Full episode: Market Call for Friday, November 9, 2018
Rob Tétrault, senior vice-president portfolio manager and head of the Tetrault Group, Canaccord Genuity
Focus: North American large caps
Our focus today is on the S&P 500 historical forward returns from the 10 per cent correction mark, a landmark achieved about two weeks ago on an intraday high-low basis. In total, there have been 30 corrections of 10 per cent or more since 1955. In a rising Fed funds environment (18 observations), without a recession (11 observations), the one year S&P 500 forward returns averaged 15.5 per cent. But if a recession unfolds (seven observations), the S&P 500 declined 4.7 per cent on average. Obviously, there are still unresolved matters which could derail the ongoing rally, such as the G20 summit, the ongoing Brexit negotiations and the Italy-Europe budget deadlock. That said, notwithstanding one’s view on the economy, history shows current market weakness should be bought. Forward returns then will diverge markedly whether or not we’re headed into a recession in 2019. This means investors still have a couple of months to formulate their economic outlook and decide whether to sell or stay put. Hence, we reiterate our overweight on equities as an asset class, with a preference for cheap EAFE and emerging markets. Depending on what happens with the U.S. in the next year, we feel there will likely be a relatively strong correlation to Canadian market performance, with the added stipulation that commodities could propel Canada to increased returns.
UPDATE: I sold a portion of Distinct Infrastructure Group (a top pick from March) when it hit $1.50 and the rest when it dropped below 80 cents. I didn’t trust management.
Alphabet continues to be a global market disruptor. This is a long trade. I liked it when I came here in late September and I like it more at this price. Their most recent quarter earnings didn’t really disappoint, but the rout on techs stocks spurred a selloff. Earnings per share (EPS) beat consensus and our estimates by about 25 per cent; year-to-year paid click growth came in ahead of expectations and accelerated compared to the second quarter. We have a $1,140 target on it, but given the fact that they control information, they will find new ways to create revenue streams in the long term. Our price target is at $1,140, based on 24 times our 2019 GAAP EPS estimate of $47.49. I expect earnings beats in the next year. This is a long hold for me.
“Be fearful when others are greedy and greedy when others are fearful.” We liked Suncor because it’s the strongest name in the sector. I like management, and given the steep correction in all energy companies, we’re buying at a fairly decent discount. Given the recent volatility in western Canadian light and heavy differentials, we’re focused on the flexibility of the company’s integrated assets, which insulate its exposure to market effects. We have a $67 price target on the stock, and with the 3.2 per cent dividend yield expected to increase given the significant normal-course issuer bid in place, this makes it a good spot to be paid to wait while the sector rebounds.
This is a safer play. The utility company beat expectation on earnings in Q3, and has strong technical signs. Again, we’re getting paid 4 per cent to wait here in a relatively safe asset class that should see some price appreciation in the future. On the technical side, there are positives: it hit a relative strength index (RSI) reading of more than 50, its current price is over the 50- and 200-day moving average, the moving average convergence divergence (MACD) signals a mechanical buy, and the on-balance volume (OBV) is trending positive. These all point to some strong technical momentum likely coming. This is a play where if we get a 10 to 15 per cent bump on the stock price in the near future, I would likely liquidate the position.
PAST PICKS: SEP. 21, 2018
SURGE ENERGY (SGY.TO)
- Then: $2.56
- Now: $1.73
- Return: -32%
- Total return: -32%
BROOKFIELD ASSET MANAGEMENT (BAMa.TO)
- Then: $57.20
- Now: $56.41
- Return: -1%
- Total return: -1%
- Then: $1172.12
- Now: $1078.17
- Return: -8%
- Total return: -8%
Total return average: -14%