As before, we compare two large-cap Canadian equity ETFs with similar holdings but different weighting schemes to identify where the market is either pricing above (optimism aka Darlings) or below (pessimism aka Dogs) actual historical results - iShares' S&P TSX 60 Index Fund (symbol: XIU), which is the price-weighted ETF, and Claymore's Canadian Fundamental Index (CRQ), the historical fundamental accounting data-based ETF. The table below shows the companies and the sectors colour-coded - Darlings in Green and the Dogs in Red with the really big differences between XIU and CRQ highlighted in Yellow. The table also shows the change in internal weighting over the past year for each ETF, which tells us stocks and sectors that have been on the up- or down-swing, either in terms of price (XIU) or fundamentals (CRQ).
Financials - Dogs
- As a sector, Financials were Dogs a year ago and are even more so today with a dropping share of both funds, though the pessimism of the market with a faster drop in market cap has outstripped what is justified on the basis of CRQ's adjustments due to fundamentals
- Bank of Montreal (BMO), Manulife (MFC), CIBC (CM) and Sun Life (SLF) are all going in the same downward direction in both CRQ and XIU, indicating that actual trailing results in CRQ back up the direction of the market's forward looking price opinion as seen in XIU. However, is the market pessimism overdone as the drop in XIU much exceeds that in CRQ?
- Royal Bank (RY) on the other hand may be the victim of unwarranted market pessimism as it is going in the opposite directions in CRQ and XIU, rising in CRQ while dropping in XIU. Royal has just raised its dividend for the first time in years but its stock has dropped fairly significantly in the last few weeks and analysts have it rated as 'Hold'. Why?
- The sector was a Darling a year ago, is still a Darling today and is growing even more so
- Some validation comes from the increasing proportion of CRQ for such companies due to elements like rising sales and profits but the optimism in prices outstrips the reality confirmed so far
- One unusual contrary company is EnCana (ECA). It suffers from pessimism in the market - a much lower place in XIU last year that has got worse while its place in CRQ due to better fundamentals has gone up. What does the market know that the accounting results do not show is the critical question.
- The sector was a Darling last year and is getting more price affection from the market, contrary to the direction in CRQ
- BCE Inc (BCE) and Telus (T) are the main beneficiaries of this positive market opinion. Again, why so?
- They were Dogs a year ago and are Dogs today. Some of the imbalance is due to XIU not including companies like Empire Company (EMP.A) and Alimentation Couche-Tard (ATD.B). There is not much change on the price side but the decline of this sector within CRQ indicates that the market opinion is being proven right by results.
- From Darling sector of last year, it is now a slight Dog, XIU having dropped its seemingly undue optimism to the level of reality in CRQ.
- Research in Motion (RIM) is the explanation, its fall from lofty heights being widely observed.
- Dog status is little changed. The market / XIU seems to have little respect for the well-mannered Dogs of this sector as companies that are substantial in accounting terms do not achieve the market cap to be included in XIU but gain entry to CRQ. The list of absentees from XIU includes Canadian Utilities (CU), Emera (EMA) and Atco (ACO.X), the first two of which looked rather attractive in our recent review Electric Power Utility Stocks for the Income Investor?
Disclaimer: this post is my opinion only and should not be construed as investment advice. Readers should be aware that the above comparisons are not an investment recommendation. They rest on other sources, whose accuracy is not guaranteed and the article may not interpret such results correctly. Do your homework before making any decisions and consider consulting a professional advisor.
Disclosure: the blogger owns shares of RY and CRQ.