Resource stocks flashing a 'buy' signal
nationalpost.com
Canaccord's Mr. Majendie
Steve Maich
Financial Post
Canaccord Capital Corp.'s top stock strategist has made a killing buying gold stocks so far this year, and now he's telling clients to buy even more into cyclical resource sectors.
In a report issued yesterday, Nick Majendie advised clients to go overweight in mining, oil and gas, chemicals, forest products and steel stocks. He repeated his advice to cut exposure to interest-rate sensitive stocks like financial services, pipelines, utilities and real estate. The strategy is built around one of the most simple and time-proven investing principles: buy heavily in sectors others have neglected. Resource stocks are near the bottom of their historical weight in the TSE 300 index, and throughout the past 23 years, that has always signalled a buying opportunity, Mr. Majendie said.
"We would categorize these groups ... as still under-owned and hence likely to outperform," Mr Majendie said. Mr. Majendie has looked at the relative weight of different sectors in the TSE 300, dating back to 1978. Time after time, when a sector's weight falls to the lower end of its historical weight range, that sector generally outperforms the market until its weighting returns to a more reasonable level.
Natural resource sectors now make up about 22% of the TSE 300, compared to their historical high of 55% in 1980. About 35% of Canaccord's model portfolio is held in resource stocks. All of this just lends more weight to Canaccord's prediction that resource stocks will surge this year because they're generally the first to benefit from a resurgent world economy.
"These stock prices respond to economics and I think the world economy will be improving. When monetary policy is easy, [investors] look ahead to 2003 and say 'let's buy these stocks now'." If early returns this year are any indication, investors would be well served to heed Canaccord's strategy. The Canaccord model portfolio has risen about 2% so far this year while the TSE 300 has dropped 2.1%.
Mr. Majendie acknowledged that many Canaccord clients questioned his bullish call for gold stocks at the beginning of the year. But with stock markets giving up their gains, gold has been the star of the Canadian market of late. Yesterday, the price of gold rose US$7.65 an ounce to close at US$297.55, pacing a 3.8% rise in the TSE gold and precious minerals sub-index. Some of Canaccord's top resource picks include several beaten-up stocks, like Abitibi-Consolidated, Noranda, Teck-Cominco, Nexen, and the soon-to-be-merged PanCanadian Energy Ltd. and Alberta Energy Ltd.
"Paradoxically, when the earnings look fantastic and the P/E. multiples are below 10 times, that's when you need to be selling these things," he said. "I've learned these lessons painfully over time." Rate sensitive stocks like banks, financial management firms, high-dividend pipeline operators and real estate companies are now overbought, sitting at a record high 41% of the TSE 300. Last year, as rates were slashed, investors flocked to these defensive sectors. But the end of that run is at hand, he said. |
