Canadian Small-cap Model Portfolio Market Overview
Following the completion of the Q2 reporting period, we reviewed the Canadian market for earnings momentum. In our analysis, we have developed a screen (Exhibit 1) in which we select Canadian companies between $300mm and $5bln in market cap and measure the average three-month change in calendar* 2021 and 2022 consensus estimates. We have also limited the influence of commodities by excluding the energy sector, along with the metals & mining and paper & forest products sub-sectors. We have also excluded the REITs which typically trade off of cashflow and less so on earnings. To reduce volatility in the screen and minimize extreme values, we also exclude companies with calendar earnings of less than $0.25.
* We standardize consensus estimates into calendar years to account for different fiscal year-ends.
At the top of this screen is Russel Metals, with an average estimate revision of 46.2% over the Q2 reporting period (three months). Russel Metals is also highly dependent on steel pricing, similar to portfolio holding Stelco Holdings Inc. (STLC-T, portfolio weight 3.9%). Stelco has been our long-standing top holding within the materials sector in our small-cap portfolio, given the robust strength in steel prices. However, over the past two weeks, we have seen a slowdown in hot rolled coil steel pricing, including the first weekly decline in 28 weeks earlier this month. If we see further weakness in steel prices in the coming weeks, we would look to reduce our position in Stelco.
Following Russel are portfolio holdings Methanex Corp. (MX-T, portfolio weight 3.6%) and Hardwoods Distribution Inc. (HDI-T, portfolio weight 4.8%). After a brief dip through the late-spring/early-summer, methanol prices have surged higher over the past three months (+24.3%), leading to an average increase in consensus estimates for Methanex of 38.4% over the same time period (Exhibit 2). Hardwoods Distribution is our top holding within the industrials sector and continues to be an earnings momentum leader after bottoming in Q2/20 (Exhibit 3).