Market Factors begins with an interesting model identifying the most promising stock opportunities and those set to underperform. The next section is a trade idea from Scotiabank strategists and the diversion treats famous physicists like basketball players.
Stock picks
Buy contenders, not defenders
BofA Securities global quant strategist Nigel Tupper’s contenders and defenders model identifies large-cap companies with the best and worst attributes for stock appreciation. There are two Canadian stocks among the contenders.
Mr. Tupper’s analysis of earnings, price and valuation data that starts from 1990 formed the basis for the contenders and defenders dichotomy. He found that stocks with all three attributes of above average price and earnings momentum and attractive valuations were most likely to outperform the All Country World Index.
Defenders are the inverse - stocks representing weak price and earnings momentum and higher valuations. Historically they have substantially underperformed both the benchmark and contenders.
In May, the global contenders generated an average return of 8.8 per cent, outdistancing the MSCI All Country World index by 3.8 percentage points and the defenders by 4.4 percentage points. Over the past twelve months, the contenders crushed the index with an average return 34 percentage points higher than the index and 45 percentage points above the defenders.
The list changes very quickly, which makes it designed for more active investors. It all makes the overall strategy a higher risk proposition as every finance study ever done on the topic found that performance declines in direct accordance with number of transactions.
There are five additions to the global contenders list for June: Geely Auto, Alphabet, Broadcom, State Street, and Twilio. The other non-Canadian names on the contenders list are Hana Financial, United Microelectronics, Wiwynn, OTP Bank, AerCap, BNP Paribas, Carrefour, Sandoz, Kajima, AppLovin, CVS Health Corp, Dollar General, FedEx, Fox, GM, Halliburton, Jabil, KLA, NVIDIA, Royalty Pharma, Seagate Tech, and Vertiv.
The names on the defenders list include some big surprises. These are Alchip Tech, Bank Central Asia, Eternal, Xiaomi, Al Rajhi Bank, MercadoLibre, Banco Sabadell, Beiersdorf, Rheinmetall, Straumann, Nidec, Abbott Labs, Applied Materials, Berkshire Hathaway, Expand Energy, First Citizens BancShares, First Solar, HP, Live Nation, Motorola, News Corp, NIKE, Palo Alto Networks, Procter & Gamble, Qualcomm, Republic Services, Sherwin-Williams, VeriSign, Vertex Pharma and Watsco.
OK, OK, I’ve made readers wait long enough for the two Canadian contenders: Kinross Gold (K-T) and Magna International (MG-T).
A United Parcel Service driver loads boxes during a delivery in downtown Seattle. Montreal-based trucking and logistics firm TFI International agreed to buy UPS Freight for about US$800 million several years ago.Ted S. Warren/The Associated Press
Canadian equities
Scotiabank trade idea: TFII
The Scotiabank strategy team led by Hugo Ste-Marie offered an interesting trade idea in their monthly report summarizing market activity: TFI International (TFII-T), as it gains momentum from depressed levels.
TFI had until recently been among the worst domestic stocks, according to Scotia’s analysis of quality, value, momentum and growth. The company is staging a quick turnaround, however, as stock price momentum improves and earnings revisions finally turn positive. The team posits that “we could thus be in the early innings of a quant breakout.”
The trade idea is not without risks. Scotiabank analyst Konark Gupta, who covers the stock, is more cautious because of high valuation levels. The strategists, however, are suggesting the end of the domestic freight recession, which could send the TFI stock price through all-time highs.
The strategy team is looking at the $220 stock price level as an important technical indicator, which is where it was trading near on Wednesday. In their words, “we would buy the name on a clean breakthrough of the $220 level, or if it fails to clear, buy the pullback for a second breakthrough attempt over the summer.”
US nuclear physicist Julius Robert Oppenheimer (1904 - 1967), director of the Los Alamos atomic laboratory, testifying before the Special Senate Committee on Atomic Energy.Keystone/Getty Images
Diversions
Manhattan project player rankings
The From First Principles (FFP) podcast is a solid antidote to those wo believe social media is 100 per cent evil. Hosts Krishna Choudhary and Lester Nare present important scientific news and concepts in a digestible way.
The most entertaining of the podcasts so far, clipped on Instagram, were the rankings of Manhattan Project scientists as if they were favourite basketball players. J. Robert Oppenheimer himself was ranked only 12 despite Christopher Nolan’s hagiography. Richard Feynman, who would eventually become a prominent public intellectual, just barely missed the top five at number six.
Readers can likely guess at the number one ranked scientific mind but I found the profile of the number three ranked Kurt Gödel, one of the few non-physicists, the most fascinating. Mr. Godel’s feat was a theory of logic and pure mathematics so mind bending that I haven’t stop thinking about it.
Mr. Gödel’s Incompleteness Theorem proved that any system of logic, like mathematics, with a finite number of rules or axioms, is either incomplete or inconsistent. This means that either there are truths that can’t be proven true or there are false statements that can be proven true.
The Incompleteness Theorem means that mathematics is an insufficient model for understanding the universe and this hurts my brain. Mr. Choudhary called it “one of the biggest [scientific] results in the history of mankind.”
There is another FFP where the potential for dream engineering - it’s exactly what it sounds like - is discussed. The hosts cover REM sleep during which your brain activity is almost the same as when awake.
The essentials
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Globe Investor highlights
Ted Dixon reports that insiders are betting that this is a good time to accumulate mining stocks
CIBC’s chief market technician, Sid Mokhtari, reveals his Top 10 stock picks for June
The S&P 500 technology sector now accounts for more than 39 per cent of the market capitalization of the overall benchmark index, its highest on record. Lewis Krauskopf reports on the risks this presents. Meanwhile, Jamie McGeever notes that small caps have also become huge AI big winners
Andrew Willis points out that short seller Andrew Left’s conviction shows how social media can be used to rip off retail investors
The Iran energy story may be masking a bigger inflation worry: the AI boom is building a head of steam in prices under the surface, says Mike Dolan
Quick hits
Citi has added Equinix Inc. (EQIX-Q) to its “Focus List” of top global stock picks. The list is determined by a combination of high analyst conviction and a catalyst to realize value. Equinix is a digital infrastructure company, specialists in network connectivity with recurring revenue from consulting. Citi analysts expect sales growth approaching double digits thanks to a large backlog of work orders. The stock has been trading in the US$1,070 range and Citi has a U$1,240 target price.
Scotiabank and BofA published reports highlighting the difficulties active fund managers will have beating the index in the current environment. The S&P 500 is led by a small number of stocks and few if any fund managers will be willing to hold them in their portfolios at full weightings (same as index) for risk management purposes. I am a little bit sorry for active managers here. Their underweight of mega cap tech stocks will pay dividends when the rally cracks and the index heads south, but at that point no one will want to buy any type of funds.
Morgan Stanley chief U.S. equity strategist Michael Wilson reported improving earnings momentum in the transportation and consumer discretionary sectors. How am I supposed to trust this when higher energy costs are slowing global economic growth? Clearly these sectors will jump when a sustainable U.S./Iran peace deal is negotiated but that event has been presented like Lucy holding the football for Charlie Brown to kick.
Read this week’s earnings and economic calendar here