G&M BMO chief investment strategist Brian Belski believes that the pace of the U.S. equity market rally is unsustainable and that as a result, the TSX will outperform the S&P 500 in the coming months.
Mr. Belski’s most recent research report outlined how U.S. markets are broadening out – returns are less driven by megacap technology companies and more determined by sectors with slower profit growth rates – and so performance of the S&P 500 will likely be choppy and flat in the coming months.
BMO’s analysis of market history shows that domestic stocks have been able to post solid returns and outperform U.S markets when they are rangebound. Since 1990, S&P/TSX Composite Index returns have exceeded the S&P 500 by 4 percentage points when the latter was relatively trendless. Domestic stocks outperformed 61 per cent of the time.
In addition, the TSX has strong representation in market sectors like energy and financials where relative performance is improving and valuations are below historical averages. The strategist is particularly interested in communications services and real estate stocks where underperformance is significant relative to history.
Mr. Belski developed a stock screen to uncover contrarian buying opportunities with the biggest upside potential if domestic stocks begin to outperform. TSX stocks with market capitalizations above $600-million were filtered to find those with year-to-date price changes ranging between a gain of 10 per cent and a loss of 20 per cent, less than half of analyst earnings revisions were positive, forward price to earnings ratios were below 20 times, and less than 50 per cent of analyst ratings were buys.
The end result is a list of 18 companies representing what BMO calls “Canadian True Contrarian” stocks. These are, in alphabetical order: BCE Inc., Birchcliff Energy Ltd., Bank of Nova Scotia, Cogeco Communications Inc., Canadian Imperial Bank of Commerce, Canadian National Railway Company, Capital Power Corporation, CT REIT, Canadian Tire Corporation, Canadian Utilities Limited, Dream Office REIT, Empire Co. Ltd., Enghouse Systems Limited, Canada Goose Holdings Inc., H&R REIT, IGM Financial Inc., Labrador Iron Ore Royalty Corp, and Richelieu Hardware Ltd.
-- Scott Barlow, Globe and Mail market strategist