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Canadian stocks are ripe for 'bottom fishing': BMO's 13 (Grade A) candidates

Briefing highlights

  • Belski’s ‘bottom fishing’ candidates
  • BlackBerry posts profit on Qualcomm
  • BlackBerry shares sink on results
  • Annual inflation dips to 1.3 per cent
  • Markets at a glance


Gone fishing

Brian Belski says it's time to go bottom fishing for Canadian stocks, with a possible "surprise recovery" as the bait.

"After a stellar 2016, it has been a much tougher environment for Canadian equities so far in 2017," Mr. Belski, chief investment strategist at BMO Capital Markets, said in a report on the second half of the year.

"With investors increasingly laser focused on louder headline areas such as the U.S., Europe, and emerging markets, perhaps it is time to turn down the noise and come home to Canada again."

Mr. Belski, in rather entertaining fashion, asks and answers five questions as investors head into the second half of 2017.

The first question – and the answer is yes – is whether "it's time to bottom fish Canada."

"Huh? With the Canadian dollar bottoming and financials not imploding, we smell a surprise recovery coming," he said in the report.

"Yes, we have reached the point where everyone hates energy," he added.

"Just this week, the negative banter surrounding [West Texas Intermediate crude] entering a bear market, let alone extreme pessimism surrounding energy, was the loudest since 1Q 2016 – despite the fact that WTI is up over 50 per cent from the 2016 lows."

Question 2: Given the weakness in energy, is the time right for a recovery?"

Answer: "We caution patience – but the upside potential rebound in oil prices back to the upper end of the range is becoming more compelling, in our opinion."

Question 3: Are financial stocks the "real contrarian view?"

Answer (my personal favourite response): "Financials may in fact be the real contrarian view, with the sector only slightly outperforming the TSX and generally underperforming its global peers. Considering the 'end of the world' pomposity surrounding Canadian housing, we consider it a victory that the banks in particular are basically flat for the year."

Unemployment is at its low for the cycle, he added, and growth in lending is stable.

"We would focus on banks with strong cross-border businesses with the U.S. and insurance companies with asset management."

Question 4: Might materials be an opportunity in the next six months?

Answer: "With the materials sector in negative territory year to date and most commodity prices up on the year, we believe there may be opportunities within this sector in the back half of the year."

Question 5: What about sectors other than those big three?

"With the three largest sectors the source of weakness in the first half of the year, any rebound in these sectors likely means the non-big three sectors will underperform. However, with oil prices range-bound and emerging market growth stagnant, we still believe the long-term trend of outperformance remains intact."

Mr. Belski also listed several potential stocks to bottom fish.

"The longer-term trade is financials, and the tactical trade is energy," Mr. Belski added in an interview.

He gave several potential stocks for fishing, all of which are rated "outperform" by BMO and all exhibiting what are known as GARP, or growth at a reasonable price, characteristics:

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BlackBerry posts profit

BlackBerry shares slipped after the company posted a first-quarter profit that included a hefty settlement from a Qualcomm arbitration case.

BlackBerry posted a quarterly profit of $671-million (U.S.), or $1.23 a share, diluted, compared to a loss a year earlier of $670-million or $1.28.

Revenue tumbled to $235-million from $400-million.

The results include $815-million in "expense recovery" and $139-million in investment income related to the Qualcomm settlement.

"Our financial foundation is solid," chief executive officer John Chen said in unveiling the results.

"Our outlook for fiscal 2018 is unchanged," he added in the statement.

"We expect growth at or above the overall market in software and services."

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Inflation dips

Canada's annual inflation rate dipped in May to 1.3 per cent, coming below where economists had expect it.

That's down from 1.6 per cent a month earlier, Statistics Canada said.

The good news (if you happen to drive) is that prices at the gas pump slowed to half the pace they recorded in April.

The bad news (if you happen to eat) is that "declines in food prices continued to moderate," according to the agency.

Other good news (if you happen to turn on the lights) is that the rise in shelter costs slowed, with electricity prices easing 3.3 per cent largely because of Ontario.

"Growth is coming in hot, but inflation is not," said Nick Exarhos of CIBC World Markets.

"The details of the May [consumer price index] again highlighted a large divergence between the more selective ex-food and energy line item, which stands at a slim 1.4 per cent, and services inflation, which was almost a full percentage higher," he added.

"We're off the opinion that the latter is a better indicator of domestic slack, and where underlying inflation trends are heading."

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Markets at a glance





The Oracle of Ontario

"This one wasn't long, but it was to the point, and that got my interest," Warren Buffett says of his deal to rescue Canada's Home Capital Group Inc.

Read our extensive coverage by James Bradshaw, Jacqueline Nelson, Andrew Willis, Christina Pellegrini, David Berman and Rob Carrick.

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