BMO chief strategist Brian Belski noted the significant outperformance of Canadian stocks versus the S&P 500 in January but warned investors to pull in their horns a bit and pay closer attention to valuations as 2022 progresses.
The returns of the S&P/TSX Composite Index beat the S&P 500 by about five percentage points in January and Mr. Belski noted that this was the biggest relative outperformance since 2009. The sell-off in U.S. technology stocks combined with strong returns from the domestic energy sector were a big driver of the trend but the strategist also noted that valuations played an important role.
“The key underlying trend from our perspective was a valuation correction driven largely by receding earnings,” he wrote. “In fact, the top two quintiles composed of the highest valuation stocks in the TSX have seen their 2022 EPS estimates revised lower on average by 1.9% and 1.5%, respectively, over the last three months.”
This trend of expensive stock underperformance was particularly evident on Wednesday as Shopify Inc., with its trailing price-to-earnings ratio over 200 times, was trading down over 15 per cent midday after providing disappointing guidance.
At the same time, the benchmark’s cheapest stocks are seeing their earnings outlook improve. 2022 profit forecasts for the bottom two valuation quintiles have climbed 1.9 per cent and 1.5 per cent, respectively, over the past 90 days.
Mr. Belski sees more room for attractively valued stocks to outperform but also cautioned investors to be selective. He recommends a GARP – growth at a reasonable price – approach and provided a list of 44 large cap stocks that fit the definition. The stocks on the list ranked “outperform” by BMO analysts are: Rogers Communications Inc. , Quebecor Inc., BRP Inc., Linamar Corp., Magna International Inc., Sleep Country Canada Holdings, Canadian National Resources, Cenovus Energy Inc. Parex Resources Inc., Suncor Energy Inc., Tourmaline Oil Corp., TC Energy Corp., Bank of Nova Scotia, CI Financial, CIBC, Canadian Western Bank, Equitable Group, Manulife Financial, National Bank, Sun Life Financial, Air Canada, CAE, Evertz Technologies Ltd., CGI Inc., Kinaxis Inc., Open Text Corp., B2Gold Corp., Equinox Gold Corp., New Gold Inc., Nutrien Ltd., Teck Resources Ltd., Altagas Ltd., and CT REIT. (The remaining stocks on his list are rated below an “outperform”.)
-- Scott Barlow, Globe and Mail market strategist
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The Rundown
Gordon Pape shakes up his RRSP portfolio
One of the greatest mistakes people make with their RRSPs is to make a contribution and then forget about it. Think of the money you put into your plan as a seed. It’s not going to grow unless you provide the tender loving care needed to make that happen. That means choosing appropriate investments and then reviewing the plan at least once every six months to ensure it’s on track. If the investment climate changes, it may mean you have to pivot on some of your investments to keep pace. The investment climate has in fact changed dramatically in the past six months. We’ve moved into a period of rapidly increasing inflation, with the probability of rising interest rates for the rest of 2022 and perhaps beyond. As such, Gordon Pape is making a number of changes in his RRSP portfolio.
‘We’re out of everything’: How rising commodity prices are driven by ever-growing demand
Much like consumer inflation, the run-up in commodity prices is proving to be much more than a transitory blip driven by the pandemic. Energy and metals prices have been ripping higher pretty steadily for nearly two years now, as production on a global scale has struggled to keep up with the demands of a growing economy. A severe undersupply is looming over the entire global commodity complex. And as stockpiles of several economically critical commodities dwindle, some analysts see years of elevated prices ahead. Tim Shufelt reports.
One more thing to worry about: Squeezed profit margins
Canadian corporate profit margins have been rebounding as the economy heals from the shock of lockdowns two years ago. But there are challenges ahead as central banks raise interest rates, giving investors a good reason to be cautious. David Berman reports.
As nuclear power and the uranium that feeds it rises again, its second act is in doubt
The uranium industry is in the early stages of a second act as some countries turn to nuclear power to help reduce their carbon footprints, but skepticism abounds about how long its moment in the sun will last. And that has major implications for Cameco Corp. and other Canadian uranium plans. Niall McGee reports.
