This Market Factors starts with a highly selective stock-picking strategy recommended by Goldman Sachs and then moves to an update on the domestic housing market with some eyebrow-raising statistics. I’m desperately looking for new TV shows in the diversion and we have Quick Hits as always.
AKHTAR SOOMRO
Equities
Rule of 10 uncovers opportunity
Goldman Sachs chief U.S. equity strategist Ben Snider is emphasizing a Rule of 10 investment strategy to uncover winners as the market backdrop becomes more supportive of secular growth stocks.
Mr. Snider began his Weekly Kickstart report by noting that while the S&P 500 is within 2 per cent of its all-time high, secular growth stocks (those, like in technology, with industry-specific growth drivers rather than profit sensitivity to overall economy) are more than 20 per cent below their highs on average.
Secular growth stocks outperform during periods of modest economic growth and falling bond yields and that is exactly what Goldman Sachs economists and strategists are expecting. They are projecting 1.7 per cent GDP growth for the U.S. and Treasury yields slowly falling through this year
Concerns that AI will replace existing software companies will continue to overhang that subsector for the foreseeable future. There are, however, secular growth stocks outside of software that are equally depressed and potentially poised for recovery.
To identify rebound candidates and avoid value traps – attractively valued stocks that are likely to stay that way – Mr. Snider recommends a Rule of 10 approach. This methodology selects S&P 500 companies with realized and expected annual sales growth of 10 per cent or better from 2024 to 2028.
There are 35 companies that made it through the screen but 11 are software stocks that will remain under the cloud of AI. The median price-to-earnings of the non-software stocks is 29 times, a 53 per cent premium to the market. This premium is close to the bottom of the range of the trailing ten-year average. Consensus profit estimates for 2027 are triple the benchmark average, at least for now.
In order of 2027 profit growth expectations, the stocks emerging from the Rule of 10 criteria are Broadcom Inc. (AVGO-Q), Advanced Micro Devices Inc. (AMD-Q), Micron Technology Inc. (MU-Q), NVIDIA Corp. (NVDA-Q), Axon Enterprise Inc. (AXON-Q), Carvana Co. (CVNA-N), Super Micro Computer Inc. (SMCI-Q), Vertiv Holdings Co. (VRT-N), DoorDash Inc. (DASH-Q), Arista Networks Inc. (ANET-N), Seagate Technology Holdings Plc (STX-Q), Insulet Corp. (PODD-Q), Meta Platforms Inc. (META-Q), Monolithic Power Systems Inc. (MPWR-Q), Alphabet Inc. (GOOGL-Q), Uber Technologies Inc. (UBER-N), Intuitive Surgical Inc. (ISRG-Q), Texas Pacific Land Corp. (TPL-N), Netflix Inc. (NFLX-Q), Eli Lilly and Company (LLY-N), Amazon.com Inc., (AMZN-Q), Dexcom Inc. (DXCM-Q), Quanta Services Inc. (PWR-N) and Boston Scientific Corp. (BSX-N).
Real estate
Biggest housing market correction ever by some measures
Most Canadians are aware that the domestic housing price rally stalled but the full extent of the value declines might be surprising to many. Macquarie North American economist David Doyle recently published an in-depth look at the sector.
Canadian home prices have fallen almost 30 per cent in inflation-adjusted terms since the February 2022 peak, which translates to a 20 per cent nominal decline. This is the biggest nominal decline in the data set that begins in 1975.
Mortgages continue to be renewed at higher rates and Mr. Doyle expects this to remain a hurdle to higher prices in the near term. Mortgage renewals at lower rates should begin next year and provide a tailwind for home prices.
The silver lining is affordability. The economist points out that down payment affordability (years of after-tax median income needed) has improved by 30 per cent since the March 2022 lows and monthly payment affordability has improved by 25 per cent since the march 2023 lows - although it remains elevated relative to long-term history. Mr. Doyle expects affordability to continue improving until the end of 2027 in large part because of the abrupt slowing of population growth.
Mr. Doyle is cheering recent government policy changes designed to support condominium markets by removing excess supply. Ontario, for instance, has announced a public/private partnership to purchase condo units and make them available to renters. This preserves homebuilders until they are needed.
Tron: Legacy
Diversions
57 channels and there’s nothing on
I’m a bit at sea where TV shows are concerned. The Pitt is great and Paradise can hold my attention for episodes at a time but nothing else really appeals right now. The Harry Hole detective show on Netflix was pretty good but now I’m stuck. I got desperate enough to watch the cheesy 2014 classic film Tron: Legacy last weekend.
Lifehacker recently listed the most popular streamed TV shows. The Madison is number one but I think I’m Tayler Sheridan’d out. Paradise is number two and The Pitt is number three. Scarpetta is four, it’s a show I’ve heard is clunky despite star Nicole Kidman. DTF St Louis is fifth most popular but I have no interest in this one at all. I’m squeamish about intimate relationships, that’s the problem.
Shrinking is sixth. I liked this one for a while but found I agreed with Chris Ryan at The Watch that it’s a bit saccharine. A show called One Piece is next, I’ve never heard of that one. Apparently it’s “live-action anime”, a new genre for me. Young Sherlock is show number eight and I will probably give this one a try shortly.
Monarch: Legacy of Monsters, a Godzilla-oriented show (I never thought I’d type that phrase) is number nine and Love Story: John F. Kennedy Jr. and Carolyn Bessette is tenth. Concerning the latter, see my comment about intimate relationships above.
The essentials
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Globe Investor highlights
Norman Rothery tested seven single-stock portfolios - and came away surprised with how well they worked
Tim Shufelt wonders, Have investors forgotten how to panic?
Sam Sivarajan says don’t follow the market shock - follow what it sets in motion
Bonds were supposed to save the day. Tom Bradley explains why they haven’t
Gary Christie presents a screen of Canadian dividend stocks that stand out when viewed through a quantamental lens
Quick hits
Morgan Stanley analysts see a capital expenditure cycle beginning, as major companies look to ensure their supply chains. The weekly newsletter from the Morgan Stanley Institute highlighted a recent renewable power company acquired by Alphabet Inc. and GE Vernova buying an electrical equipment company as deals that underscore the trend.
Scotiabank analyst Jonathan Goldman believes engineering and construction stocks are “Fundamentally Sound; Irrationally Depressed” - that’s the title of his most recent report. He describes the domestic market environment as accelerating and sees little negative impact from Middle East events, particularly on his top pick WSP Global Inc. (WSP-T), which is nonetheless down 23 per cent from the June high.
I was mostly ok with Amazon Prime showing commercials because the network was thrown in with my annual Amazon membership fee. I am much less receptive to Crave doing the same for basic subscribers (a non-ads higher fee subscription was added) because I paid Crave a monthly fee on the premise that I’d see no commercials. Your mileage may vary but for me the programming lineup outside of The Pitt is mediocre so I’m likely to cancel after the final Pitt episode of the season this Thursday.
Read this week’s earnings and economic calendar here