2024 has been a stellar year for equity markets, and, according to CIBC’s chief market technician Sid Mokhtari, further gains are in store for investors. He notes the S&P/TSX Composite Index has delivered an average return of 1.3 per cent in December over the past 30 years with all 11 sectors rising.
Successful stock selection is essential if you want to outperform the market. Mr. Mokhtari’s publishes a monthly report in which he highlights his Top 10 stock ideas. He screens and selects stocks from the largest 100 members by market capitalization within the S&P/TSX Composite Index. His disciplined process has produced impressive that have outpaced the TSX in 2024. Through Nov. 30, his basket of stock recommendations has rallied 27.6 per cent, outperforming the broader index by 5.3 per cent.
For December, his Top 10 stock ideas are: Bank of Nova Scotia (BNS-T), Brookfield Infrastructure Partners L.P. (BIP-UN-T), Cameco Corp. (CCO-T), Exchange Income Corp. (EIF-T), GFL Environmental Inc. (GFL-T), Fairfax Financial Holdings Ltd. (FFH-T), Onex Corp. (ONEX-T), Peyto Exploration & Development Corp. (PEY-T), Shopify Inc. (SHOP-T) and West Fraser Timber Co. Ltd. (WFG-T).
On Monday, The Globe and Mail spoke with Mr. Mokhtari and discussed his top-10 best ideas list, ETFs that have momentum and trends that he is seeing.
In November, stocks in your top-10 best ideas list rallied a respectable 4 per cent but came in below the 6-per-cent gain for the S&P/TSX Composite Index.
We did have one outlier in our basket and that was Cargojet (CJT-T). It came out with third-quarter financial results that were not too bad, but the guidance was not well received by the Street. And then later on, there was a short seller that came out with a note on the negative side that pushed the stock price even lower. We have 10 equally weighted names in our recommended basket, and Cargojet really weighed heavily on our performance this past month. We have to hold on to our recommended names until month end. I would say that was the main culprit.
This month, there are seven new stocks on your top-10 best ideas list and three carryovers. Of the 10 stocks, which ones appear particularly strong to you on a technical analysis basis?
Brookfield Infrastructure, that’s a good name that clears all our factors and there is the element of Canadian dollar weakness that BIP benefits from because of its reporting in U.S. dollar terms.
In our opinion, the Canadian dollar is likely to stay rather stagnant against the U.S. dollar, and that is going to be able to better buoy the likes of BIP, the likes of Shopify that will be able to benefit from the U.S. dollar exposure.
When you said BIP “clears all our factors”, what are those factors?
BIP clears the rate of change of trend following indicators, and those would be moving average composition, which means all averages need to be trending above one another. Secondly, BIP also clears momentum on three different time frames, on a monthly, quarterly and yearly basis. And it also has a neutral to better positive seasonal hit-rate between now through to year end as well as January. So, we think that it has a positive ranking on the seasonal influences as well. And finally, we have a stronger preference for beta, growth and momentum as we go into year-end, as well as January. It’s a pretty high beta name.
Can you elaborate on those three points: beta, growth and momentum?
So, every month we run a matrix that looks at all factors that have positive or negative attribution to price performance. We look at dividend yield, we look at volatility. We’ll look at size, be it large cap, mid cap, small cap or equal weight. We also look at value factors in our matrices and then we look at growth, which is not only price appreciation but also an earnings per share backdrop for growth. We look at momentum, which is a function of absolute price and relative methodology. And then I would say beta, which is a function of how strong a name may respond to the performance of the underlying benchmark index. So, when we look at all those things on a one month and one quarter basis, we are noticing that growth, momentum and beta factors have been showing better performance attributions.
Do you believe there will be a broadening of outperformance to small and mid-cap stocks in Canada, like we are seeing in the U.S.?
We think large-cap indices may be in more of a range bound condition on the upside within a lot of rotation among sectors.
Within small and mid-caps, we are noticing very strong breadth expansion, which is a function of collective participation by the members in general.
So, to answer your question, we are advocating investors focus on lowering their cap size and rotating into mid and small caps with an element of profitability within those names. I would say if anybody wants to go into mid-caps and small caps, maybe they should look for that factor of profitability in their scanning process.
