Barlow’s Research Roundup: One change to RBC analyst’s global energy best ideas list

Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow

Energy best ideas

RBC Capital Markets head of global energy research Greg Pardy made one change to his global energy best ideas list,

“Our view: In July, the RBC Global Energy Best Ideas List was up 8.9 per cent sequentially compared to the iShares S&P Global Energy Sector ETF (IXC), which was up 13.4 per cent and a hybrid benchmark (75 per cent IXC, 25 per cent JXI – iShares Global Utilities ETF) that was up 9.7 per cent on a sequential basis. This month, we are adding BP p.l.c (LSE: BP) to the RBC Global Energy Best Ideas List”

The list as it stands now includes Suncor Energy, BP p.l.c, California Resources, Chord Energy Corporation, ConocoPhillips, Permian Resources, PrairieSky Royalty, Canadian Natural Resources, Ovintiv Inc., Woodside Energy, Enerflex Ltd., AltaGas Ltd., Pembina Pipeline Corporation, Cheniere Energy, Inc., Williams Companies Inc., EDP Renováveis, S.A., and Northland Power.

Earnings overcome worry

Scotiabank strategist Hugo Ste-Marie outlined how strong earnings are outweighing the many reasons to worry about markets,

“Why does the market look through this long list of issues and concerns? In one word: earnings. To be fair, the scale of the earnings surge has been unprecedented … If bottom-up forecasts are ball-park accurate, the S&P 500 could deliver a 5-year stretch of double-digit EPS growth, which would be unprecedented since at least WWII, i.e., in the last 80 years! And ... 2026/2027/2028 bottom-up EPS forecasts continue to be revised up (not down). As we indicated several times before, as long as earnings keep climbing, equities will benefit from a solid tailwind. And frankly, we don’t see what derails the earnings train at this stage … TSX Banks: Valuation concerns offset by strong fundamentals. Record high valuations have become a major concern for clients lately (forward P/E ratio stands at 16 times). While the sector might be due for a pause after such a rally (up 65 per cent year-over-year), we continue to like fundamentals in the space. ... 12-month forward EPS continue to trend up at a decent pace. Unless the next round of quarterly earnings disappoint, which we doubt based on cues from U.S. banks, we think the uptrend will persist over time. Note also that P/Es have benefited from foreign flows. While foreigners remain overall net seller of CDA equities, they have been buying CDA financials/banks stocks”

CAT is back

BofA Securities analyst Michael Feniger is very bullish on Caterpillar Inc. (CAT-N),

“CAT shares finished up 6 per cent (SPX up 2 per cent) on a strong Q2: adj EPS of $8.17 (32 per cent ahead of cons or 22 per cent ex IEEPA relief), raised FY outlook (mid-to-high teens sales growth vs low double digits), backlog of $72-billion (up 92 per cent year-over-year). What sticks out? I) CAT reported record sales, record backlog & record FCF ($5.1-billion, up 118 per cent year-over-year) - at a time when we are only a few months into an industrial economy trying to recover from a multi-year downturn & geopolitical tension, ii) CAT is typically viewed as a ‘cycle play’ yet we see a company flexing its muscles to drive outgrowth and returns above underlying demand. Reiterate Buy rating … Oil & gas backlog is nearly 2x bigger driven by gas infrastructure (Pipeline owners race to build capacity, source: Bloomberg). Channel checks suggest increasingly favorable terms & conditions for CAT that provides a level of visibility (and cash flow). In our view, the next unlock to the CAT story to explore (and combat ‘peak backlog peak narrative’) is the rising services stream … We keep our PO unchanged at $989 based on 29 times 2027 estimates (vs 30 times) as a slightly lower multiple is warranted as the machinery recovery cycle is moving off the trough.

Bluesky post of the day

Diversion

“Archaeologists Thought This Was a Roman Temple. It Might Actually Be a 1,700-Year-Old Library” - Gizmodo