Sound Bites: Value stocks in short supply on the TSX

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August 10, 2016 - The long anticipated correction, or at least consolidation, in metals stocks appears to have started with the S&P/TSX Composite Gold down 0.5% in the week ended August 5th, and down 4.5% for the previous 30 days as of Friday. We started reporting to subscribers in May that insiders were positioning for a pullback noting that insiders had picked up their selling as we headed into summer which is a traditionally weak period for gold. Indeed, according to Equityclock.com, June and August tend to be the roughest months for the gold price before entering into a seasonally strong fall.

At this point, we would not read more into the recent decline in senior gold producers beyond an overdue pullback. Mining bulls can take heart that insider sentiment towards junior miners remains strong with our INK Venture Index at a healthy 180% (1.8 stocks with key insider buying for every stock with selling) as of Friday. Indeed, it is not unusual in a gold stock bull market to see insiders take profits in senior and mid-tier producers while putting money into junior miners. At least one high profile gold insider is doing just that this summer. Over the past 90 days, Eric Sprott, has been taking profits in high-flying producer New Market Gold (INK Edge outlook: rainy; NMI), and redeploying the proceeds and then some into a number of smaller names including Golden Predator Mining (INK Edge outlook: mixed; GPY) and Excellon Resources (INK Edge outlook: mixed; EXN). His most recent investment was a $20 million stake in Ascot Resources (AOT)

Gold bulls can also take some encouragement from the latest productivity numbers out of the United States. On Tuesday the Labor Department reported that for the third quarter in a row, productivity fell at a 0.5% annual rate in the April-June period, extending the longest decline since 1979.

As gold stocks try to take a rest, consumer stocks are trying to make a relative comeback. Auto parts stocks in particular came to life last Friday with INK Canadian Insider Index members Linamar (INK Edge outlook: mostly sunny; LNR) and Martinrea International (INK Edge outlook: mostly sunny; MRE) jumping 4.0% and 4.7% respectively. Yesterday, Linamar reported second quarter earnings of $2.39 per share, above analysts' expectations thanks to improving margins. Sales of $1.66 billion were about $30 million shy of consensus.

We also note that both our Consumer Cyclicals and Consumer Non-Cyclical Indicators advanced last week even as both sectors outperformed the broad Canadian market. A rising indicator into rising prices often means that value remains attractive with stock gains lagging behind cash flow growth prospects. In particular, we will have to see if auto stocks can get into gear this fall after spending most of the past year in reverse.

Value-oriented situations such as those that appear present in some auto stocks are the exception in the market right now. Generally, opportunity seems to be narrowing among Toronto-listed stocks.Instead, opportunities as identified by stocks with a sunny INK Edge outlook are increasingly being concentrated among small and micro-cap names including some listed on the Venture Exchange.

In the current environment, it appears that investors who want a shot at above average returns will need high enough risk tolerances to go into some of Canada's riskiest stocks. Then again, that is exactly what central bankers including Stephen Poloz at the Bank of Canada are prodding people to do: take more risk. Unfortunately, if ultra-low rate monetary policy ends badly for markets, it will be investors, not Mr. Poloz or Janet Yellen, left holding the bag.

 

This post includes material from the August 8th Market INK subscriber report. Listen to Ted Dixon on Roundhouse Radio FM 98.3 every Thursday for his weekly financial markets commentary at 7:30 am Pacific Time. If you missed the live broadcast, catch the replay here.

 

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