Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
Goldman Sachs chief U.S. equity strategist David Kostin warned investors to keep risk levels low in Hope for the best, but risk mitigation means also considering the worst to prepare for the worst,
“The equity market currently prices a soft landing. The relative performance of Cyclicals vs. Defensives stocks corresponds with a Manufacturing ISM Index level near 50, in line with its most recent reading (48.4) ... Under a soft landing (no recession) scenario, we forecast S&P 500 EPS growth will be flat, as revenue growth is offset by a decline in margins. Consensus forecasts EPS growth of 3 per cent ... But S&P 500 earnings revisions point to a hard landing. The current 3-month trend of S&P 500 forward EPS revision sentiment is the most negative reading outside of the 2008 and 2020 recessions. In a hard landing (recession) scenario, we forecast S&P 500 EPS will fall by 11 per cent (vs. our baseline forecast of flat EPS and consensus of +3%). The gap largely reflects our lower margin expectations”
The list of stocks Mr. Kostin believes will hold up best in a hard landing scenario is too long to list all of them. Companies most likely to be of interest to Canadian investors include Activision Blizzard Inc., Home Depot Inc., Costco Wholesale Corp., Church & Dwight Co., Medtronic PLC., Pfizer Inc., Microsoft Corp., Visa Inc., and Paychex Inc.
“Goldman Sachs’ hard landing portfolio” – (full table) Twitter
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It’s a good policy to always read Morgan Housel, and his most recent essay The Art and Science of Spending Money is typically insightful,
“I think you’ll see that a disproportionate share of those with the biggest homes, the fastest cars, and the shiniest jewelry, grew up ‘snubbed’ in some way. Part of their current spending isn’t about getting value out of flashy material goods; it’s about healing a social wound inflicted when they were younger. Even when “wound” is the wrong word, the desire to show the world that you’ve made it increases if you grew up snubbed out of what you wanted. To someone who grew up in an old-money affluent family, a Lamborghini might be a symbol of gaudy egotism; to those who grew up with nothing, the car might serve as the ultimate symbol that you’ve made it. A lot of spending is done to fulfill a deep-seated psychological need.”
“The Art and Science of Spending Money” – Housel, Collaborative Fund
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Scotiabank mining analyst Orest Wowkodaw is bullish on his sector because of extremely low inventory levels,
“Supply side pressures mute impact of slowing consumption. Although global growth has been slowing due to steeply rising interest rates, higher energy prices, Russia’s war on Ukraine, a strong US dollar, and until very recently, pandemic lockdowns in China, most commodity markets appear surprisingly tight in 2023 as ongoing supply side challenges have served to largely offset weaker consumption. Moreover, with visible inventories for many metals already at critically low levels (Cu and Zn are =<3 days), we anticipate a volatile yet relatively attractive pricing environment in the year ahead despite a highly uncertain economic climate in both China and ex-China markets. In the medium to long term, we continue to anticipate the emergence of a new commodities super cycle driven by growing demand from global decarbonization efforts to address climate change amplified by the impact of severe underinvestment in new production capacity… With average 2022E-2024E EV/EBITDA multiples of 6.4x, 6.7x, and 5.5x for the large/mid-cap base metal producers (lower 6.2x, 5.3x, and 4.6x at spot) vs. 3-year and 10-year average multiples of 5.3x and 5.8x, valuations appear relatively mixed. The equities are trading at an implied average Cu price of $4.28/lb (9% above spot). Given the solid FCF generation outlook for many, we anticipate meaningful shareholder returns to continue, led by FCX-N [Freeport-Mcmoran Inc.], LIF-T [Labrador Iron Ore Royalty Corp.], TECK.B-T [Teck Resources Ltd], and VALE-N [Vale SA].”
“Scotiabank bullish on mining sector thanks to low inventory levels” – (research excerpt) Twitter
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Diversion: “True or False: 10 Controversial Predictions About the Future of Streaming, Tech, and Media” – The Ringer