Your top-10 best ideas list is generated by screening the 100 largest members in the S&P/TSX Composite Index by market capitalization. Given your expectation that small and mid-cap stocks are going to outperform, can you identify a few small and mid-cap names that you see a potentially gaining momentum?
For this basket, we can highlight Exchange Income, which is a smaller cap by relative terms. Another would be Cineplex (CGX-T), a smaller cap name, but it is demonstrating a better set of tendencies in terms of rotation that we see out there.
But, to your point, the reason we don’t allocate a lot of weight into small caps in Canada is because liquidity is very important to us, and that liquidity factor is not as transactionable in Canada as it is in the U.S. Mid-caps and small caps in the U.S. are very liquid compared to those in Canada.
For three consecutive months, the S&P/TSX Composite Index has outperformed the S&P 500. Do you see the Canadian stock market continuing to outperform the U.S. market?
There is a strong tendency of relative performance within U.S. equities, globally speaking, in the year one of the U.S. presidential cycle. It is very front end loaded. The first half of the year tends to perform better relative to the second half of the year. As we go forward into the new year, I believe our process will be able to identify the fact that the U.S. may be able to pick up some better performance relative to the TSX.
In the U.S., we believe the preference of the style and the preference of cap size is now becoming more tied to the Russell 2000 and the S&P MidCap 400 Index, which by definition are the smaller market cap names.
I do think back half of next year should be able to buoy the TSX. We think that there will be a level of positive mean reversion in commodities and U.S. dollar strength may begin to subside as we go into the back half of next year, and that should be a positive for commodities in general and commodity related indices, i.e. the TSX.
In the U.S., the Russell 2000 Index with a focus on small-cap stocks was a top gainer last month, rallying more than 11 per cent.
When we run our factors, we are fully aware that there is a cap size rotation and a preference for mid-caps and small caps in the U.S.
And that’s been, I think that’s a very reasonable call, especially given we have a pro cyclical indicator that has been triggered in the U.S. and that’s called the Dow Theory buy signal.
By definition, a Dow Theory buy signal is when you get market averages confirming one another, and that is usually tied to a pro-growth narrative. By historical measures, when you get that signal, we have a better narrative for a pro cyclical approach to the market. Typically, areas that perform well by historical measures in the year following a signal are financials and industrials. The small cap Russell 2000 does have a lot of financials, and industrials are very heavily built within the mid-caps in the U.S.
How will the Magnificent Seven stocks perform in 2025 in this backdrop that you’re talking about?
I think they are becoming more of a range trade than anything else. They’ve had an enormous, fantastic run in the past couple of years. We’re not necessarily too negative on them, but we think that the source of alpha can be better produced elsewhere. Those Magnificent Seven may be able to pause for some time and pass the leadership baton to smaller caps and mid-cap names, particularly tied to financials and industrials and pro cyclical areas. This is not a big negative call, it’s more a preference for other areas of the market.
Earlier in the conversation, you mentioned the Canadian dollar might stagnate relative to the U.S. dollar.
The Canadian dollar was a range-bound currency relative to the U.S. dollar. And we recently saw a very sharp break in the Canadian dollar relative to the U.S. dollar.
The general trend of the Canadian dollar off the 2021 reference points has been on the weaker side. The backdrop of trend structure for the Canadian dollar is generally on a weakening bias and then the recent breakdown of the reference points for the Canadian dollar reaffirmed that trend bias for us.
When we spoke last month, you indicated that the Canadian dollar relative to the U.S. dollar could have a floor, or technical support, between 68 cents and 70 cents. Is that still the case?
That is the case.
The fact that it has broken down below 73 cents has opened it up towards 70 cents. And we think that new lower range is pegged towards 70 cents to as low as 68 cents with ebb and flows. And, in our opinion, we now have a big ceiling above 73 cents for the Canadian dollar having broken through that two-year floor effectively at that point.
The election win by Donald Trump contributed to a surge in the price of bitcoin, which is currently just under the $100,000 mark. Is the bull run for bitcoin due for a pause or can this strength continue?
We have bitcoin within our leading category, but it has dropped from a rate of change perspective. We are noticing that range of rate of change of appreciation for bitcoin is beginning to slow, and I think that’s where we want to focus.
