Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
BMO chief economist Doug Porter detailed the easing of inflation pressure in a late Tuesday report,
“Canadian CPI continues to calm down after last spring’s unnerving sprint. Beyond the plunge in pump prices last month, we also saw a record monthly drop in appliances (-4.1%)—reinforcing the point that the supply chain issues are fading as a driver. Note, though, that services prices are still up 5.6% y/y, warning of some persistence. Pulling some of the underlying strands together, the three-month trend on seasonally adjusted prices, excluding food & energy, eased to a 3.7% annualized pace. That’s less than half the peak hit in May, and the slowest in almost a year. It’s also below the level of short-term interest rates, suggesting that the BOC may indeed be just about done hiking. However, the 12-month trend is still lofty at 5.3% (and most core measures are holding around 5%). And even the much more moderate 3-month pace is still above the top of the BoC’s 1%-to-3% comfort zone, and is at the very high end of trends seen in the two decades prior to the pandemic—topped only by the spike in auto insurance rates back in 2002. Bottom Line: Better, but not yet good”
“BMO highlights easing of Canadian inflation pressure” – (research excerpt) Twitter
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RBC Capital Markets energy analyst Greg Pardy described his top pick amongst Canadian major oil companies,
“Favorite Canadian Major – Canadian Natural Resources Limited. Globally Distinguished. CNQ’s management committee structure and shareholder alignment are unique factors that distinguish the company globally. CNQ’s long-life, low-decline portfolio—anchored by low sustaining capital—affords the company with superior free cash flow generation throughout the cycle. Material Shareholder Returns. CNQ is currently allocating 50% of free cash flow (after dividends and base capital) to share repurchases, with the balance (less strategic growth capital/acquisitions) earmarked for debt reduction. Once CNQ’s net debt falls to $8 billion, the company plans to allocate 80%-100% of its free cash flow as incremental returns to shareholders. 23-Year Dividend Track Record. CNQ carries an uninterrupted 23-year track record of dividend growth. CNQ also raised its common dividend twice in 2022, representing a 45% increase last year to an annualized rate of $3.40 per share.”
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Goldman Sachs chief U.S. equity strategist David Kostin warned about declining profitability and recommended stocks with improving return on equity (ROE) measures,
“Negative consensus earnings revisions and analyst expectations for a lackluster 4Q 2022 earnings season continue the trend ofweakening corporate profitability in recent quarters. S&P 500 trailing 4-quarter return on equity declined by 29 bp to 20.6% in 3Q 2022 driven by a contraction in margins. At a sector level 7 of 11 S&P 500 sectors experienced declining ROE, with Info Tech suffering the largest drop and Energy expanding the most. An upwards inflection in S&P 500 ROE will be difficult to achieve in 2023, as headwinds from a higher cost of capital and higher taxes will place further strain on profitability. We rebalance our ROE Growth basket in this report, which outperformed the S&P 500by10 pp in 2022.”
Mr. Kostin screened his universe for companies capable of improving ROE. Stocks most likely of interest to Canadian investors include Walt Disney, Nike Inc., Keurig Dr. Pepper, Becton Dickinson, Baxter International, Boston Scientific, NVIDIA Corp., Corning Inc., PayPal Holdings, and Advanced Micro Devices.
“GS: ‘Constituents of our ROE Growth basket’” – (full table) Twitter
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Diversion: “People’s Choice: Wildlife Photographer of the Year 2022″ – The Atlantic
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