Small-cap stocks have significantly outperformed their large-cap peers so far this year but valuations remain at a massive discount, so what names should be on your radar? On this episode of In the Money with Amber Kanwar, Aubrey Hearn, Senior Vice-President, Portfolio Manager & Lead – U.S. & Small Cap Equities at CI Global Asset Management, makes the case that the small-cap opportunity is far from over.
For a look at the week ahead read my Globe and Mail column!
Here are five things to know today:
Easy street: Stocks are starting the week flat ahead of another deluge of earnings. The quiet start to the week gives us time to reflect. The old adage “Sell in May, Go Away” springs to mind and I’ll only mention it once here. Yes, returns are lower in the period between May to October, but they are still positive and overtime that compounds to meaningful gains. Stay in May and keep the podcast not far away! While the markets are flat right now, that doesn’t fully capture the volatility we’ve seen this morning. Futures plunged on reports that Iran hit US patrol boats. However, the US denied that was true and stocks recovered. There Strait of Hormuz remains effectively closed and yet the S&P 500 has rallied for five weeks in a row. Once again…it’s earnings, stupid. Earnings are coming in much better than expected and all that AI spending is helping to prop up the American economy. Bespoke estimates AI capex spending by just four companies is equal to 2.5% of US GDP. The past month has been trickier for Canadian investors as the materials trade has been struggling. The TSX has been lagging the S&P 500 as strength in energy has not been enough to offset weakness in the material sector. Big earnings in focus today after the bell include Palantir in the US and TMX, Cargojet and Propel Holdings in Canada.
Berkshire without Buffett: Berkshire shares are modestly higher after hosting its first annual meeting under new CEO Greg Abel. However, Buffett sat in the audience and an AI generated version of him asked a question! Interesting given Berkshire has no real pure-play AI exposure in the portfolio. The cash pile increased to a record $397 billion and the company was a net seller of stocks for a 14th quarter in a row. “Greg Abel performed well in his first Annual Meeting as CEO, in our view, exhibiting a deep understanding of all of BRK’s major businesses and plans to drive operational excellence,” wrote Brian Meredith of UBS, “We were encouraged by the technological transformation being deployed (including AI) at BNSF and other BRK businesses to drive improved returns and close the performance gap with peers. We see operational improvement as a key value driver for BRK’s shares. Abel did not express any urgency in deploying BRK’s $380bb of cash, and we were disappointed that the company did not repurchase more shares with them trading at an 8% discount to intrinsic value, by our estimate.”
Life line: Norwegian Cruise is down 6% after cutting its full-year profit outlook on travel disruptions in the Middle East. The cruise operator now expects its first drop in profit since the pandemic. Fewer people are booking trips, particularly travelers from Europe. In addition, higher fuel prices are driving up costs which is also eating in the bottom line.
Hitting the high notes: Scotia is upgrading shares of TD to buy on the expectation it has the most to gain from future branch closures. “We strongly believe that the large Canadian banks have an opportunity to meaningfully improve their expense ratios over time through branch reductions in Canada,” wrote Scotia’s Mike Rizvanovic. He believes TD has the most potential to close branches compared to peers. (Where will they put that comfy green chair??) TD is trading at a record high and the price target of $150/share doesn’t imply huge upside on price appreciation alone.
Bizarro world: GameStop is proposing to buy eBay in a $56 billion takeover. Investors appear skeptical that the hobbled meme-stock can pony up with the eBay trading at $110/share – far from the $125/share on offer (a 20% premium to Friday’s close). It’s a mix of cash and stock so financing is key. Surprisingly, GameStop says it has a non-binding financing letter from TD Bank to provide $20 billion in debt financing. It would be a story of a worm eating an elephant if the deal goes through (is that a saying??) eBay is currently four times bigger than GameStop. It has been challenged by slow buyer growth and losing market share to Amazon and others. GameStop’s Ryan Cohen has said he is willing to go hostile with the offer. eBay was a top idea from Bill and Cole Smead in February calling it the “redheaded step-child of tech” that gets unfairly penalized.
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