When it comes to where it may go from here to year end, I would say $98,000 to $112,000. That is the measured move for bitcoin on the upside and we’re not too far away from it.
But as we go forward, we do favour a pause. I think this magnitude of the strength that we saw in relative outperformance of bitcoin is going to ease some of the overbought conditions and mean revert. But with a general notion that the stronger trend forces are likely to keep it well supported on pullbacks.
We do assume that as we go forward into next year, bitcoin should be able to resume uptrend forces again. But I do believe that we need a period of pause, a period of consolidation before we can refresh trend forces again.
Did I see ethereum listed on your improving quadrant?
Correct. Ethereum has moved into our improving, better improving part of our quad work. And I think as a relative candidate over bitcoin, ethereum does make sense to us.
I have a few questions on ETF’s. So, ETFs can be an attractive vehicle for investors to own given their diversification benefits and their low management expense ratios. How many Canadian and U.S. ETFs do you screen and are you seeing evidence of certain styles or industries that are technically strong?
So, we look at 100 ETFs in our matrix work. Our process is very much systematically based and ranks ETFs according to their constituents and its members within them. And then we use a quad model quantification process and it tells us what ETF’s that are producing better alpha and better momentum, internally speaking, from a breadth perspective.
For quite some time, we have had a lot of financials and banks. Recently, an ETF of interest that we started to see is FINX (FINX-Q), which is a fintech ETF in the U.S. We are seeing broker dealers IAI (IAI-A), that’s another one that is coming up in our baskets very nicely. Another interesting one is IBUY (IBUY-A), which is in retail, that is also picking up a lot of strong alpha in our process. Followed by PEJ (PEJ-A), which is a leisure and entertainment ETF. So, there are plenty of names that are starting to show a very strong set of readings for us.
I do want to reiterate the notion that financials have been leading very strongly. BITO (BITO-A), IBIT (IBIT-Q), as well as BLOK (BLOK-A) are tied to cryptocurrencies and are also part of that leadership category. But we are seeing some fintech and even igaming and sports gambling ETFs coming up in our matrices. This tells you that the element of risk taking is still alive. We are seeing money flow rotation and relative strength rotation that is showing better performance within some of the riskier assets or riskier ETFs that we hadn’t seen for some time. And they’re beginning to work, which is again a function of smaller and mid-cap rotation preference.
Earlier you mentioned earlier, the rotation into small and mid-caps, particularly in the U.S. where there is ample liquidity. Are there any ETF’s that an investor who wants to play that space can invest in?
I would say for the midcaps, we favor IWR (IWR-A), which is the Russell MidCap Index, followed by IWM (IWM-A), which is the Russell 2000 ETF. Those would be our preferred choices of ETF candidacy.
And they rank well on your screens?
Yes, they both have entered the improving sub quad of our leading major quad and that’s usually a very good sign.
Lastly, 2025 marks a year when many homeowners will be renewing their mortgages. The five-year government bond yield is a good proxy for the popular five-year fixed mortgage rate. Where do you see the five-year bond yield headed?
I’m going to approach this purely from more of a systematic and technical perspective because we do have economists here who may have a differentiated view from how we look at the direction and the trajectory of the yield market.
I would say that the five-year Canada is likely to stay range bound below 3.25 on the upside with more downside yield trajectory that is closer to 2.50.
So, my own views on the trajectory for the five-year Canada is likely to be lower high in yields with the potential test of the lower end of the range boundary, which is currently pegged at 2.75 to as low as 2.50. I would not be surprised if we get the five-year Canada closer to the low end of its range.
Anything else that we didn’t discuss that you want to mention?
We don’t talk a lot about natural gas or energy. We have seen natural gas stocks participating on the upside in a broader fashion and I think that’s probably going to last a while longer. Both natural gas and uranium are perceived to be cleaner energy and there’s a big narrative for both commodities to be used for data centers. So, we are seeing a better buoyancy in both areas.
We added Peyto to our top-10 best ideas list, which is a natural gas-oriented stock in Canada that has an 8 per cent yield. We haven’t had many energy names in our baskets, and this past month Peyto made it in.