CIBC analyst details office REIT rally, reiterates top picks in broader sector

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

Real Estate

CIBC REIT analyst Dean Wilinson emphasized the rally in office REITs in his monthly report on the sector,

“REITs generally underperformed the market in September with a marked exception: office REITs were a standout as there appears to have been a very noticeable sentiment shift owing to increased RTO mandates. That observation notwithstanding, the fundamental office backdrop is for the most part largely unchanged … Health Care, which includes our Seniors Housing coverage, posted a strong month, besting the TSX with 6.1-per-cent return. Year-to-date, TSX Real Estate continues to track towards the upper end of our full-year expectations, delivering in excess of a 10-per-cent total return … Our REIT coverage universe is trading at an unchanged average 12-per-cent discount to NAV and just under a 13 times forward P/FFO [funds from operations] multiple, levels that have historically led to increased activity … Our Top Picks Remain Unchanged: We continue to lean towards the simple adage of that which is working will continue to do so. By asset class, we favour seniors housing (EXE, CSH) and retail (FCR, PMZ), while multi‑family continues to trail (we like KMP domestically and GO, MHC for U.S. exposure). We see an improving backdrop in Industrial (GRT) that should carry into 2026 (could the beds and sheds theme re-emerge?)”

Small caps

BofA Securities head of global research Candace Browning highlighted research showing improving fundamentals within the U.S. small-cap rally,

“Earnings growth is broadening beyond mega caps and is now extending into small caps. The Russell 2000’s 3-per-cent gain last month was driven entirely by EPS revisions, not multiple expansion – its forward P/E stayed flat at 16.2 times while implied earnings saw their strongest change since mid-2022. EPS and sales revisions are at multi-year highs, and consensus expects small cap profits to outpace large caps in 4Q and through 2026. This improved growth comes with attractive valuations: small caps trade 30 per cent below large caps (0.72 times P/E vs. 0.99 times historical avg.) and imply 8-per-cent annualized returns over the next decade versus less than 1 per cent for the Russell 1000. Mid caps are also historically cheap relative to mega caps, a setup Jill Hall favors. Within small caps, Value looks especially well-positioned as Fed cuts rates, a shift into “Recovery” in the US Regime Indicator, and rising breadth all reinforce the case for rotation. Growth, meanwhile, remains expensive and more exposed in case of higher yields”

Value creation

Citi chief U.S. equity strategist Scott Chronert’s list of top “value creator’ small and mid cap stock picks were published with good timing in light of BofA’s observations above,

“In this report we are making two changes to our SMID Cap Recommended List. Penske Automotive Group (PAG) and Flowserve (FLS) are added. Both are Buy-rated by Citi Research … the selection universe for the SMID Value Creators List universe includes Citi Buy-rated stocks with market caps between $1-billion and $15-bilion. We select stocks from the universe with a bottom-up fundamental methodology while incorporating our US Equity Strategy views. We consider growth prospects relative to the valuation setup, health of the balance sheet … Generally, we look for operating leverage with a resultant impact on profitability”

The stocks on the list now are Penske Autotmotive Goup Inc., BJs Wholesale Club Chewy Inc. Ovintiv, First Horizon Corp., Ally Financial,Guardant Health Inc., Insulet Corp., Flowserve, QXO Inc., Knight-Swift Transportation, Docusign, Mirion Technologies, Wix.com Ltd., Pegasystems Inc., Coherent Corp, Sealed Air Corp, East Group Properties Inc., and ÆS Corp.

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