Diamonds glitter as Canadian insiders tilt to a rate rally

Move over real estate, insiders appear to be setting up for a long-rate rebound. REITs and other defensive stocks such as utilities lost ground in the semi-annual rebalancing of the 50-stock INK Canadian Insider (CIN) Index. Taking their place is a mix of resource and economically-sensitive industrial stocks.

Tomorrow after the close, the index will get 14 new members which will take the place of the same number of departing stocks. Stocks are dropped from the index if they fall below the top 30% of all stocks ranked by our equally-weighted INK Edge V.I.P. criteria of valuations, insider commitment and price momentum. For a new stock to make it into the Index, it has to be the highest ranked stock not already an Index member as of determination date which was April 30. The complete list of adds and drops and disclosures can be found here.

The highest ranking new member of the Index is Dominion Diamond (DDC). Formerly known as Harry Winston Diamond which sold off its retail division to Swatch Group in 2013, DDC is now strictly focused on mining. In 2012, it acquired BHP Billiton’s diamond assets, including a controlling interest in the Ekati Diamond.

Chart source: INK Research

Another mining stock to make the grade was Eric Sprott's Kirkland Lake Gold (KGI). Recently, Mr. Sprott has said that he would be looking to invest into precious metal mining companies, and Kirkland Lake was clearly on his list. He is board chair and is the second largest shareholder, owning 9.6% of shares outstanding.

Copper miner Nevsun Resources (NSU) is one of the economically sensitive stocks to join the Index. The company is operator of the high grade Bisha Mine located in Eritrea, East Africa. Another stock geared to global growth joining the Index is construction and engineering firm WSP Global (WSP).

In terms of interest-sensitive defensive stocks, three REITs, Milestone Apartments (MST.UN), Morguard (MRT.UN) and Retrocom (RMM.UN) are leaving as well as three Telecom and Utilities stocks: Emera (EMA), Fortis (FTS), Telus (T). Within the Energy sector, we note that pipelines Pembina (PPL) and Interpipe (IPL) are leaving, while natural gas focused E & P stock Advantage Oil & Gas (AAV), service company Black Diamond Group (BDI) and Middle East producer TransGlobe Energy (TGL) are coming in.

Meanwhile, Chorus Aviation (CHR.B), which operates the Jazz regional carrier, is joining while defensive Jean Coutu Group (PJC.A) is leaving.

The tilt towards growth can be seen in terms of the rebalanced sector allocation. Both Industrials and Energy will see their allocations gain about 5% to 14% each. However, that understates the true exposure to industrial oriented companies. A number of industrial stocks such as auto-parts maker Linamar (LNR) are found in Consumer Cyclicals which will continue to be the largest sector with a 24% weight.

INK CIN Index Expected Sector Allocation May 15, 2015
 

In terms of Morningstar fundamentals as of April 30, INK CIN Index post-rebalance valuations of trailing P/E (15.3), P/B (1.6) P/S (0.8) and trailing Price-to-Cash Flow (6.2) are all lower than the S&P/TSX Composite. The expected yield on dividends is 2.72% which is comparable to the S&P/TSX Composite of 2.83%. Meanwhile, quarterly earnings momentum of -0.4% is better than the S&P/TSX Composite of -2.1%.

Compared to the S&P/TSX Composite Index, based on Morningstar classifications, the INK CIN Index is more heavily weighted towards autos, and substantially less weighted in the banks. The INK CIN Index continues to have less weight in the Energy sector than the often-quoted TSX benchmark. Overall, insiders appear to be favouring stocks which could benefit from continued global expansion and higher inflation. For those who believe a bull market in long-term interest rates may be coming, insiders seems to be leaning to stocks which would do relatively well under such a scenario.

The INK CIN Index is tracked by Horizons Cdn Insider Index ETF (HII). The investment objective of Horizons HII is to seek to replicate, to the extent possible, the performance of the Index, net of expenses.
 

Disclosure: Indices cannot be invested in directly. Nothing herein should be construed as investment advice or an offer to sell securities or an offer of services in jurisdictions where INK does not have the necessary licenses. INK receives compensation from third parties who license INK indices.

An earlier version of this post was distributed to INK Research subscribers before the market Monday and later that day on CanadianInsider.com (this version updates date references).

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