Daily roundup of research and analysis from The Globe and Mail market strategist Scott Barlow
BMO chief economist Doug Porter detailed the decline in inflationary pressure in a report Tuesday night,
“Canada’s CPI continues to subside after last spring’s unsettling sprint. Beyond the drop in pump prices last month, we also saw a record monthly drop in appliances (-4.1%), reinforcing the point that supply chain issues are fading as a driving factor. . Keep in mind, however, that service prices continue to rise by 5.6% year-on-year, which suggests some persistence. Piecing together some of the underlying threads, the three-month trend in seasonally adjusted prices, excluding food and energy, declined at an annualized rate of 3.7%. That’s less than half the peak reached in May and the slowest in almost a year. It is also below the level of short-term interest rates, which suggests that the BOC may be close to finishing its rise. However, the 12-month trend remains high at 5.3% (and most core measures hover around 5%). And even the much more moderate 3-month pace is still above the BoC’s 1% to 3% comfort zone, and is at the higher end of trends seen in the two decades prior to the pandemic, surpassed only by the increase in car insurance rates in 2002. Conclusion: better, but still not good”
“BMO highlights Canadian inflationary pressure relief” – (research excerpt) Twitter
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RBC Capital Markets energy analyst Greg Pardy outlined his first pick among major Canadian oil companies,
Favorite Canadian Major: Canadian Natural Resources Limited. Distinguished worldwide. CNQ’s management committee structure and shareholder alignment are unique factors that set the company apart globally. CNQ’s long duration, low decline portfolio, anchored in low maintenance capital, provides the company with superior free cash flow generation throughout the cycle. Material return for shareholders. CNQ is currently allocating 50% of free cash flow (after dividends and base capital) for share buybacks, with the balance (less strategic growth/acquisitions capital) 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 history. CNQ has a 23-year track record of unbroken dividend growth. CNQ also increased its common dividend twice in 2022, representing a 45% increase over last year at an annualized rate of $3.40 per share.”
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Goldman Sachs’ chief US equity strategist David Kostin warned of declining profitability and recommended stocks with better return-on-equity (ROE) measures,
“Negative consensus earnings revisions and analyst expectations for a lackluster earnings season in the fourth quarter of 2022 continue the trend of weakening corporate profitability in recent quarters. The return on equity for the last four quarters of the S&P 500 decreased 29 basis points to 20.6% in the third quarter of 2022, driven by a squeeze in margins. At the sector level, 7 of the 11 sectors in the S&P 500 experienced a decline in ROE, with information technology suffering the largest decline and energy expanding the most. It will be difficult to achieve an upturn in ROE for the S&P 500 in 2023, as headwinds from higher cost of capital and higher taxes will put further pressure on profitability. We rebalanced our ROE growth basket in this report, which outperformed the S&P 500 by 10 pp in 2022.”
Mr. Kostin searched his universe for companies capable of improving ROE. Stocks likely to be 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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Deviation: “People’s Choice: Wildlife Photographer of the Year 2022″ – The Atlantic
Tweet of the day:
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