Canaccord Upgrade Canaccord Genuity analyst Scott Chan now favours Canadian lifecos over banks, switching a stance he took at the end of last March.
“Since that time period, the Big-6 banks (average) returned 42 per cent that slightly underperformed the Lifeco’s (avg.) stock performance of 44 per cent,” he said in a research note released Thursday. “During COVID-19, we note that Lifeco shares have demonstrated much better EPS resiliency than expected.
“With vaccines being rolled out, we believe Lifeco investor sentiment continues to improve supporting our new stance: (1) Long-term interest rates have also moved higher which we believe will disproportionately benefit Lifecos (e.g. strain, NBV, earnings on surplus) over Banks; (2) Lifecos historically have exhibited higher beta (1.3 times) that should support price appreciation on improving markets over our forecasted period (albeit with volatility); (3) Canadian Banks (avg.) significantly outpaced Lifecos in 2020 (up 13 per cent) and during 4 of the last 5 years, while Lifecos have relatively outperformed the Big-6 banks year-to-date (up 4 per cent); (4) Lifecos exhibited much stronger than expected EPS resiliency in 2020 (Canaccord estinate: down 1 per cent year-over-year vs. Big-6 at down 16 er cent ) with upcoming Q4 results expected to benefit from higher exposure to market sensitive businesses; (5) Lifecos’ larger exposure to Asset Management/Wealth Management should provide a tailwind short-term (particularly with SLF); (6) Lifecos have earned larger annual EPS revisions from the Street which is a strong leading indicator for near-term share relative gains; and (7) Big-6 banks P/E (next 12-month) trade at a 5-per-cent premium to its historical average vs. Lifecos (avg.) at down 19 per cent. Further, our best fit P/B to ROE line (2021E) favors Lifecos over Banks.”
Mr. Chan upgraded Sun Life Financial Inc. to “buy” from a “hold” recommendation based on a higher price-to-earnings target multiple stemming from larger earnings potential and his expectation for a rise in return on equity.
Also seeing an “ improved valuation due to recent relative share underperformance,” he raised his target to $66 from $61, exceeding the $65.75 average.