Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
CIBC Capital Markets analyst Robert Catellier weighed in on the yield-heavy energy infrastructure/power and utilities sectors,
“Questions on potential rate cuts and economic stability likely mean some allocation in utilities makes sense. While some firms are working to cure weaker balance sheets, it seems the market is still shunning turnaround stories (quality could continue to prevail). Despite better results, improving fundamental outlooks and intriguing value, Renewables stocks struggle to inflect higher … Improving organic growth prospects and solid financial positions have us favouring midstreamers like PPL [Pembina Pipeline] over larger-cap pipelines with funding requirements … Rate cuts/lower yields (and fewer negative headlines on clean energy) are needed to reinvigorate investor interest [in renewables]. BLX [Boralex] , BEP [Brookfield Renewable Partners] and NPI [Northland Power] are preferred names … ACO.X [Atco Ltd.], BIP [Brookfield Infrastructure Partners] and SPB [ Superior Plus] are our Outperformer-rated names [in utilities] … [in midstream/pipelines] results were generally in line with expectations (2 per cent below consensus, on average; six beats and two misses) given strong core infrastructure performance and marketing strength. KEY [Keyera Corp.] posted a notable beat on the back of strong marketing performance and record G&P and Liquids margins, and TRP [TC Energy] beat due to a milestone payment on CGL”
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Scotiabank recently held a retail REIT conference and the resulting summary report was called Lots of Friends Battling One Foe,
“We felt it was quite bullish on operations (peak occupancy/accelerating blended rent growth; CT REIT felt more balanced though), a view corroborated by our next-day Property Tour and CBRE lunch presentation. Post last year’s event, we asked if it was premature to aggressively buy CAD Retail REITs. Patience proved proper for most of 2023. We’re in the same camp for now, with catalysts to change our mind = market valuation focus reverting to P/NAV on more private market deals (we think later this year), more aggressive REIT “accretive dispositions”, a big narrowing in credit spreads (i.e., improved FFOPU [funds from operations per unit] growth) on a “Soft Landing” or strong recovery in residential land demand/values. Our top picks = CHP, CRR, CRT, and REI. Here is where we struggle. Near-peak occupancy + high lease spreads (Exhibit 7) + modest new supply (Exhibit 8) and yet our 2023A-2025E Retail REIT FFOPU CAGR is 2.7% (FCR best at 4.6%; SRU least at -0.4%), better than the 0% 2018A-2023A avg., but below our 3.5% sector forecast, incl. just using 2024. The issue = higher debt costs on refi are a formidable foe”
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BMO chief economist Brian Belski still believes Canadian investors are overly pessimistic but does not believe TSX outperformance is imminent,
“We believed sentiment was resoundingly negative and becoming worse. As we approach the end of the first calendar quarter of 2024, we maintain the view that analysts and investors remain overly cautious – fundamental metrics such as earnings, valuation, and operating performance in several areas are showing definitive signs of troughing. However, ‘troughing or bottoming’ is not quite the fuel to spawn the return to the … revival that we still expect to transpire. For instance, fourth-quarter earnings season was uneventful and provided little forward guidance. Furthermore, analysts continue to revise estimates lower and the growth outlook for the TSX is now in the mid-single-digit range out to 2025. In our view, we believe these more defensive outlooks are setting the stage for very beatable quarters ahead. As such, we continue to believe Canada remains the contrarian call in terms of developed markets in 2024, even as the TSX hits a new all-time high … With U.S. price action likely to be more volatile over the forthcoming months, this could potentially prompt investors to shift their focus back towards Canada given its value proposition, GARP characteristics, and strong income potential”
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Diversion: “How AI Is Already Transforming Moviemaking” - The Ringer (podcast)
Scott Barlow