Daily roundup of research aqnd analysis from The Globe and Mail’s market strategist Scott Barlow
RBC Capital Markets analyst Geoffrey Kwan provided his top picks in domestic diversified financials,
“Element Fleet (EFN) is our No. 1 high-conviction best idea. We still view the shares as undervalued, despite better share price performance in Q2/24. Over the next five years, we think EFN can generate an almost +15% EPS CAGR [earnings per share compound annual growth rate], +25% dividend CAGR, and ~3% share buybacks per year, which would see ROE increase from 15% to almost 25%. With the shares trading at 15.5x P/E and 7.6% FCF yield (2025E), we view EFN as undervalued … No. 2 best idea: Brookfield Asset Management (BAM). We see significant valuation upside driven by double-digit FRE [fee-related earnings] growth in the near term (and mid-teens FRE growth over the medium term) and 3.4% dividend yield. We think the additional higher stake in Oaktree and recent Castlelake investments should be accretive to FRE/share … No. 3 best idea: Brookfield Corp. (BN). BN’s shares trade at a 17% discount to NAV (which already includes our 30% discount to BN’s Real Estate IFRS fair value), with the current share price implying a 78% discount to the IFRS fair value of BN’s Real Estate assets. We think BN benefits from multiple catalysts including successful fundraising at BAM, improving financial performance within its Real Estate segment, insurance segment demonstrating consistent organic growth, and increasing monetization activity, which should increase NAV growth and narrow the discount to NAV”
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Wells Fargo analyst Christopher Harvey outlined concerns about U.S. earnings, particularly consumer spending-dependent companies,
“Per Bloomberg, only 44% of SPX firms have beat sales consensus, well below the typical ~60% rate … Small caps: Similar to large-caps, SML firms are also beating less frequently on the topline … EPS beat rates for both SML and SPX firms are in-line with recent history. • Per Factset, SPX y/y EPS growth to date is +9.8% compared to the +8.9% forecast at the start of earnings season. SPX earnings are coming in 4-5% ahead of consensus, below the 6.5% average over the past year and the 8.6% average over the past five years (per Factset). • The SPX’s 1.2% aggregate sales beat is consistent with the one-year average but below the 2.0% five-year average (per Factset). Consumer Notes from 2Q24 Transcripts: McDonalds: “lower-income consumers are dropping out of the market...” Nike: “softer traffic in [North American] stores...” Delta: “domestic seat growth... impacting yield performance in the main cabin” Lamb Weston: “restaurant traffic will remain soft for at least the first half of the year...” Pool: “lower demand for low-to mid-range pools; remains solid at the higher end…””
Diageo PLC, owners of the Johnnie Walker whiskey, Guinness, Tanqueray and Captain Morgan brands, among many others in the alcohol industry, continued the trend of weak consumer spending with disappointing quarterly numbers reported overnight.
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BofA Securities equity and quant strategist Ohsung Kwon thinks it’s show me the money time for AI-exposed stocks,
“inflation started the rotation, so it’s inflation that could end the rotation. As long as inflation and rates are in check, we believe the setup remains favorable for cyclicals. Our call on cyclicals is also predicated on growth holding up. But even if growth concerns escalate, potential de-grossing will be more negative for Tech than cyclicals, in our view. People would sell what they own and Momentum stocks are ~30% overweight by long onlies. Moreover, at the micro level, AI is proving to be much more expensive - since March, hyperscalers’ 2024E capex rose by $18B vs. sales +$2B. On the other hand, truckers and industrial semis confirmed the end of de-stocking, suggesting a 2H manufacturing recovery driving earnings growth for cyclicals”
The consumer-related comments from Wells Fargo above, combined with a U.S. PMI Manufacturing survey that remains below 50 (contractionary in month over month terms), makes me suspicious about economic growth holding up.
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BMO senior economist assessed the damage in the income-paying market sectors,
“Rate sensitive sectors of the equity market have been under assault since the tightening cycle began in early 2022. Since January of that year (the BoC began to raise rates in March), TSX real estate is down roughly 20%, while utilities are off more than 10%. The broad index has managed to advance nearly 10% over that period. Is that serious underperformance about to turn around now that the BoC has embarked on its easing path? There are some early signs of improvement, with both real estate and utilities bouncing in recent months. Over the past three months, utilities are up 10% while REITs have jumped 8%, outperforming both the TSX (+3.8%) and even the S&P 500 (+7.0%). We’re quite sure more rate cuts are coming—the true question is how quickly and how much”
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Diversion: “Blood tests to screen for Alzheimer’s disease on the horizon” – CBC
NEW*- Market Factors newsletter: “Big stock moves ahead - and the best investing paper ever written”