A daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
BofA Securities U.S. quantitiative strategist Savita Subramanian has been cautious about equity returns for 2022 but finds some specific opportunities available after recent volatility,
“The S&P 500′s 7.5% loss marks its weakest start since 2008; the NASDAQ’s -11.4% start hasn’t been as bad since 1972. 61% of S&P 500 stocks are more than 10% below 52-week highs, 24% are in a relative bear market (>20% drop) with 42% of S&P 500 Tech stocks in this category. It may be too early to buy Tech wholesale– Info. Tech. and Comm. Services are crowded, expensive (note) and in many cases susceptible to rate risk. But we find some Tech stocks along with other companies that now look attractive … Fed’s dual mandate doesn’t include supporting the S&P … Of the 196 stocks lagging the S&P 500 year-to-date, we extract a short list - 15 companies - with strong fundamentals and less macro vulnerability. We screen for Buy-rated stocks that have underperformed the S&P 500 YTD, offer higher Free Cash Flow to Enterprise Value (FCF/EV) vs. sector peers, and stocks that fail to exhibit statistically strong relationships with rates and are labor-light relative to sector peers.”
The 15 stocks on the list are Applied Materials Inc., Broadcom Inc., CarMax Inc., Cisco Systems Inc., CSX Corp., D.R. Horton Inc., Home Depot Inc., KLA Corp., Lam Research Corp., Lowe’s Companies Inc., Monster Beverage Corp., NRG Energy Inc., Penn National Gaming Inc., Pfizer Inc. and Teradyne Inc.
“BofA: “Screen: Buy-rated underperformers with strong fundamentals and less macro vulnerability”” – (table) Twitter
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UBS strategist Keith Parker sees five reasons to be bullish and one reason for concern,
“Defensives have overperformed the model by 2-3%, with growth sectors in line. We see room for select cyclicals to catch-up, notably Cap Goods, Banks and Consumer Durables which have undershot our model… tailwinds now > headwinds? … Fed/rates - a lot is already priced: The market expects +100bps of hikes this year indicating little room for more hawkish pricing. The 9% S&P selloff is the same as in 1994 and 2004 when the Fed hiked >200bps in the next 1y … COVID cases to fall, growth data likely improves … Q4 earnings beats: Q4 earnings should drive a leg up in the S&P 500 with a ~9% EPS beat. Outlooks remain key, particularly for margins… Buybacks to jump, positioning u/w[ underweight]: The pace of weekly corporate flow from buybacks+dividends is set to jump fivefold the next 2-3wk … Valuations have cheapened: S&P 500 12m fwd PE has de-rated 9% to ~19.5x, close to our end-2022 target of 19.2x … Russia tensions an added downside risk”
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Morgan Stanley energy analyst Martijn Rats sees three reasons for the crude price to exceed US$100 this year.
His colleague Devin McDermott provided his top ideas in the sector which include Canada’s Cenovus Inc.
The firm’s research marketing team provided a summary of both recent reports (my emphasis) ,
“MS Chief Global Oil Strategist Martijn Rats suspects that by the middle of the year, the oil market will likely see three critical factors simultaneously at low levels: 1) low inventories - these have fallen substantially in 2021 already, but on his estimates, will be lower still by end-2022, 2) low spare capacity - this has already come down from ~6.5 mb/d a year ago, to ~3.4 mb/d at the moment but will likely drop below 2 mb/d by mid-year, and 3) low investment, which is still close to the level of the IEA’s ‘Net Zero by 2050′ scenario in which consumption and production are assumed to fall ~30% by 2030, whilst actual demand shows no such trend. If Brent were to stay at $88/bbl, he notes that spending on oil would amount to ~3.5% of global GDP this year. That is still modest in a historical context - it averaged ~4.5% consistently throughout 2011-14, in his view. To reach that percentage again, he expects Brent would need to rally to ~$110/bbl, although sizeable regions of the world would already be at an oil-burden-on-GDP equal to the 2011-14 level if Brent were to reach $100/bbl. He suspects that Brent will need to rise to that latter level, which is his new forecast for 2H22 and 1H223″
“MS Research Analyst Devin McDermott highlights that rising costs and the need to stabilize declining well inventories means spending will need to move higher in 2022 despite limited production growth…. He forecasts median y/y capex increase of ~12% across his E&P coverage. Importantly, he points out that FCF [free cash flow] yields are still positioned to rise from ~11% in 2021 to ~18% in 2022 ($80 WTI). While strong FCF, discounted valuations, and a constructive oil price outlook continue to support his Attractive sector view, the prospect of rising costs alongside 2022 guidance updates biases Devin toward more defensive positioning heading into 4Q earnings. Specifically, he prefers exposure to producers with scale including COP (OW[ overweight], $96 PT[price target]), EOG (EW, $121 PT), CVE (CVE CN OW, CAD22 PT), OXY (OW, $50 PT), and XOM (OW, $95 PT)”
“MS on oil: “‘Triple Deficit’ becomes ‘Triple Digits’ “” – (research excerpt) Twitter
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Diversion: “MUST READ: Why old music is better than today’s new music” – A Journal of Musical Things
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Scott Barlow