Canadian Equity Market Darlings and Dogs: February 2014 Update

February 14th being Valentines Day, it's a good time time for our semi-annual look at the Canadian equities market to see which sectors and companies the market loves (the Darlings) or shuns (the Dogs). To do that we don't count flowers, champagne or chocolates, we compare the relative weightings of sectors and stocks in two ETFs:

• the iShares S&P/TSX 60 Index Fund (TSX symbol: XIU), which selects its holdings and weights based on market capitalization and thus tracks market sentiment, against 
• the iShares Canadian Fundamental Index Fund (CRQ), which chooses holdings based on past hard accounting results likes sales, dividends, cash flow and book equity value

We will also examine interesting changes in the Darlings and Dogs from previous comparisons in August 2013, February 2013, August 2012, January 2012, June 2011 and the original post in April 2010.

The Numbers
The table below shows the companies and the sectors colour-coded - Darlings in Green and the Dogs in Red. The table also shows the change in internal weighting over the past six months for each ETF, which tells us stocks and sectors that have been moving up or down, either in terms of price (XIU) or fundamentals (CRQ). The bigger shifts are highlighted in Bold.

(click on table image to enlarge)

As a cross-check to be sure the sector differences are not due to the fact that CRQ has 28 more holdings than XIU's 60 (which might tend to result in XIU being more concentrated and have higher individual percentages than CRQ) we've re-calculated weights for CRQ using only its top 60 holdings like XIU. This adjustment for the most part makes little difference to the results but it does matter a lot for the Consumer Discretionary, Information Technology and Utilities sectors and two banks - TD and Scotiabank.

Financials - Continuing the trend we noted last August, the convergence of the market view and the fundamental view is almost complete on an individual stock basis. Today there are no real Darlings amongst Financials, and there are only two Dogs - Manulife (MFC) and Sun Life (SLF).  That CRQ continues to have a much heavier weighting in our table in the Financials seems to be a quirk of XIU's construction.  Several Financial companies that are in CRQ such as Great West Life, Power Financial, Fairfax Financial Holdings (see the list of the main stocks not held by the other fund at the bottom of the table) don't even figure in the XIU portfolio even though those companies are firmly within the top 60 largest market cap stocks on the TSX.

Energy - The situation is much like August. There has been no further convergence of market view with fundamentals. CRQ still has more weight in Energy than XIU, thus keeping the sector as a Dog. However, one big company - Enbridge (ENB) - is still a market Darling. Encana (ECA) meanwhile remains as the perpetual and the most extreme Dog, with the largest difference in weighting between XIU, where it is in 21st place at 1.28% and CRQ, where it is 7th at 3.67% adjusted weighting.

Materials - Not much has changed in this sector either. Perpetual Darlings Potash Corp (POT) and Goldcorp Inc (G) remain so with stock prices at levels significantly higher than accounting fundamentals justify. Apart from those two stocks, the difference in weight between XIU and CRQ is due to the fact that XIU includes several miners excluded from CRQ, and whose cap weight is not in the top 60 anyway.

Telecommunications - As the expression goes, plus ça change, plus c'est la même chose - the two Darlings BCE Inc (BCE) and Telus (T) continue to be the object of market desire, being vastly overweight in XIU compared to CRQ.

Industrials - Canadian Pacific Railway (CP) continues its resurgence as a Darling, which along with perpetual Darling - Canadian National Railway (CNR) - makes the whole sector so.

Consumer Discretionary - This sector has fallen out favour and is now a mild Dog. Despite having two extra sector companies in XIU that add 1.18% in weight, the sector has less weight than it does in CRQ. Magna International (MG) is the largest example of the unloved in this sector.

Consumer Staples - It's steady-as-she-goes in this neutral sector. Individual companies themselves remain in balance too.

Health Care - The market loves both companies in this sector - Valeant Pharmaceuticals (VRX) and Catamaran Corp (CCT). By fundamentals, Catamaran is too small even to be included in CRQ yet it is the 32nd largest holding in XIU.

Utilities - Though there is one extra utility in CRQ, it puts a lot more weight in this sector. The market thinks the sector and individual companies are Dogs.

Information Technology - Blackberry (BB) continues its fall. As the fundamentals are catching up with the market view, it is less of a Dog.

The Darling and Dog sectors and stocks since 2010
Most sectors and companies are still in the same position of being either Darlings - Materials (Potash Corp and Goldcorp), Healthcare (Valeant) and Telecommunications (BCE and Telus) - or Dogs - Financials (Manulife and Sun Life) and Encana. Utilities and Consumer Discretionary are back to being Dogs. The brief moment last August when Darling sectors outnumbered Dogs has ended and there are now five Dog sectors and only four Darling sectors.

(click on image to enlarge)

How do the Darlings and Dogs stocks' numbers look?
As before, we checked the stocks in a Globe&Mail WatchList to see recent stock and company financial performance. This time we have a bit of a surprise. The table screenshot below shows surprisingly that Dogs Manulife and and Sun Life both have performed well! Manulife in particular looks interesting. It has just reported good earnings, continuing its recovering financial performance. Yet it's Price/Earnings is reasonably low at 14. As we said last August, perhaps there is more value yet to be recognized.

(click on table image to enlarge)

Valeant is the other end of the spectrum. To use our Valentine's Day theme, it is like an exciting affair, losing money but on an aggressive acquisition strategy that seems to enthral. Will it turn out to be long term love or just a disappointing affair?

XIU and CRQ, or other broad market funds can also be used directly as diversified investments for those investors who do not feel confident, or who don't have the time, to investigate individual stocks. The differences in weightings and holdings are only a couple of aspects in comparing the two ETFs. See our previous posts reviewing Canadian equity ETFs here, here and here.

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.