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.
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There is a lot people don’t tell you about having kids. One of the most insidious aspects is all the paperwork they generate. Each new camp, each new activity, each new school event generates a minimum of 2-3 pages of forms to fill out. We are re-enrolling our son in the same school and yet they still ask our address and payment information – which they no doubt already have. I’ve attempted to offload this to my husband, but then he messaged to ask the last name of our nanny. She’s been with us for 4.5 years.
Here are five things to know:
Raging: Futures are higher on the back of generally positive tech earnings overcoming a hawkish Fed decision yesterday and escalating tensions in Iran. The Federal Reserve kept rates unchanged as expected but with the most number of dissenters since 1992. Four Fed members disagreed with the statement but some for different reasons. As usual, Governor Miran, preferred a rate cut. Three others agreed with the decision but disagreed with adding an easing bias. As a result, the market has totally priced out the chance of a rate cut this year. Chair Powell, who presided over his last meeting as Fed Chair, said he would remain on the board of governors until the investigation into the renovation of the Federal Reserve building was over. The Bank of Canada also kept rates unchanged, but the subtext was hawkish with the chance of a rate hike being priced in for later this fall because of higher oil prices. On Iran, the impasse continues although oil prices are volatile today because the June contract expires today. Still, we are near four-year highs on global oil prices. Earnings are in the spotlight with four of the Mag 7 reporting last night (more below) and Apple on deck tonight. Caterpillar reported this morning and is surging 6% in pre-market on profit beat and strong power sales. Canada is busy as well with 27 companies reporting yesterday and today.
Mixed seven: Amazon, Alphabet, Microsoft and Meta all reported results last night. Below is a summary of how the stocks are moving and key takeaways from the quarter.
- Alphabet (+7.5% in pre-market): The big Mag 7 winner after earnings poised to open at a record high. Profit was double expectations, sales were slightly better and its outlook was higher than consensus. Cash flow from operations was a slight miss. The key is that AI is not killing Google’s search business as it pivots to AI generated answers. Google’s search business was up 19% as much advertisers spend on AI-powered tools. It’s cloud business jumped 60% as more businesses pay for Google Gemini. Google also started renting out its custom AI chips which “could be a significant new revenue stream” according to Citi. Spending plans were increased to as much as $190 billion – double what it spent last year. But given they are seeing benefits from AI spending the market is willing to be forgiving.
- Meta (-8% in pre-market): The worst performing Mag 7 after earnings. Huge spending plans are overshadowing solid results. Meta boosted its spending plans to $135 billion on AI up from $125 billion. JP Morgan downgraded the stock because of “lack of visibility into AI pipeline product.” In part, the higher spending is because things like memory chips have become so expensive, not because of any new initiatives. On the bright side, people are spending more time on Instagram and Facebook.
- Amazon (+4% in pre-market): Earnings were 71% higher than expected, revenue beat expectations and cloud sales were slightly better than expected. Amazon Web Services grew 28%, which is faster than previous quarters. It’s outlook was also better than expected. “The simple message: Street numbers remain too low, the positive revision cycle continues, and the AWS margin upside surprise materially curbs the bear case on the stock,” wrote Evercore’s Mark Mahaney.
- Microsoft (-1% in pre-market): Results were mixed. On one hand, it saw big growth in its cloud business and AI solution. On the other hand, the PC market was hit because of higher memory costs weighing on the outlook. It’s cloud business, Azure, grew 40% which was much better than expected and its AI annual revenue run rate hit $37 billion which is up 123% from last year. However, the growth comes with higher spending plans that is likely weighing on the stock right now. Spending next quarter will be around $40 billion, well above the $32 billion spent this quarter while annual spending will hit $190 billion. Once again, the price of memory chips driving up its spending forecast.
Free cash: Keep an eye on Bombardier after reporting slightly weaker revenue than expected offset by stronger than expected free cash flow projection. The plane maker delivered more planes than expected and importantly its backlog reached another record high. This is the key for investors. As a result of higher bookings, free cash flow was materially higher than expected in this quarter and the key reason the company increased its forecast for that measure going forward. “Overall, we expect a positive trading reaction,” wrote Benoit Poirier of Desjardins.
De-railed: Canadian Pacific Kansas City missed profit expectations as revenue fell in every category except grain this quarter. Still, the company increased the dividend 17.5% and intends to repurchase 5% of shares outstanding. Despite a weaker Q1 than expected, the train operator maintained its full year outlook signalling confidence in a rebound. “Although upside to our target is modest, and we acknowledge some uncertainty for the company related to the pending USMCA negotiations, we continue to like CPKC‘s growth outlook over the next two years driven largely by new business wins and merger-related synergies that are independent of the macro,” wrote Cameron Doerksen of National Bank. CN Rail reported yesterday morning and fell 6% after missing profit expectations.
Garbage day: Keep an eye on GFL at the open after the controversial waste collector missed earnings per share expectations. The stock is trading near a 1.5 year low after its big purchase of Secure Waste Connections. Investors are worried about the cyclical nature of the business and the added leverage. To offset the profit miss, GFL boosted its sales and profit outlook for the year. Adjusted earnings for the quarter were better than expected and its margins were bigger. We talked about this on the podcast with Hearn who said this could be an interesting stock to buy on the dip, but he prefers Waste Connections which has also been under pressure.
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