Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
BofA Securities quantitative strategist Savita Subramanian warned clients that markets overall were approaching the highest levels of euphoria since the financial crisis and likely returns on the S&P 500 are well below average for the next decade. The strategist does see opportunity in small cap value stocks,
“Following a 16% gain in 2020, stocks now trade at 22.5x earnings, largely in line with the August peak level (22.7x), despite a ~40bps jump in the 10-year yield. Sentiment has been getting more euphoric, as our Sell Side Indicator - a contrarian sentiment model - is at the closest level to the “Sell” threshold since the financial crisis. Stocks still look more attractive to bonds (albeit less so than before), but valuations suggest equity returns are likely to be sub-average (~5%) over the next decade … we still continue to prefer small caps over large caps for 2021 … One of the reasons is relative valuation, where despite elevated captions for both size segments vs, their own histories, small caps’ relative P/E vs. large caps is still at a two-decade low, suggesting more re-rating potential (or de-rating for large)’
“@SBarlow_ROB BoA: Extreme froth, prefer small over large cap” – (research excerpt) Twitter
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Citi analyst Christopher Danely is really bullish on semiconductor stocks in the short term,
“We expect substantial upside to estimates during earnings season, driven by double ordering and inventory builds resulting from extending lead times. Our checks indicate that lead times are stretching out amid shortages of various components from microprocessors to power management. As we stated in our December note, we recommend investors buy any dips as we believe the upside from inventory build and double ordering should last at least two quarters. We are also moving Micron to our top pick, replacing Qualcomm. Our Buy-rated stocks are MU, TXN, QCOM, ADI, ON, AVGO, NVDA, LRCX and MRVL… We expect consensus estimates to increase substantially during earnings season as a combination of better-than-expected demand and conservative capacity additions by semiconductor companies has resulted in shortages and extended lead times… Remember Rule #7 - Buy semis when lead times go out.”
“@SBarlow_ROB Citi is very bullish on semis” – (research excerpt) Twitter
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The Financial Times’ Alphaville site quoted Goldman Sachs research showing that companies with no profits are leading the market, adding to fears of an overheated market,
“[The chart] shows a Goldman Sachs constructed index of non-profitable US listed firms, and it’s fair to say that after a few years of trundling sideways these companies’ share prices have done rather well since the Covid crash… Ay caramba! … Now there are two ways to frame this … One is that the stock market has totally lost its marbles, and in a bid to make as much money in as little time as possible has decided to become one giant momentum trade which consumes ever more of itself as it feeds itself. Plausible sure, but a bit simplistic for our tastes. The second take is that a lot of these companies -- such as Cloudflare, MongoDB and Roku -- are high growth, high-gross margin companies which should be re-investing all of their revenues back into the business to achieve scale. In fact, if they were making profits, it would be an admission that their end markets aren’t as big, or as lucrative, as once thought. The reality is, both are true.”
“@SBarlow_ROB From Alphaville: No-profit companies skyrocket” – (chart, excerpt) Twitter
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Diversion: The Ringer’s Rewatchable podcasts, where hosts discuss the most popular movies of previous decades, is still one of my favourites – “‘The Terminator’ With Bill Simmons, Chris Ryan, and Shea Serrano” – The Ringer
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