CIBC 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 , Brookfield Infrastructure Partners L.P. , Cameco Corp. , Exchange Income Corp. , GFL Environmental Inc. , Fairfax Financial Holdings Ltd. , Onex Corp. , Peyto Exploration & Development Corp. , and West Fraser Timber Co. Ltd.
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 . 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 , 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.