Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
BofA Securities U.S. quantitative strategist Savita Subramanian posits ‘summer sadness’ for the S&P 500. Ms. Subramanian has become bearing enough to screen for short ideas,
“‘Summertime sadness’ for the S&P 500? We continue to see more downside than upside risk to the S&P 500 through year-end: equity sentiment is close to euphoric, valuations look frothy, a continued Value rotation suggests downside to the index which is top-heavy in Growth stocks, and a potential tax hike poses risks. Seasonality could also suggest weakness from here: strength in July tends to be front-end …and August/September tends to be a historically weaker period for S&P 500 returns (below-median returns in August, and September typically a negative month). While we still see opportunity in pockets of the market (value stocks, high quality stocks, small caps, select cyclicals), here we focus on S&P 500 ideas with potential downside based on our quantitative work.”
The screen for short ideas – or at the very least stocks to avoid – involves “stocks that rank poorly (bottom two quintiles) on the combined rank of three factors (one technical, one quality and one valuation factor): 1) 12m Performance +1m Reversal, 2) Return on Assets (ROA) and 3) Free Cash Flow to EV (FCF/EV). We limit to Underperform-rated stocks by BofA fundamental analysts”
The list of 15 vulnerable stocks is American Airlines Group Inc., Albermarle Corp., Align Technology Inc., Aptiv PLC, DTE Energy Co., Genuine Parts Co., Interpublic Group of Co.s, Iron Mountain Inc. , Lumen Technologies Inc., Royal Caribbean Group, Molson Coors Beverage Co, Under Armour Inc., United Airlines Holdings Inc., V.F. Corp. and Walgreens Boots Alliance Inc.
“@SBarlow_ROB BoA: “Get your shorts on”” – (research excerpt) Twitter
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RBC’s Greg Pardy, global head of energy research, published the bull case for oil sands stocks,
“We envision that Canada will become sustainably long export pipeline capacity commencing in 2022 as the Line 3 Replacement and Trans Mountain Pipeline Expansion (TMX) collectively add 860,000 bbl/d of net export capacity … Despite enormous free cash flow generation amid reset cost structures, Canada’s oil sands-weighted majors have witnessed relative valuation compression vis-à-vis major oil companies in the US and Europe over the past 18 months, despite comparable balance sheets … We believe this valuation dynamic largely reflects ESG factors … Where this all leads to is a potential valuation rerating of Canada’s oil sands weighted majors as the market narrative improves amid better E scores and institutional investors revisit the fundamental strength of the oil sands model to generate free cash flow.”
“@SBarlow_ROB RBC: Bull case for oil sands” – (research excerpt) Twitter
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Also from BofA Securities, the firm’s widely-read monthly survey of global portfolio managers uncovered some surprising changes in fund positioning (my emphasis),
“Bottom line: investors much less bullish on growth, profits & yield curve steepening, have unwound junk>quality, small>large, value>growth trades back to Oct’20 levels (pre-vaccine/election), but maintain big longs in stocks (back to tech) & commodities. Cyclical “boom” has peaked: July growth expectations @ 47%, down from 91% peak in Mar’21; global GDP & EPS readings show macro momentum weakest since Q3′20… expectation for US infrastructure stimulus down to $1.4tn (was $1.9tn in Apr’21); investors predicting higher inflation @ 22% (was 93% in April); …Where reflation was unwound: while stock, commodity & sector positions show little unwind of reflation trade, relative positioning in junk vs quality, small vs large, value vs growth slumped to lowest since Oct’20; any resumption of reflation trade via China ease, US infrastructure stimulus, yield curve steepening likely to be seen in these trades first.”
" @SBarlow_ROB A ton of ‘stop and reverse’ PM positioning reflected in BoA global fund manager survey this month” – (research excerpt) Twitter
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See also: " Reflation trades aren’t working - but these stocks might” – Barlow, Inside the Market (newsletter)
Diversion: “What Is the Most Damaging Conspiracy Theory in History?” – Gizmodo
Tweet of the Day: “@TheStalwart Lumber just wiped out its 2021 gains. bloomberg.com/news/articles/… " – Twitter
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Scott Barlow