Investors continue to sit on the sidelines, waiting for the results of the Nov. 8 U.S. election.
Neutral investor sentiment continues to grow.
According to the latest AAII Investor Sentiment Survey reported for the week ending Nov. 2, 23.6 per cent of respondents have bullish expectations for the stock market six months out, down 1.1 per cent from the prior week, 42 per cent of respondents have neutral expectations, up 0.9 per cent, and 34.3 per cent of participants are bearish, which is up 0.2 per cent from the previous week. In comparison, for the week ending October 19, bullish sentiment was 23.7 per cent, bearish sentiment was 37.8 per cent, and the neutral camp was below 39 per cent.
Today is the busiest day of the week in terms of the number of companies in the S&P/TSX composite index that are scheduled to report quarterly earnings – 42 companies to be exact. Amongst the companies in the earnings parade are BCE, Quebecor, Canadian Natural Resources, Enbridge, Encana, RioCan REIT, Magna, Cominar REIT, Finning, Open Text, Interfor, Pembina Pipeline, Artis REIT, Great-West Lifeco, and TMX Group.
Looking at major commodities, this morning, oil prices have stabilized and are up slightly, while the price of gold is down over 1 per cent.
Let's briefly recap what happened on Wednesday. The S&P/TSX composite index fell 184 points, or 1.24 per cent to close at 14,595. Only 29 securities in the TSX Index that advanced, 216 securities declined in value, and two stocks closed the day unchanged. Every single sector closed in negative territory led by losses in the health care, energy, materials, and real estate sectors.
The S&P/TSX composite index is down 1.30 per cent month to date, down 0.89 per cent quarter to date, and up 12.18 per cent year to date.
On today's TSX Breakouts report, there are just 16 stocks on the positive breakouts list (stocks with positive price momentum), while the number of securities on the negative breakouts list (stocks with negative price momentum) is up to 78.
The growing list of stocks on the negative breakouts list can be used to represent a list of potential future buying opportunities. While some stocks on the list reflect earnings shortfalls and deteriorating fundamentals, the weakness for other securities is merely a reflection of negative investor sentiment with solid company fundamentals remaining intact. Discussed today is one such example.
Highlighted below is a company that appears on the negative breakouts list, despite having solid fundamentals and a reliable, attractive dividend. The company will be celebrating its one-year listing anniversary as a publicly traded company. Shares of the company began trading on the Toronto Stock Exchange on Nov. 5, 2015. The stock I am referring to is Hydro One Ltd. (H-T).
A brief outline is provided below that may serve as a springboard for further fundamental research.
The company
Toronto-based Hyrdo One provides electricity to more than a million customers and is Ontario's largest electricity distributor. Its operations are rate-regulated, representing 99 per cent of total revenue, providing the company with high earnings visibility and reliability. The company's earnings are growing at steady pace. Looking out to 2020, the rate base is forecast to grow at a compound annual growth rate of 4.9 per cent.
Before the market opened on Aug. 12, the company reported better-than-expected second quarter financial results. Adjusted earnings per share (EPS) came in at 26 cents, surpassing the consensus estimate of 23 cents. On the company's second quarter earnings conference call, when asked about future acquisition prospects, chief executive officer Mayo Schmidt said: "2017 is really our transformational year where we have an opportunity for some of the breakout strategies related to opportunities." The share price advanced 1.1 per cent that trading session.
The company will be reporting its third-quarter financial results before the market opens on Nov. 11. The consensus EPS estimate is 31 cents.
Dividend policy
The company pays its shareholders a quarterly dividend of 21 cents per share, or 84 cents on a yearly basis. This equates to an annualized yield of 3.5 per cent.
Valuation
According to Bloomberg, the stock is trading at a price-to-earnings (P/E) multiple of 19.4 times the 2017 consensus estimate, exactly at its one-year historical average, and off from its peak multiple of just over 21 times forward earnings.
Over the past year, the stock has traded at a forward P/E multiple ranging from a low of 18 times to a high of approximately 21.5 times. Looking at the downside risk, should the stock trade down to a forward P/E multiple of 19 times, this would take the share price down to $23.75, and at an 18 times multiple, this would reflect a share price of $22.50.
Analysts' recommendations
Since July, 11 firms have issued research reports on the company, and of these firms, there are two 'buy' recommendations and nine 'hold' recommendations.
The average one-year target price is $26.23, implying there is 8 per cent upside potential in the share price over the next 12 months.
The Street is forecasting steady earnings growth for the company. The consensus EPS estimate is $1.19 for 2016, $1.25 for 2017, and $1.32 for 2018.
The company offers investors high earnings visibility and stability. On January 1, for instance, the consensus EPS estimate was $1.17 for 2016 and $1.24 for 2017, relatively consistent with current forecasts.
Insider transaction activities
On Sept. 16, board member, Philip Orsino, purchased 10,000 shares at a price of $25.75 per share.
On June 2, board member, James Hinds, bought 20,000 shares at a price of $24.80 per share.
On May 25, the chief financial officer, Michael Vels, purchased 5,000 shares at a price of $24.01 per share.
This information can be found on the website, www.sedi.ca.
Chart watch
The shares have been under pressure over the past month. The stock is the worst one-month performer in the S&P/TSX composite utilities sector index. Year-to-date, the stock price is up nearly 9 per cent.
Shares of Hydro One have large overhead resistance between $26 and $26.60, its previous closing high is $26.59, set in July 2016.
There is initial downside support between $23 and $24, and failing that, there is solid support at $22.
The relative strength index is at 28, suggesting the shares are in oversold territory. Generally, a reading at or below 30 indicates an oversold condition.
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The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company's dividend policy, analysts' recommendations, and provides a brief technical analysis for a security to provide readers with more information.
If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.
Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indexes that have a minimum market capitalization of $200-million.
A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.