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Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow

TD mining analyst Greg Barnes is looking for a strong recovery for his sector in the next 18 months (my emphasis),

“We would have preferred to have been more proactive and underweighted the sector two months ago, but, in our view, the stocks now represent compelling value at ~0.6x P/NAV (based on our revised commodities price deck) and ~4.6x EV/2023 EBITDA. We estimate that copper equities are discounting a copper price of $2.94/lb, effectively in line with the 90th percentile of the cost curve. Historically, at these levels, share prices have priced-in a recession and strong returns can be realized over the ensuing 12-18 months. If we look at large-cap base-metal equity returns from the bottoms in 2009, 2016, and 2020, the average is ~300% over the following 12 months … On average, we have reduced our base metal price forecasts by ~5% for H2/22 and ~11% for 2023. Our lower price deck reflects weaker growth expectations into 2023 and the current sharp sell-off in prices. Chinese COVID-19 cases have shown signs of leveling off, but the persistent fear of further lockdowns, along with bearish macro sentiment, weighs heavily on the industrial metals complex. Copper has underperformed as these macro headwinds weigh on growth and metals sentiment; energy-intensive metals such as zinc have outperformed as European energy prices continue to surge, resulting in supply curtailments… Teck Resources remains our ACTION LIST BUY, with a reduced C$57.00 target price (from C$70.00 previously). Among the midcap names, our top picks are Altius Minerals and Champion Iron. Solaris Resources remains our top pick among the developers.”

“TD now bullish on mining stocks” – (research excerpt) Twitter


RBC analyst Darko Mihelic sees domestic bank stocks priced for a mild recession,

“Valuations seem to already be reflecting a shallow recession. The Canadian bank index is trading at 1.53x book value per share, significantly below the historical average since 2010 of 1.80x and the longterm historical average of 1.99x. During the last shallow and short recession in 2015, the Canadian bank index troughed at 1.49x book value per share, which is close to the current P/B multiple . We think major positive catalysts (like a weak inflation print or maybe the end of the war in Ukraine) are difficult to see shorter term. That said, the unemployment rate (the most important metric) does not seem to be deteriorating either - so we think the Canadian banks stocks may generally trade range bound shorter term until there is greater clarity on the state of the economy.”

It seems like a good time to slowly add to bank positions particularly in light of attractive yields.


BofA Securities quantitative strategist Savita Subramanian warned clients that U.S. stocks might be cheaper but they’re not cheap (my emphasis),

“The S&P 500 now trades in line with its historical average forward P/E of 15.8x. But our forecast for 20% downside in EPS would drive the ratio well above average on next year’s $200 EPS (see our target & EPS update). Not just high inflation but inflation volatility argues for lower multiples: historically, the avg. trailing P/E amid inflation volatility regimes (rolling 3-yr CPI volatility over 1 std. dev. above the avg.) has been just 11.9x vs. a 16.5x average (1960 to now). The most bullish valuation metric of the last decade, the ratio of div. yield / 10-yr yield, is now below average at 0.50x vs. 0.66x. A 70bp rise in the equity risk premium (ERP) [definition here] since the April 2021 ERP bottom suggests a 70% chance of a mild recession has been priced in (based on the ERP increase during the early 90s), but just a 25-30% probability based on the average move in all prior recessions… Energy, Materials and Financials are more than or almost fully pricing in a full recession, while defensive sectors (Staples, Utilities, and Health Care) have priced in little if any recession risk (Exhibit 1). But interestingly, the biggest laggards YTD, Tech and Consumer Discretionary, have not priced in recession risk either”

“BofA: “The most bullish valuation metric of the last decade, the ratio of div. yield / 10-yr yield, is now below average at 0.50x vs. 0.66x”” – (research excerpt) Twitter


Diversion: “Little Ways The World Works” – Housel, Collaborative Fund

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