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My eldest shared she is ready to take over my podcasting and newsletter duties. It will be demanding. Not for her – she will surpass anything I ever do in this life. No, the demands are for me. She needs to be picked up early from school and a fresh blowout everyday. The topics may also be a deviation from what you are used to. “My two favourite topics are fire ants and jokes.” I think we can all agree that is way more interesting. Look out world.
Here are five things to know today:
Was it something I said?: Days after Prime Minister Mark Carney an US President Donald Trump took in the World Cup game together, the US threatened 50% tariffs that would affect 5% of Canadian exports to the US – including some goods covered under USMCA. The US is using a depression era law – Section 338 which gives the President authority to tariff countries that discriminate against the US – over Canadian tariffs on alcohol, dairy, and autos. BMO estimates this is about 0.8% hit to Canada’s GDP. “While that still sounds digestible in the aggregate, some specific businesses/industries would be hit extremely hard. And, if the shelter of USMCA is in fact broken, that would do serious further damage to business confidence,” wrote BMO’s Robert Kavcic. Industries that are hard hit include: chemicals, industrial equipment, consumer goods (hockey sticks!!), and forestry. Watch KP Tissue, Cascades and West Fraser Timber which could come under pressure warns an analyst at TD. The tariffs are set to take effect August 19 which leaves room for a negotiated breakthrough. The Canadian dollar seems to be glass half full on this, only down a few basis points. Having said that, a red line has been crossed in that USMCA protected trade is no longer off limits. “The most important policy change, in our view, is that the new Section 338 tariffs apply regardless of whether products qualify for preferential treatment under USMCA,” wrote Ed Mills of Raymond James, “Rather than targeting trade outside the USMCA framework, the administration has demonstrated that it is willing to override preferential treatment when broader trade objectives are at stake, which may increase uncertainty around future USMCA renegotiation discussions.”
Enough: Markets are bouncing here with the recovery led by semiconductors. Investors are stepping in after a 16% sell off over the past month. The tug of war between semis vs software continues. Software outperformed semis over the past month, as investors were willing to dip their toes in. Morgan Stanley is cutting off those toes today in a sweeping note downgrading many stocks in the sector noting the recent rally isn’t validated by improved business prospects. Salesforce, Intuit, Adobe, and Workday are among the downgrades. Meanwhile the analyst sees highest conviction potential in Microsoft, Palo Alto Networks, Service Now, Snowflake and Shopify (see below). This is the big debate on Wall Street right now – will semis come back to dominate or is it time to shift into software? UBS weighed in creating two baskets depending on your view: opportunities on the pullback and stocks that have been beaten up that could benefit from a rotation into software. Both are screened for positive cash flow return on investment. I have included the list at the bottom of the email.
Source: Morgan Stanley
Bears out for blood: Morgan Stanley is downgrading Telus to underweight ahead of Victor Dodig’s first quarterly results as CEO at the end of the month. Telus is already trading at a 14-year low with the yield a screaming 11.6%. “With a new CEO (Victor Dodig succeeded Darren Entwistle after a 26-year tenure) and competitive pressure limiting earnings growth while dividend commitments remain elevated, we see increasing risk that management ultimately prioritizes balance sheet flexibility over continued dividend growth with a yield >11% and payout ratio >100%, making a dividend cut a likely reality. While Telus has announced it is exploring the monetization of its Health business, ranging from a partial stake sale to a full divestiture, we have a hard time seeing it valued for >C$3bn, which would help leverage modestly (~0.2-0.4x), but still ~3x net debt to EBITDA,” wrote Morgan Stanley’s Sean Diffley. He is upgrading BCE to equal weight noting it has already cut the dividend and likes the AI business. Diffley prefers US telcos to Canadian ones right now noting Canadian telcos are trading at a premium despite “more challenged competitive backdrop” and threats from Starlink which he doesn’t believe is priced in.
Mmm good: Shares of 3M are surging 7% after beating profit expecations and raising its forecast. The maker of Scotch Tape and Post-It said that recent efforts to streamline operations and efforts to bring new products to market are paying off. With limited Middle East operations it also managed to skirt supply chain issues and reduced demand stemming from the war. Construction and activity around data centres is showing up in 3M sales: revenue from their safety and industrial division was up 7.5%. The company recently struck a deal with Microsoft to deploy its optical technology in Azure data centres.
Health check: Danaher is plunging 14% after its growth outlook missed expectations. Quarterly results at the life sciences company were actually much better than expected and the company raised its full-year forecast. The issue is that Q3 revenue growth outlook fell short of expectations. “We’d use the stock’s weakness as a buying opportunity,” wrote RBC’s Dan Leonard of the results. Noting some of the perceived weakness in Q3 are from idiosyncratic issues and that full-year targets appear achievable.
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