Thursday, 26 January 2012

Canadian Equity Market Darlings and Dogs: January 2012 Edition

Once again we look at sectors and companies that the TSX market favours (darlings, highlighted in green in our comparison table below) or dislikes (dogs, in red) to see how the situation has evolved from our previous reviews in June 2011 and March 2010. As before we do this by comparing the holdings of two ETFs - the iShares S&P/TSX 60 Index Fund (TSX: XIU), which selects and weights stocks by their market value and thus represents market opinion, and the Claymore Canadian Fundamental Index ETF (TSX: CRQ), which picks and weights holdings by accounting factors of actual dividends, cash flow, sales and book value.

Market Darlings
Almost two years after our first review, it is remarkable how persistent are some of the favoured sectors and companies.
  • Energy and Materials still receive the market's love, far outweighing what their tangible accounting factors would suggest. The market is looking forward to results that are even better than they are now for companies like Suncor (SU), Barrick Gold (ABX), Canadian Natural Resources (CNQ), Potash Corp (POT) and Goldcorp (G), the very same companies we listed in 2010. The promise is mostly yet to be fulfilled as these stocks' accounting results have not carried them much higher in the CRQ holdings. Potash Corp's latest just-released quarterly results show strong growth and a doubled dividend but analysts were described as disappointed in the Globe and Mail. Is this a case of over-optimism that will eventually be dashed? On the other hand, Encana (ECA) remains an unusual energy outlier, being far less valued in the market than its fundamentals indicate. Is this over-pessimism that will eventually be corrected? ECA recently attracted mention in the Globe and Mail as a stock meeting value investor criteria.
  • Telecommunications companies BCE Inc (BCE) and Telus Corp (T) have been darlings on our list all along as well. They have crept ahead somewhat in the CRQ weightings but what is it that attracts investors so much? Perhaps the high dividend yield, the growth in dividends, the relative price stability of the stocks, lowish P/E of around 14? Time has yet to tell.
Again, it is largely a familiar continuing story.
  • Financials continue to be vastly under-weighted, partly because of exclusion of major firms like Power Corp (POW), Fairfax Financial Holdings (FFH), Onex (OCX), Great West Lifeco (GWO) and partly because of troubled companies Manulife (MFC) and Sun Life (SLF). One thing that has changed is that big banks, with the one exception of Bank of Montreal (BMO), are now close in terms of market opinion and fundamental factors. BMO's market weight is still far below its fundamental weight - is that indicating a trading opportunity as it has started to move back into line with the other banks? Looking back, the market pessimism about Manulife seems to have been justified to a good degree, as the company's struggles have dragged it down on accounting measures reflected by CRQ. Looking forward, the question is whether those negatives have been overdone, since MFC's fundamentals still indicate a far stronger entity than the market estimates.
  • Consumer Discretionary & Staples, as well as Utilities stocks still find no market favour as they receive much smaller market weighting. It is a surprise since Utilities like Emera (EMA), Fortis (FTS) and Canadian Utilities (CU) have gained good returns over the past year while the TSX has declined.
These differences between holdings and weightings in XIU and CRQ provide a good starting point to investigate and possibly then invest in companies whose fundamental and market values are at odds. The answer could go either way, either that the market has mis-estimated, or that it has properly assessed the future, in a way that is not reflected in CRQ's fundamental factors.

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.

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