We start this edition of Market Factors with a comprehensive and compelling way to drill into the most promising market sectors. A quick piece on the extremely bright outlook for global electric power stocks is followed by a diversion featuring the auction of an absolutely ridiculous music memorabilia collection.
Stock picking
U.S. materials stocks soaring
BofA Securities chief U.S. equity and quant strategist Savita Subramanian introduced a novel strategy for identifying promising areas of the market that looks extremely promising. It involves a scoring system splitting each market sector into three categories: opportunities, value traps and momentum breakdowns.
The methodology scores every U.S. market sector for price momentum, earnings revision rank and valuation rank. The latter is particularly relevant currently as the S&P 500 as a whole is trading above its historic average in 16 of the 20 measures the strategist tracks.
I like the transparency of the strategy. Conservative, more value-oriented investors can focus on the valuation scores (real estate, health care and financials score best there) while growth-focused investors can emphasize earnings (IT, materials, and communications services score best) and price momentum (energy, industrials, and materials).
In terms of combined rank, materials, real estate and communications sectors score highest. The latter two are a bit of an issue for most Canadian investors who prefer to buy domestic REITs and telecom stocks although telecom has been a rough road in recent years.
Materials is where U.S. markets provide potential diversification for domestic portfolios. Unlike here, the U.S. materials sector is not dominated by precious metals stocks. Some of the best performing U.S. materials stocks are from industries that are not represented, or have only marginal weighting, in the TSX.
Plastics and chemical producer Lyondellbasell industrials NV, up more than 65 per cent in the past three months, is a good example of a sector not well represented domestically. Albemarle Corp., also in the chemical sector, is up 24 per cent for the last three months and an impressive 110 per cent in the past 12 months. Industrial gases provider Linde PLC is higher by 16 per cent in the past three months.
I will also note that fertilizer stocks are also helping U.S. materials stocks outperform. Canada, of course, has its own giant in the sector - Nutrient Ltd. is up 23 per cent in the last three months and 42 per cent in the previous 12 months.
Energy stocks, surprisingly, are the second least attractive sector according to Ms. Subramanian’s method. The sector ranks first for price momentum but right near the bottom for earnings revisions and valuation. It’s possible that analysts are just waiting to jack up earnings forecasts but it’s curious to me nonetheless.
Consumer discretionary companies make up the worst category of stocks. Companies like ParamountSkydance Corp., significantly lower after leveraging up to buy Warner Brothers, and Lululemon Athletica, down 50 per cent in the past three months, are dragging the subindex lower. Consumer discretionary ranks worst for valuation, second worst for earnings revisions, and third worst for price momentum.
Tech stocks need to be watched closely. They rank worst for price momentum and historically that honour results in drastic underperformance relative to the S&P 500 equal weighted benchmark.
Christinne Muschi/The Canadian Press
AI
Strong growth outlook for electrical power equipment
Citi analyst Pierre Lau outlined the company’s top picks in global electrical equipment providers in a research report this week. There are few industries with a more promising outlook than this sector, which benefits from both decarbonization efforts and the massive ongoing data centre buildout.
Mr. Lau expects electrical transformers to be in short supply relative to demand for the foreseeable future. Available transformer supply was 30 per cent below demand in 2025. There is a shortage of both production capacity and required specialist labour.
Citi expects demand to increase at a healthy 7.3 per cent compound annual growth rate. A recent increase in data centre construction expectations by Citi analysts suggests that this growth rate could be revised upwards.
The top picks in the sector include Japan’s Hitachi and Hyosung Heavy in Korea. Mr. Lau likes the fundamentals for Siemens Energy and GE Vernova but they are trading at higher price-to-earnings ratios and are rated sector perform.
Diversions
Music memorabilia auction nets over US$80-million
The Irsay family is probably still most known for moving a beloved, historic NFL football franchise to a different city in the dead of night but that doesn’t make the recently deceased Jim Irsay’s music memorabilia collection any less remarkable.
Almost exactly 42 years ago, Baltimore Colts owner Robert Irsay had all the team equipment packed up in moving vans in the middle of the night and moved the team to Indianapolis without notice. Jim Irsay took over as owner in 1997 and was probably unable to walk safely in the city of Baltimore for the entire rest of his life.
Jim Irsay had an eventful life as owner, and that included the building of a massive collection of music memorabilia that was recently up for auction.
Pink Floyd guitarist David Gilmour’s legendary black Fender Stratocaster went for US$14.5-million. A custom guitar commissioned by the Grateful Dead’s Jerry Garcia went for US$11.6-million. A saddle worn by Secretariat went for over a million. A John Lennon piano went for US$3.2-million.
A John Coltrane saxophone and a Miles Davis trumpet were on the block. A bass drum from Ringo Starr’s kit used on the Ed Sullivan show was auctioned but I can’t find how much it raised. In a non-sports sale, the original manuscript for Jack Kerouac’s On the Road was involved.
The total auction amount was US$84-million, quadruple the lowest estimate. Every story about it I opened included more unbelievable artifacts. I highly recommend music fans Google a few reports about the auction.
The essentials
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Quick hit
There are apparently plans for construction in space by the U.S. military and large corporations. This would involve, for instance, orbiting platforms that can build satellites. Morgan Stanley analysts believe that critical minerals and what it terms “highly engineered metals” will be necessary and in short supply, and will represent a major bottleneck for the plans.
See our full earnings and economic calendar here