Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
RBC Capital Markets analyst Robert Kwan previewed earnings results for the dividend-centric energy infrastructure sector,
“Interest rate exposure is likely to be a key topic. Only Gibson Energy, Keyera and Pembina stand out as being self-funded for their capital expenditure programs. Even the “equity self-funded” names (i.e., Brookfield Infrastructure, Hydro One, most of the rest of midstream) have come under pressure as investors have been concerned about incremental debt required to fund growth and the resulting downward pressure on project returns stemming from higher interest expense. We have found investors are most cautious on names that require both debt and equity (e.g., DRIP, ATM, discrete equity, asset sales) … What we like heading into the quarter? In short, Midstream. The high commodity price environment, strong basin fundamentals and lower perceived valuation exposure to interest rates by investors have driven stronger investor sentiment for Midstream among many investors within Canadian energy infrastructure. Further, we have made no changes to any of our quarterly estimates for the Midstream companies and if anything, we believe our estimates are conservatively positioned. Headed into the quarter, we would focus on Pembina and Keyera given strong commodity prices”
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BMO senior economist Sal Guatieri reports that despite an ongoing housing affordability crisis, residential construction spending has stalled,
“Canadian residential construction spending (in constant dollars) rose 1.6 per cent in August, breaking a string of 12 consecutive declines. The year-over-year slide of 27 per cent is the second worst on record dating back to 2011 (after July’s 28 per cent) and spans both singles and multiples. The level is a little higher than during the darkest days of the pandemic. (By contrast, real nonresidential construction spending is almost unchanged in the past year, with strength in the industrial space countering weakness in commercial and institutional.) Labour shortages, expensive materials and high credit costs aren’t helping, nor are rising resale listings of late. Recent moves by the federal government to lower borrowing costs for developers and reduce sales taxes on the construction of rental units are helpful first steps. But the hoped-for building boom could be delayed until the Bank of Canada chops interest rates”
“BMO: “Double Homebuilding? Just a Steady Rise Would be Nice”” – (research excerpt, chart) Twitter
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Goldman Sachs chief U.S. equity strategist David Kostin is recommending defensive investment positioning through strong balance sheet, large cap stocks likely to buy back shares,
“The 10-year US Treasury yield reached 4.98 per cent this week, the highest level since July of 2007. Amid higher rates, we expect investors will continue to focus on balance sheet strength and avoid companies that are most vulnerable to increased borrow costs. Performance since the start of September has reflected this dynamic as strong balance sheet stocks outperformed weak balance sheet stocks by 4 pp [percentage points] . For companies with strong balance sheets, we expect investors will reward those firms returning cash to shareholders and will remain skeptical of companies making large capex investments at this stage of the cycle.”
Stocks in Goldman’s “Buybacks Basket” that are most likely to interest Canadian investors include T-Mobile U.S. Inc., MGM Resorts International, Quest Diagnostics, Salesforce Inc., Apple inc., F5 Inc., Applied Materials and Meta Platforms Inc.
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Diversion: The quest to understand tornadoes – Ars Technical
Scott Barlow