BofA Securities U.S. quantitative strategist Savita Subramanian published her investment recommendations for 2021 and describes her two favourite sectors – financials and energy – as “unapologetically cyclical and value-focused.”
The selections are also very good news for Canadian equity investors, given these industries when combined dominate the S&P/TSX Composite.
I detailed the strategist’s compelling argument for value stocks in a Nov. 18 column. Most importantly, she notes that value stocks have outperformed their growth counterparts after the end of all of the last 14 recessions. It makes sense then that, as the U.S. economy recovers from 2020′s pandemic-caused slowdown, economically sensitive value stocks will outperform in the coming year.
Where U.S. financials are concerned, BofA points out that balance sheets are far healthier than at any point before the financial crisis. Profit growth expectations in the sector are extremely low relative to the S&P 500 – below financial crisis levels – providing easy targets to exceed. Portfolio managers are also significantly underweight in the sector, so if financials start outperforming there will be a rush to add exposure, boosting stock prices.
Ms. Subramanian’s year-ahead report features a “double-upgrading” of the energy sector from underweight, through equal weight, to overweight. The strategist believes that the purge of fossil fuel stocks from socially responsible funds is largely behind us, removing a source of selling pressure. The dividend yields offered by U.S. energy stocks have also hit record levels of more than 7 per cent and Bank of America analysts believe these payouts are sustainable.
Energy stocks on both sides of the border have been climbing in the wake of vaccine news in anticipation of stronger demand once lockdowns end. BofA grants that the sector faces headwinds in the longer term as energy supply evolves towards renewables, but so far the historical pattern of oil and gas stocks benefitting from the end of recession has been followed.
Canadian and U.S. market sectors are not, of course, exactly the same but the same trends generally affect the sectors on both sides of the border. Rising demand and higher prices for crude will benefit domestic and U.S. energy companies. Banks are trading at valuation levels below historical norms in the S&P 500 and S&P/TSX Composite and should recover strongly as pandemic conditions ease.
-- Scott Barlow, Globe and Mail market strategist
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Stocks to ponder
Sierra Wireless Inc. (SW-T) shares shot up this week after a bullish new analyst call. He said the Richmond, B.C.-based Sierra Wireless is “in the early days of a turnaround story led by a strong management team and board.” He also cited the company’s business model transition “toward higher-margin recurring revenue” as a reason to like the stock right now, as well as its exposure to the emerging 5G technology. Brenda Bouw reports. (for subscribers)
Jamieson Wellness Inc. (JWEL-T) On Nov. 6, Jamieson Wellness’ share price closed at a record high of $43.21. Since then, the stock price has plunged nearly 22 per cent with the stock nearing oversold territory. The stock has come under pressure as confidence for a coronavirus vaccine grows. A concern by investors is that the company’s growth has been boosted from the coronavirus with individuals focusing on health and wellness. But, as Jennifer Dowty tells us in this profile of the company, this is a stock to watch given it may be overshooting to the downside. (for subscribers)
Suncor Energy Inc. (SU-T) Tax-loss selling season - where investors can sell their losers for a tax credit and perhaps buy them back later - is upon us. The Contra Guys explain why this could create a good opportunity to buy shares of Suncor. (for subscribers)
Tesla Inc. (TSLA-Q) If you traded a U.S. stock in the past week, there’s a fair chance it was Tesla. Shares in the electric car maker led by CEO Elon Musk have now surged 40% since Nov. 16, when it was announced Tesla would join the S&P 500 in December. Investors rushed to buy shares ahead of index funds that will be forced to acquire over $50 billion of its shares. Noel Randewich of Reuters tells us more about Tesla’s stock action this week. (for subscribers)
Score Media and Gaming Inc. (SCR-T) soared 24 per cent on Thursday after the federal government introduced a bill to legalize single-event wagering in Canada, following a similar trend south of the border. And the stock as of midday Friday was up a further 28 per cent. Brenda Bouw looks at why the bill has investors bidding up the shares in such a frenzy. (for subscribers)
Have markets priced in all the good vaccine news? Not when it comes to these stocks
Bold investors may want to go bargain hunting in areas left behind in this vaccine-driven market rally. Thanks to a steady stream of good news from medical trials, several broad benchmarks of stock prices have jumped higher in recent weeks. Even the staid Dow Jones Industrial Average surged to a record on Tuesday, surpassing the 30,000 mark for the first time in the index’s 124-year history. However, many individual sectors and companies are still trading well below their prepandemic levels. For adventurous investors, these neglected areas could hold potential deals. Ian McGugan gives us some examples. (for subscribers)
His investment adviser is jacking up his fee - why that might not be a deal-breaker
Rob Carrick looks at the downside of fee-based advice: some clients could be getting the same advisory package of services while paying much more in fees. (for subscribers)
Vaccine is no shot in the arm yet for emerging markets
Emerging markets have surged on the prospect that coronavirus vaccines will become widely available soon, but analysts think the rally is overplayed given the risks from slower rollouts for some economies that could delay their recoveries. Tom Arnold of Reuters reports. (for subscribers)
Have coronavirus vaccines killed the gold rally?
