If you’re looking to build a portfolio for the next decade—not chase yesterday’s winners—Garey Aitken says it’s time to get much more selective. Canada’s rally may not be over, but after one of the strongest runs in years, finding value has become much harder. The Head of Canadian Equities at Franklin Templeton’s ClearBridge Investments joins Amber Kanwar to explain where he’s taking profits, why he still likes energy, and the overlooked companies he believes could be the market’s next winners.
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I am happy to report that we are winning the war against lice. It hasn’t been perfect, in my “boil everything” vigilance I accidentally left the pot on and forgot to come back to it only to find the comb melted into pan. That’ll show the nits.
Here are five things to know:
Tale of two cities: Tech stocks struggled once again yesterday while the TSX and the equal weight S&P 500 hit new record highs. The TSX rally is interesting because it occurred despite a three-day plunge in oil prices and was held up by…tech stocks. While US tech is under pressure, Canadian tech names like Constellation Software, Celestica, and Kinaxis have posed a mini rebound with our tech sector up 13.5% in the last three sessions compared to the US which is down. To be fair, the Canadian names are software plays that have been run over but appear to be catching a bid in this rotation out of AI spenders and semiconductors. SK Hynix – South Korea’s second largest chip maker – is a poster child for the unwind with the stock cratering 23% over the last two days despite a six fold increase in profit (wasn’t enough vs expectations). This morning, stocks are finding their footing ahead of the Fed rate decision today and Microsoft and Meta earnings tonight (I incorrectly wrote that was happening yesterday – apologies). Right now the market is pricing in a 30% chance of a rate hike, which is more a reflection of new Fed Chair’s reluctance to guide the markets on the next rate move. “…This is the most uncertain that the market has been on whether the Fed will change rates going into a meeting since December 2018,” wrote Jim Reid of Deutsche Bank. Even if the Fed holds on rates, there could be a few dissenters looking for a rate hike. Indeed oil is higher today after a three-day slump following news Iran attacked US bases and the US retaliated with strikes of their own.
In pieces: Intact Financial could come under pressure after earnings missed expectations on higher insurance payouts in it’s UK business. Profit at Intact fell nearly 40% from last year as the company experienced large losses for some of its commercial clients related to fires, winter storms, and larger than normal property losses. On the bright side, the company said this does not affect their outlook going forward and that these were one-off occurrances. Analysts also note that the company can make up for these losses down the road by increasing insurance premiums. Intact has been a lumpy story for investors over the past year with the insurance market softening, but Garey Aitken of Franklin Templeton said on the podcast it is a good investment for investors with a long-term investing horizon. “While we would not be surprised to see the market exact its pound of flesh, we do not believe that the Q2 results reflect an impairment of IFC‘s profitability,” wrote John Aiken of Jefferies, “Further the weather events that negatively impacted earnings in the second quarter should be supportive to future premium growth.” I own Intact. The conference call is at 11am.
Hit the gas: Ford is popping 6% after a surprise profit despite a drop in sales and a boosted profit forecast for the year. The automaker raised its forecast for the second time this year as demand for SUVs continues and losses around its EV business are in the rear view. Overall US vehicles sales were down 10%, with EV sales dropping a whopping 41% from last year. But that is being forgiven thanks to better sales of its Bronco and Explorer SUVs. Ford shares recently got a jolt as it hopes to repurpose its energy storage investments for use by hyperscalers – though no deal has been signed and profit won’t show up for years. Citi upgraded the stock to buy following the results saying momentum is turning and supply constraints are easing. I own Ford.
Energized: Cenovus is up 4% in the pre-market after better than expected quarterly results, hitting their debt targets earlier than expected and increasing cash return to shareholders. The oil producer’s cash flow per share was higher than expected this quarter and it’s net debt came in at $5.39 billion which is below its intermediate target of $6 billion. As a result it will now return 75% of its free cash flow to shareholders. Margins in the US refining business – a past problem child – came in higher than expected. It also increased its oil production targets and expects to hit 1 million barrels of oil equivalent per day by July. “We would expect a positive share price reaction and relative outperformance today,” wrote Robert Mann of Desjardins.
Stuck: I’ll be curious how investors greet CGI Group results. The IT services company has been crushed by concerns about AI threats and the latest quarterly results didn’t necessarily validate those concerns but they didn’t decimate them either. Sales grew a tepid 2.5% which was about what was expected. The backlog increased on government contracts and the company said AI is bringing new opportunities, but the street may want clarity on what exactly that means in terms of revenue growth potential. The conference call is at 9am. “We estimate that constant currency (CC) organic growth was -1.2%, slightly above our estimate of -2.0% and an improvement from -3.0% last quarter,” wrote RBC’s Paul Treiber.
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