National Bank Financial analyst Maxim Sytchev warns industrial stocks haven’t performed well historically when the U.S. Fed beings easing off peak interest rates, calling it “not an ideal place to be” for investors.
“All things being equal, lower rates equals higher NPV [net present value], propelling recent laggards such as staples and real estate-exposed names,” he said in a report. “The operative word ‘being equal’ as starting valuations, anticipation of rate cuts and, more importantly, their need — now to stabilize the weakening labour market in the U.S. and prop up overall economy in Canada, respectively, (amid rolled over inflation) — all play an evolving part within the capital allocation equation.”
“When using historical data, Industrials have not performed well during prior bouts of rate cuts because coincidental nature of rate compressions = slowing economy, not a great setup for earnings revisions Staples, on the other hand, appear (not exactly surprisingly) as the most defensive. What could be different this time? A soft landing would of course go a long way, but as the saying goes, economists have predicted nine of the last five recessions. Fiscal stimulus on the infrastructure side (US$1.2-trillion IIJA pool of capital continues to be allocated — 40 per cent (US$480-billion) to be exact has been announced for over 60,000 projects) and continued industrial decoupling from Asia should lead to greater installed manufacturing capacity over the years; we are, however, clashing somewhat against high by historical norms valuations, coupled with again weakening manufacturing PMIs.”
Mr. Sytchev recommends investors “stick with names that will exhibit a counter-cyclical dynamic to an economic slowdown,” pointing to Rb Global Inc. , or “have something unique within the structural setup to emerge stronger post any dislocation.”
“ATS/FTT have already been negatively impacted; in the engineering consulting space, we now see Atkins (ATRL) as providing the best risk/reward skew as the nuclear refurb cycle/margin expansion potential seems compelling, especially at relative valuation which imputes a 40-per-cent discount vs. peers,” he said. “In the small cap space, we like RUS (steel market is depressed) and AFN (ag cycle is scraping the bottom).”
Mr. Sytchev’s ratings and targets for his recommended stocks are:
- Ag Growth International Inc. with an “outperform” rating and $77 target. Average: $78.13.
- AtkinsRalis Group Inc. ( with an “outperform” rating and $68 target. Average: $68.09.
- ATS Corp. ( with an “outperform” rating and $52 target. Average: $57.83.
- Finning International Inc. ( with an “outperform” rating and $47 target. Average: $49.33.
- RB Global Inc. with an “outperform” rating and US$90 target. Average: US$96.63.
- Russel Metals Inc. with an “outperform” rating and $46 target. Average: $46.33.