Daily roundup of research and analysis from the The Globe and Mail’s market strategist Scott Barlow
Credit Suisse global strategist Andrew Garthwaite is recommending an overweight in U.S. small-cap stocks with considerable evidence to back it up,
“The relative performance of small caps is closely following ISM new orders and seems to be currently pricing in no recovery in ISM (a pick up to 50 would imply c17% outperformance). ii) Given their higher leverage, small caps are very sensitive to credit spreads, but US small caps have not yet priced in the recent fall in spreads. iii) Small caps tend to outperform when inflation expectations rise (and we expect inflation to rise to 2.5% over the next 18 months from 1.3% currently) and the 30-5 year yield curve steepens (already at a 3-year high). iv) The P/B relative of small caps relative to large caps is well below its 2009 low and the yield relative is unusually high – P/Es are meaningless in the current environment with loss-making small caps back to peak levels (c33% of the Russell 2000). v) Since 1923, small caps outperformed by 2.3% a year. The biggest five stocks as a percentage of market cap have never been more than 30% of market cap in any major market and are now already 23% in the US”
Personally, the thought of buying small caps in the current environment is terrifying, and that could be yet another argument in CS’s favour.
“@SBarlow_ROB CS’s Garthwaite likes U.S. small caps” – (research excerpt) Twitter
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Citi analyst Prashant Rao has updated his outlook for the Canadian oil patch and provides a list of preferred stock picks,
“Canadian producers have taken prudent actions to conserve cash in the downturn: cutting negative netback production, suspending dividends/buybacks, reducing capex, and boosting liquidity… Based on changes to our commodity price forecasts and operational assumptions, we are on average raising 2Q20E FFO/sh [funds from operations per share] by 38%, our 2020E FFO/sh by 38% and our 2021E FFO/sh by 7%. On balance, lower [weighted average cost of capital] across the group generally drive increases in our DCF-derived target prices.”
Mr. Rao’s top picks are Suncor Energy Inc., Cenovus Energy Inc., Imperial Oil Ltd. and Husky Energy Inc.
“@SBarlow_ROB C on Cdn oil stocks” – (research excerpt) Twitter
" @SBarlow_ROB C: top picks in Cdn oils (with reasoning)” – (table) Twitter
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A veritable ocean of government of Canada bonds is set to be issued, but National Bank economist Warren Lovely notes that the Bank of Canada is also set to buy a big chunk of them,
“The QBS doesn’t give details on average auction sizes and/or the total amount to be borrowed. Applying our own tenor-specific guesstimates to the planned schedule, it looks like more than $100 billion of fresh GoC bonds will be auctioned in the coming quarter. Again, that’s an unprecedented tally—it’s not even close based on the historical record. But before you start thinking that’s too big a mouthful for the market to comfortably swallow, do the math (really the subtraction) on how many bonds the Bank of Canada will be taking out of the system via QE … Strip out the BoC’s allotment at auction (we assume a steady 13%), subtract QE-related purchases in the secondary market, further control for maturities, and the remaining net issuance might be around $18 billion for the quarter”
“@SBarlow_ROB NBF: don’t worry about the ocean of GoC debt to be issued, the BoC is going to buy most of them” – (research excerpt) Twitter
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Diversion: “While Trump eyes tariffs, Americans really want more Canada” – Maclean’s
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Scott Barlow