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What are we looking for?

Canadian names benefiting from the rotation into cyclicals.

Pfizer Inc. and BioNTech SE sent shockwaves through the stock market on Nov. 9 when they announced their landmark COVID-19 vaccine results, spurring a sell-off in high-flying growth sectors and a rotation into beaten-down cyclical names.

The average Canadian technology company, as indicated by FactSet, rose 12.4 per cent from Nov. 9 to Dec. 21 while energy companies gained an astounding 39.8 per cent during the same period. Technology is often seen as a growth sector, characterized by metrics such as high earnings growth and valuation multiples, while energy is classified as a cyclical sector, often reliant on the volatile prices of commodities. Only time will tell whether this favouritism toward cyclical names is a long-term trend or a short-term phenomenon, but prudent investors can prepare themselves by examining which Canadian companies could be the biggest beneficiaries of a continued trend.

The screen

To begin our analysis, we used FactSet’s Universal Screening tool to pull all publicly traded securities on the Toronto Stock Exchange. In order to avoid smaller securities with high stock-price volatility, we only included stocks that had a market capitalization of greater than $10-billion.

Next, we limited our universe to companies that have had a positive total return from Nov. 9 to Dec. 21. As a simple indicator of price momentum, we only included stocks that had their Dec. 21 closing price greater than their 50-day moving average. This is commonly interpreted as a bullish signal by technical analysts and suggests an upward trend in the stock price.

Last, we ranked each company by their price performance from Nov. 9 to Dec. 21, as an indicator of those that could continue to benefit from this trend.

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What we found

A total of 39 companies met our criteria, of which the top 10 are shown in the accompanying table. The Canadian stock market tends to be dominated by energy companies and banks, so it was no surprise that 18 of our 39 resulting companies were classified as either energy or finance according to FactSet’s Revere Business Industry Classification data.

Finance companies were the most represented sector in our analysis, returning minus 1.3 per cent year to date among 12 results. Rock-bottom interest rates have hurt banks, which rely on lending at high interest rates to generate profits. Positive vaccine developments could spark the hope of rising central bank rates, which, in turn, may have helped drive finance companies up an average of 15.3 per cent since Nov. 9. Two banks made our top 10 list: Toronto-Dominion Bank and Bank of Nova Scotia.

Energy was the second-most represented sector, and the one hit the hardest by the pandemic, down a staggering 22.8 per cent year to date. This drop, which was due in part to plummeting crude oil prices, could have contributed to these companies benefiting from the positive sentiment spurred by the vaccine news. Since Nov. 9, their return as a broader group has been 29 per cent, led by four companies. The first, Suncor Energy Inc., rebounded 43.2 per cent from Nov. 9 to Dec. 21. Despite the strong move upward, Suncor is still down 46.9 per cent year to date on a total return basis, which could leave some room for further appreciation. Other energy companies on our list include Canadian Natural Resources Ltd., Imperial Oil Ltd. and Teck Resources Ltd.

Moving away from a sector-level analysis, two 2020 initial public offerings made our list, led by Nuvei Corp., a global payment services provider, at No. 4 with total returns of 38.2 per cent from Nov. 9 to Dec. 21. GFL Environmental Inc., a waste management company, placed seventh with a return of 21.2 per cent during that time.

The information in this article is not investment advice. FactSet assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained above.

Select TSX-listed cyclical stocks 

CompanyTickerFactSet RBIC Sector Class.Mkt. Cap. ($ Mil.)1Y Ttl. Rtn. (%)YTD Ttl. Rtn. (%)Nov. 9 One-Day Ttl. Rtn. (%)Nov. 9 - Dec. 21 Ttl. Rtn. (%)50D MA Price ($)Dec. 21 Close ($)Div. Yld. (%)
Suncor Energy Inc.SU-TEnergy33,050.0-46.7-46.924.743.2419.2521.673.9
Cdn. Natural Res.CNQ-TEnergy35,632.5-20.9-21.722.643.1626.9530.175.6
First Quantum Min.FM-TNon-Energy Mat.15,166.871.967.20.642.1216.8522.000.0
Nuvei Corp.NVEI-TFinance10,657.2n/an/a-4.938.1857.7877.130.0
WSP Global Inc.WSP-TIndustrials13,641.036.137.42.136.2597.62120.161.2
Imperial Oil Ltd.IMO-TEnergy17,515.1-27.4-27.917.430.7921.1723.863.7
GFL EnvironmentalGFL-TBusiness Serv.11,223.7n/an/a-0.621.2231.7634.390.2
TD BankTD-TFinance129,815.41.73.15.720.1365.7771.504.4
Bank of Nova ScotiaBNS-TFinance82,190.6-2.1-1.75.820.1061.6367.875.3
Teck Resources Ltd.TECK-B-TEnergy12,190.24.53.12.920.1019.9722.900.9

Source: FactSet

Arjun Deiva, CFA, is a vice-president at FactSet Canada’s consulting division.

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