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Identifying companies with strong earnings momentum – an upward trend in forecast profits – has long been an effective investing strategy and this tactic is particularly relevant in a market environment where revenues continue to recover from full lockdowns and global quarantines.

A closer look at earnings momentum for Canadian large-cap companies uncovers an interesting list of economically sensitive investment opportunities based in the financial, mining and industrial sectors.

To find the stocks with the most rapidly improving profit outlooks, I first ranked all S&P/TSX 60 stocks by the three-month change in earnings outlooks – the percentage by which analysts had increased their earnings estimates for the next 12 months – using Bloomberg data. The accompanying table shows only those stocks where the percentage increase in the past three months (for next-12-month profit estimates) exceeds the index average of 5.9 per cent.

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I also excluded the two companies where forecast earnings were unavailable – Brookfield Property Partners LP and Canadian Apartment Properties REIT.

Rapidly improving profit outlooks

Select S&P/TSX 60 stocks ranked by three-month change in 12-month earnings estimates

CompanyTickerYTD Ttl. Rtn. (%)3M Ttl. Rtn. (%)Est. EPS Next 12M ($/share)1M Chg. in Est. EPS (%)3M Chg. in Est. EPS (%)
Shopify Inc.SHOP-T175.97.50.514.11,662.1
Cdn. Natural ResourcesCNQ-T-39.50.6-0.0343.993.5
Cenovus Energy Inc.CVE-T-60.5-14.6-0.0312.878.8
First Quantum MineralsFM-T-6.4-11.8-0.0343.168.9
Imperial Oil Ltd.IMO-T-51.0-25.0-0.09-41.765.7
Magna InternationalMG-T-
Teck ResourcesTECK-B-T-
Kinross Gold Corp.K-T100.
Canadian Tire Corp.CTC-A-T3.521.33.350.127.1
Barrick Gold Corp.ABX-T55.71.30.304.525.9
National Bank of CanadaNA-T-
Agnico Eagle Mines Ltd.AEM-T39.625.00.680.921.5
Wheaton Precious MetalsWPM-T74.34.50.318.320.4
Toronto-Dominion BankTD-T-13.4-
CCL Industries Inc.CCL-B-T-5.715.60.683.516.3
Royal Bank of CanadaRY-T-
Alim. Couche-TardATD-B-T8.9-2.20.480.212.6
Pembina Pipeline Corp.PPL-T-37.2-13.80.570.211.8
Kirkland Lake Gold Ltd.KL-T18.09.60.911.210.9
Inter Pipeline Ltd.IPL-T-
Power Corp. of CanadaPOW-T-14.812.50.710.07.4
Restaurant Brands Int'lQSR-T-
Manulife Financial Corp.MFC-T-
Waste Connections Inc.WCN-T17.53.10.66-0.36.1
Constellation SoftwareCSU-T20.1-5.28.48-0.96.1
S&P/TSX 60 Index-0.33.548.701.45.9

Source: Scott Barlow; Bloomberg

Shopify Inc., ranked No. 1 in the table, is really in a league of its own. The remarkable increase of more than 1,600 per cent in the earnings outlook is a function of both rapid growth and the fact the company is relatively young. Forecast profits for the next year have jumped from very small numbers – pennies a share – to a significant 51 cents a share.

There are a series of energy stocks near the top of the list – Canadian Natural Resources Ltd., Cenovus Energy Inc. and Imperial Oil Ltd. In these cases, the sharp increase in earnings projections is certainly positive for the stocks, but losses are still expected for the coming year.

The banks feature heavily on the list. Of all the stocks displayed, banks represent the most risk-averse way for investors to benefit from an economic recovery.

Bank profits climb with economic activity for two reasons. The first is the obvious – a growing economy means more lending activity and market transactions. The second reason is more activity is generally associated with a steepening yield curve – forward interest rate expectations and longer-term bond yields climb. Banks borrow at short-term rates and lend to clients at long-term rates, so a steepening yield curve increases the profit margins on loans.

Magna International Inc. and Teck Resources Ltd. have also seen sizable percentage increases in profit expectations in the past 90 days. These companies are near-pure plays on the global economic recovery – through the auto sector and commodity prices, respectively.

The output from this simple stock screen provided a positive surprise in that I didn’t expect this level of sector diversification. There are plenty of candidates for further research here, but the revenue for most of the companies listed is dependent on the sustainability of the economic recovery. Investors should keep in mind that a downturn in economic data could severely limit gains.

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