, a reading at or above 70 indicates an overbought 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.