Gold has tumbled from record highs as investors, eyeing an end to the coronavirus pandemic, move money to riskier assets. But while some analysts now believe the rally has peaked, others say prices may still have room to rise, at least for a while. Peter Hobson of Reuters reports. (for subscribers)
Three stock picks for the post-pandemic recovery from $220-million fund manager Jennifer Radman
Portfolio manager Jennifer Radman felt the market start to shift at the end of the second quarter, when many technology stocks stalled. “The companies were recording record earnings but stocks didn’t respond,” says Ms. Radman, who is also head of investments at Caldwell Investment Management Ltd. in Toronto. At the same time, she says investors saw the “worst case” for cyclical stocks. “And that’s when that rotation from growth to cyclical started,” she says. It was also around that time that her team started to pick up a few beaten-down cyclical names in sectors such as steel, auto production, forestry and agriculture. Brenda Bouw looks at some of Ms. Radman’s latest portfolio moves. (for subscribers)
Short sales on the TSX: What bearish investors are betting against
The squeeze is back on for short sellers. The Toronto Stock Exchange has rallied by more than 6 per cent during the first 3 weeks of November to stand within a whisker or two of pre-COVID-19 peaks. And short sellers are scrambling for the exits: the short position in the iShares S&P/TSX 60 ETF has tumbled to 16.5 per cent of its float – the lowest level this year. Larry MacDonald looks at the latest moves by shorts on the Toronto Stock Exchange. (for subscribers)
Small-cap rally the latest sign for investors looking to the end of the pandemic
The latest winning streak in small-cap stocks is a pretty good indication that markets have begun to price in the end of the pandemic. In a year dominated by the largest and most growth-oriented stocks on the market, the past few weeks have belonged to smaller stocks and companies more tightly linked to the cycles of the global economy. Since the end of October, the S&P/TSX SmallCap Index has gained 16 per cent, while the U.S. Russell 2000 small-cap index is on track for its best month on record. Tim Shufelt looks at the latest trends. (for subscribers)
Low-volatility ETFs are lagging, which is why some investors believe it’s time to buy
Many investors have the wrong idea about low-volatility ETFs, a product pitched to prevent investor whiplash. Having consistently outperformed the broader market over the past several years, experts say the low-vol ETF run has led many investors to mistakenly believe they’re intended to beat the market. However, many have lagged the latest market rebound, which some money managers argue is exactly how those products are intended to perform. And the outlook for them at this particular juncture may be brightening. Jameson Berkow reports. (for everyone)
Others (for subscribers)
Insider Report: Trading activity reported by CEOs of these three companies
Number Cruncher: Balance sheet tools uncover 11 financially strong TSX stocks
Others (for everyone)
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Ask Globe Investor
Question: I’m looking for U.S. exposure ETFs with some income that can be purchased from the Toronto Stock Exchange. I am moving RRSP investments to a RRIF because my age. Any suggestions would be greatly appreciated. - Raymond L.
Answer: There are hundreds of ETFs with a U.S. focus that trade on the TSX. Some track major indexes, like the Dow or the S&P 500, while others focus on specific sectors of the economy.
If you want broad market coverage, consider the iShares Core S&P U.S. Total Market ETF (XUU-T). It aims to replicate the return of the entire American equity market (small, medium, and large-cap stocks). It’s up 13.3 per cent year to date (as of Nov. 19). Distributions are paid quarterly but they aren’t very large (about 10c cents per quarter). The trailing 12-month yield is 1.4 per cent.
For more cash flow, look at the BMO Covered Call Dow Jones Industrial Average Hedged to CAD ETF (ZWA-T) It tracks the Dow and the managers write covered call options to enhance income. This is not a great fund for capital gains (it is actually down 3.5 per cent for the year to Oct. 31). But it currently pays a monthly distribution of 10 cents a unit, for a projected yield of 5.2 per cent over the next 12 months. – Gordon Pape
What’s up in the days ahead
On the 20th anniversary of the TSX debut of the world’s first bond ETFs, Rob Carrick this weekend looks at why money keeps pouring into these investments at a time when bonds look unappealing as a result of low yields.
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Compiled by Globe Investor Staff