We begin this edition of Market Factors with a look at regulated utilities that imply not only strong defensive characteristics but also profit growth. Then, how upcoming market volatility might resemble Vaccination Day during the pandemic. The diversion is racing-centric and we have quick hits as always.
Equities
Regulated utilities with growth potential
It’s not often that an analyst praises the stocks they cover. RBC Capital Markets’ Maurice Choy came as close as analysts come to waxing poetic about a sector, in this case regulated utilities. Helpfully, he also provided his top picks along with the plaudits in a Wednesday research report.
Mr. Choy began by commending his companies for delivering on their strategic goals, retaining long-term capital spending goals and maintaining primary growth themes. He noted that many regulated utilities have been able to de-risk their businesses and execute on growth initiatives, facts that “should not go unnoticed despite daily macro and AI/tech headlines.”
Canadian regulated utilities have provided value in the shadow of the more dominant investing theme surrounding the AI buildout. Enough investors, however, have recognized the “longer runway of growth ahead,” in his words, and the stocks’ defensive characteristics to leave much of the sector expensive relative to historic trends.
On average, regulated utility stocks are trading at a 36-per-cent premium to the S&P/TSX Composite and the yields are 117 basis points above the Government of Canada ten-year bond yield. In the past, the PE ratio average has been roughly equal to the index, and the average yield has been 3.5 percentage points higher than the bond yield.
Mr. Choy recommends investors exercise caution and choose individual opportunities with the most “bankable’ growth forecasts. His favourites are Brookfield Infrastructure Partners (BIP-UN-T), Altagas Ltd. ALA-T and Emera (EMA-T).
Brookfield is not specifically a regulated utility but it does own positions in many of them. Mr. Choy likes Brookfield’s “unique capital recycling strategy” as a profit engine. Instead of issuing new stock or issuing debt, Brookfield Infrastructure Partners operates almost like a venture capital fund - acquiring assets, improving them and then selling at high multiples to fund the next investment.
In Emera’s case, its natural gas and trading operations in Florida have been highly lucrative in 2026 thanks to Winter Storm Fern in January of this year. The company’s CAPEX plans are focused on AI-related opportunities in Florida that have been partially de-risked by U.S. federal legislation protecting utility stock balance sheets and by Emera’s insistence that new capacity be funded by data centre developers.
Altagas’s consensus-beating first quarter results were driven by higher commodity prices. High profit margins and high demand for liquid petroleum gas (LPG, mostly propane and butane) were central to strong growth and RBC expects this to remain the case.
Mr. Choy’s appreciation for his sector seems entirely justified. Not only do regulated utilities stocks imply strong defensive characteristics, their growth profiles are much less boring than they look on the surface.
Markets
Vaccination Day as Prologue
Wells Fargo strategist Ohsung Kwon thinks post-Iran market action will resemble the post-vaccine period during the pandemic. The announcement of an effective COVID-19 vaccine was followed by the selling of stay-at-home beneficiaries like Zoom Communications (ZM-Q), Peloton (PTON-Q) and Docusign (DOCU-Q).
Economically sensitive assets like the Russell 2000 index of U.S. small caps rallied hard on vaccine news as did the equal weighted S&P 500. (The equal-weighted index benefited from an expected broadening of earnings growth beyond the few companies capable of growing during lockdowns).
Mr. Kwon forecasts a more severe sell-off in market leaders when the Strait of Hormuz opens. He notes that the Nasdaq 100 was 41 per cent of the market cap of the S&P 500 in 2020 and now it’s 56 per cent. Investors who felt compelled to buy tech stocks - which are counter-cyclical, or less affected by economic growth - because of the closing of the Strait of Hormuz will likely sell those positions to buy economically sensitive stocks when it opens.
The strategist recommends selling calls against holdings in AI-related, rally-leading stocks when a credible peace deal with Iran is announced. He recommends buying U.S. stocks in the transport, consumer discretionary, financial and gold sectors.
Mr. Kwon also noted the first big IPOs since COVID-19 are scheduled for later this year. (I discussed them in Monday’s newsletter). Historically, large scale IPOs have not halted broader market rallies but have led to the underperformance of the sectors involved. In this case the IPOs – Anthropic and Open AI – are distinctly AI-related.
Diversions
World’s Deadliest Race is on Now
The Isle of Man TT, a series of motorcycle races underway this week, is an anachronism in many important ways. There has already been a fatality, pushing total rider deaths closer to 300 since the first race in 1907. Spectators have been killed too but not yet this year.
The race takes place on pothole-ridden village streets on super bikes with 200-horsepower highly tuned engines. The prize money isn’t significant. The winner of the Senior TT, the main event, wins £25,000.
The risk of death was part of the attraction of motorsports until the 1970s. There were three driver fatalities during the 1960 Formula One season. In 1970, Jochen Rindt’s trophy for winning the Formula One driver championship was given to his wife after he died during practice for the Italian Grand Prix, one of the season’s final races. The most devastating accident happened in 1955 when a Mercedes-Benz race car flew into the crowd at LeMans, killing the driver and more than 80 spectators.
American, U.K. and Italian engineers collaborated to vastly improve racing safety for race cars but nothing really can be done for motorcycles. The TT, however, continues.
I own and ride a motorcycle - I commuted to work on it this (Tuesday) morning – but what the TT riders do is still incomprehensible to me. Over 320 kilometres an hour on straights and their leathers actual brush stone walls around turns. They are insane.
I can’t see the race continuing for much longer. It is an anomaly in a safety-conscious culture, and even if no one forces riders to compete, I think it will be banned as inhumane in the coming years. I will miss the incredible footage – the hype video for this year’s event is here for the interested – but maybe that’s for the best.
The essentials
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The Rundown
Yes, the SpaceX IPO is coming. But the sector as a whole has skyrocketed, offering plenty of opportunities for investors. Andrew Galbraith reports.
Investors are hunting for AI-winners among small caps.
Here are seven U.S. cash cows with strong balance sheets for your consideration.
Quick hits
Analog semiconductors are like the behind the scenes workers at a Broadway play. They manage the lights, curtains and sound to allow the stars – in this case GPUs and CPUs - to shine. Analog chips regulate power delivery, manage data transference and clarity, and drive optical connections between main data-centre components. BofA Securities analyst Vivek Arya recommends Texas Instruments (TXN-Q), Analog Devices (ADI-Q) and ON Semiconductor (ON-Q). In a separate BofA report, analyst Tal Liani raised price targets on Cisco Systems Inc. (CSCO-Q) and Ciena Corp (CIEN-N) on demand for optical equipment in data centres.
BMO chief economist Doug Porter put the TSX’s rally in historic context in a late Monday report after the domestic benchmark made its first all-time high since March 2. The index is up 74 per cent over the past three years, which ranks among the best rallies of the past four decades. Only three sectors have outperformed the benchmark for the period – financials, materials and energy – but these are the biggest three in terms of market cap. Mr. Porter emphasized that the TSX has kept up with global markets despite minimal exposure to the AI investment story.
The Citi economic surprise indices are designed to measure economic data against consensus economist expectations. The way it’s run is if all data comes in exactly as predicted then the index stands at zero. The results are weighted by importance – GDP growth data counts for a lot more than consumer confidence surveys (which, in my opinion, are a waste of time). The current index level is -88. Data is coming vastly weaker than expected. This is not an environment where bank of Canada rate hikes make sense.