THE STOCK: Saputo Inc.
RECENT PRICE: $33.10
THE TREND
Canadian equity investors must always have an eye on the materials and energy sectors. Because these commodity stocks account for 47 per cent of the S&P/TSX composite index, they set the tone for broad market performance. However, periods of sector rotation implies that nimble investors have increased their relative exposure to other parts of the economy - despite the diminutive capitalization of some Canadian non-resource sector industries. Strip away the driving force of the Potash Corp. takeover bid that elevated the materials sector last week and the market is presenting a summer brief worth noting: Consumer staples, health care and real estate stocks - now leading relative performers on the TSX - should be a larger part of investors' portfolios.
The relative size and impact of these sectors in Canada's stock market should be put into context, though. Consumer staples stocks, for instance, account for only 2.8 per cent of the benchmark S&P/TSX composite. By comparison, the U.S. consumer staples sector is 11.5 per cent of the S&P 500 index. The health care sector accounts for 12 per cent of the U.S. large cap index; but Canadian health care stocks amount to less than 1 per cent of the TSX broad market index. Needless to say, the performance of these sectors in Canada depends greatly on the investment grade of just a handful of stocks.
THE TRADE
One bullish trending consumer staple name that stands out is Saputo Inc. The stock of this Montreal-based cheese, milk and snack foods producer, a member of the S&P/TSX 60 index since early last year, has been hitting new 52-week highs in five of the last seven weeks. It is outperforming the Toronto market by 16 per cent over the past three months - the rewarding result of the company's successful growth strategy and high cheese prices. In a struggling market, a stock hitting all-time highs is a welcome exception. A 10-per-cent increase in its quarterly dividend announced with its fiscal first quarter results earlier this month is a clear indication the company feels even better about prospects going forward.
Is it too late to buy the bullish Saputo trend, a trend which fortuitously began with the heavy buying associated with the stock's inclusion in the blue chip index in February, 2009? Typically, trend followers like to wait for a stock to retreat to trend line support before adding to positions in up-trending stocks, anticipating a rally back to higher share prices. The stock's drop below $28 in early May would have been the most recent opportunity to capture that buying support. However, Saputo's move above $33 should entice new buyers prompted by the release of overhead resistance, fuelling a continued rally.
THE UPSIDE
Investors shifting to defensive stocks in the coming months will help elevate interest in Saputo. As market trading volume revives in September, shares in this attractive consumer stock should push to a valuation that advances the stock above $36.
THE DOWNSIDE
The trading of momentum stocks always demands that an investor be prepared for a reversal. Deciding what constitutes an appropriate exit will prevent excessive losses on a bad turn. Saputo's price chart suggests $31 as marker for re-evaluating this trade, although the defensive nature of this holding should override the sell impulse if the broad market slides.