The next drop in the stock market will be a doozy - here’s why it could come soon
John De Goey, senior investment adviser and portfolio manager at Wellington-Altus Private Wealth, is doubling down on his bearish views on the market. Owing to the unique nature of the 2022 “everything bubble” across assets, he believes the next drawdown will be worse than anything any of us have ever experienced. He explains his view.
Bitcoin runs into Russian rules and regiments
Bristling tensions and looming laws in Europe could offer clues to two questions: Can bitcoin be a safe-haven asset? And can Russia emerge as a crypto superpower? Alun John of Reuters reports.
Lithium supply crunch Part II - this time it’s for real
The lithium supply crunch has arrived in full force. The price boom of 2016-2017, it’s now clear, was just the dry run. This is the real deal. Andy Home of Reuters explains why there is simply not enough of the stuff around to meet demand at the moment, and how that could have profound implications for global efforts to decarbonize.
U.S. yield curve prices for Fed tightening, shows fears of policy error
A dramatic flattening in key parts of the U.S. Treasury yield curve is reflecting worries that the U.S. Federal Reserve has been too slow to raise interest rates and will now risk causing a recession by tightening monetary policy too aggressively. Karen Brettell of Reuters reports.
Also see: Entangled fears of Fed error and Ukraine crisis
Acronym bets like BRICs or FAANGs rarely endure
A 24-hour earnings blitz from Facebook-owner Meta and Amazon this month showed just why market acronyms like “FAANGs” capture a changing world for a bit but rarely endure as long-term investment concepts, Jamie McGeever of Reuters tells us.
Others (for subscribers)
National Bank reveals its ‘2022 Dividend All-Stars’
Wednesday’s analyst upgrades and downgrades
Tuesday’s analyst upgrades and downgrades
Tuesday’s Insider Report: Chairman invests $2-million in this oversold dividend stock
Number Cruncher: 15 U.S. companies that have shone this earnings season
U.S. federal prosecutors probing short-sellers: report
Globe Advisor
Don’t expect vaccine makers’ shares to jump despite ongoing demand for boosters, treatments
Demand for annuities set to rise as investors eye larger payouts
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Ask Globe Investor
Question: Could you please give me your thoughts on (ZWC-T) and (ZWE-T) as income generating ETFs.
Answer: ZWC is the BMO Canadian High Dividend Covered Call ETF. It invests in dividend-paying Canadian stocks and the managers write out-of-the-money covered call options to generate additional cash flow.
Four of the top five holdings are major banks. Other stocks in the top 10 include BCE Inc., Canadian National Railway Co., Enbridge Inc., Manulife Financial Corp., Telus Corp., and Bank of Montreal, so this is very much a blue-chip portfolio.
The fund started off 2021 paying a monthly distribution of 11 cents a unit, but that was scaled back to 10 cents in June ($1.20 a year), where it remains. At a recent price of $19.53, that translates to a yield of 6.1 per cent.
This ETF was launched in September, 2017. Since inception, it has generated an average annual total return of 6.3 per cent (to Jan. 31) although its most recent results have been much better. The management expense ratio is high for an ETF, at 0.72 per cent.
Overall, the annualized total return since inception is mediocre but the current yield is very attractive, the fund is performing better now, and the portfolio is top-grade.
ZWE is the BMO Europe High Dividend Covered Call Hedged to CAD ETF. It operates in the same way as ZWC, except that the portfolio is composed of European blue-chip stocks such as Nestlé, Unilever, Novartis, and Rio Tinto.
This ETF was launched in May, 2018. It was weak out of the gate but its performance has gradually improved, The average annual total return since inception is 6.8 per cent.
The monthly distribution at the start of 2021 was 11.5 cents a unit but it was cut twice over the period and now stands at 10 cents. The yield is 6.1 per cent.
Both these ETFs offer decent yields, but remember that the distributions are not guaranteed and could be cut (or raised) at any time.
--Gordon Pape
What’s up in the days ahead
It’s that time of the year yet again - the annual ETF Buyers’ Guide. Rob Carrick will present the first installment later this week.
Click here to see the Globe Investor earnings and economic news calendar.
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Compiled by Globe Investor Staff