Lighten up on energy, Levkovich suggests
Investors may want to lighten up on energy, materials and utilities, according to Citigroup equity strategist Tobias Levkovich, who warns that rising expectations for profits may be putting stocks at risk.
The best opportunities often come from exploiting the gaps between fundamental reality and market perception, he said. He believes that it's not only the earnings that matter but how they line up against a set of predetermined expectations.
Mr. Levkovich argues that one generally does not want to be a buyer when the vast majority of analysts are raising forecasts, since the expectations hurdle has become relatively high and the possibility of disappointment grows. Conversely, when numbers are heading down, any good news is likely to be quickly rewarded with a stronger stock price.
The strategist says that earnings revisions for some industry groups seem to have an inordinately strong relationship with stock prices. Those groups account for almost half of the market capitalization of the Standard & Poor's 500-stock index and include the insurance, energy, semiconductor and related equipment, household and personal products, materials, capital goods, transportation and utilities industries.
In the energy sector, for example, with revision trends very robust, he suspects that expectations are quite high, given that oil prices are already at record levels.
At the same time, Mr. Levkovich moved to an “underweight” rating on the materials group after revisions climbed. Stock prices subsequently weakened, he says.
Currently, the strategist is still recommending that investors not load up on stocks in household and personal products.
Mr. Levkovich says there has been a sharp pullback in revisions and stock prices have remained pretty much indifferent to the bad news. He figures prices are likely to fall if estimates don't bounce back soon, and he does not see a catalyst for that to happen.
As for the utilities sector, he says increasing forecasts make that group riskier and warns that stocks are likely to weaken.
Similarly, the insurance and transportation sectors have both been downgraded recently.
On a positive note, Mr. Levkovich likes semiconductor stocks. Earnings forecasts are improving, but he believes they have yet to top out.
Over all, Mr. Levkovich is bullish on the U.S. stock market for the next couple of months, but cautions that new risks may emerge in the fourth quarter. Carolyn Leitch
Shoppers Drug Mart attracts analysts
Shares in Shoppers Drug Mart Corp. (SC-TSX) are growing increasingly attractive to a couple of Bay Street analysts.
The stock has been added to UBS Securities Canada Inc.'s 12-stock list of best bottom-up ideas, replacing Alimentation Couche-Tard, which has seen a sharp runup in its stock price.
UBS analyst Peter Rozenberg — Shoppers is his top pick in consumer staples — says the company operates in a stable regulatory environment with a superior competitive position and is expected to achieve a 15-per-cent growth rate over the next three to five years.
At Merrill Lynch Canada Inc., analyst Patricia Baker lifted her 12-month target price to $54 from $50. She believes the stock has some catching up to do with other North American drug store stocks.
Carolyn Leitch
