Market Factors: Stock ideas for all risk tolerances

A BofA Securities strategist provided a host of stock screens that provide ideas for most investors, regardless of how bullish or bearish they’ve become. Section two covers the housing market where the good news is that rising borrowing costs are unlikely to cause much damage going forward. The diversion is a wretched top 200 songs list from Rolling Stone and we have quick hits as always.

Equities

Bearish? Bullish? Here are some stock ideas

BofA Securities equity and quant strategist Savita Subramanian reported that large institutional clients are waiting for an all-clear signal before committing new money to the market. There’s a catch, though – she doesn’t think they’re going to get one. In recognition of this investor trepidation, and the varied opinions on the resilience of the AI rally, Ms. Subramanian offered stock ideas for many different layers of risk-aversion.

Fund managers have been asking for growth stock ideas less correlated with AI. The strategist obliged with a list of companies with low-to-negative correlation to the AI growth story, high long-term earnings forecasts, and are buy-rated at BofA. Stocks on this list most likely to interest Canadian investors include Mastercard Inc., AbbVie Inc., Eli Lilly & Co., aerospace and defense specialist L3Harris Technologies Inc., Starbucks Corp., and Nasdaq Inc.

Ms. Subramanian’s clients looking for prudent exposure to AI were provided with an AI GARP screen. These are companies best at converting profits into operating cash flow, and with positive free cash flow expectations for the next 12 months. The positive free cash flow requirementscreens out companies with capital spending plans beyond available cash. Popular stocks making it through this screen include Advanced Micro Devices, Ciena Corp., Cummins Inc., GE Vernova Inc., Corning Inc., and Vertiv Holdings.

The strategist also designed an AI adopters/improving efficiency screen. This involves companies without direct revenue exposure to the AI buildout that have improving efficiency in terms of previous 12 months revenues divided by employees. This list is longer, and hasa more diverse set of names including 3M Co., Twilio Inc., Coca-Cola Co., RTX Corp., Ralph Lauren Corp., Jabil Inc., Keurig Dr Pepper Inc., Boeing Co. and Domino’s Pizza Inc.

(As an aside, I worked for a company that used revenue per employee to determine staffing needs in each business division. I thought it was too crude at first but the more I thought about it the more genius it became. No manager hired administration until desperate because every body counts the same as a part of the denominator for revenue – better to hire a revenue generator).

Portfolio managers with serious concerns about an AI stock implosion can choose from Ms. Subramanian’s list of stocks with negative betas to the S&P 500 over the past six months. These are stocks moving most often in the reverse direction of the benchmark. These include, in order or negative beta, areAltria Group Inc., McKesson Corp., Mondelez International, JM Smucker, Coca-Cola Co, and Costco Wholesale.

TR=Total returns. TTM=Trailing 12 months. NTM=Next 12 months

Real estate

Housing market has bottomed, won’t recover for a while

Macquarie economist David Doyle believes the Canadian housing market has bottomed but does not expect a recovery anytime soon.

Mr. Doyle predicts a further 100 basis points in Bank of Canada rate hikes by the end of 2027 and that will not help affordability, which had been improving. Nationally, housing prices have stabilized roughly 20 per cent below the February 2022 peak.

Government estimates of population growth have shown increases recently and this will help soak up any excess inventory. Sales activity in residential real estate markets are unlikely to fall further from depressed levels according to Macquarie.

The Canadian consumer has remained resilient, as shown by retail spending that remains robust. This implies a lack of stress for the household balance sheet. Credit growth has continued to fall as consumer finances are repaired.

Diversions

Rolling Stone top 200 songs

Rolling Stone magazine has listed their top 200 rock songs of the 21st century and of course it’s trash. I really like the number one song and think it’s a good pick and number two is a band I love although they picked the wrong song. Same for number five, which is from Radiohead. (I’ve been a bit addicted to Radiohead’s jarring Pyramid Song lately for some reason, by the way).

Rolling Stone also proved they are still stuck in the 1960s to some extent by picking a terrible Rolling Stones song at number 169 and a Lou Reed song at 146. Neil Young, Paul McCartney and Bob Dylan also take up Boomer-pandering slots they probably don’t deserve. They picked two Dylan songs.

A lot of the songs I don’t know at all, which is to be expected since I’m getting old. I try to keep up through Spotify lists but it’s impossible. A lot of it is too auto-tuned and disco-y for me anyway.

That said, I think Snail Mail’s Heat Wave deserves to be higher than 143, and Soccer Mommy’s Circle the Drain is too low at 141. There should be more Elliott Smith in my opinion too - he made a big impact through movies.

To be fair they picked the right Kings of Leon, Lucy Dacus and Japandroids songs - The Bucket, Night Shift and The Nights of Wine and Roses - respectively. I’m happy to see Waxahatchee because I think Katie Crutchfield is a genius and Oxblood is probably my favourite song of the 21st century.

The Essentials

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The Rundown

CIBC’s chief market technician Sid Mokhtari reveals his Top 10 stock picks for November

Norman Rothery says high yields and low volatility make these Canadian dividend stocks worth a look

David Berman thinks Canada’s own Celestica could be a smart bet on the AI trade right now

Larry MacDonald’s latest report on what short sellers are up to on the TSX

Reuters on the stock market sectors to closely watch as results come in during the U.S. midterms

Quick hits

There’s a lot of market-related things we can talk about this week but, in terms of importance, they all pale in comparison to the U.S. midterms. On Tuesday the Americans go to the polls with a Democratic sweep of the House and Senate predicted by Citi chief U.S. equity strategist Scott Chronert. The extent to which president Donald Trump accepts the election results is the key and nothing, including declaring a state of emergency, is completely off the table.

BofA Securities strategists removed Apple Inc. from their U.S. 1 list of highest conviction stockpicks because the analyst believes profit margins are at risk. Analyst Wamsi Mohan believes consensus gross margin forecasts are too high and underestimate component cost inflation in new iPhone models. Importantly, Mr. Mohan thinks margin pressure is temporary and profitability will improve in late 2027, setting up the potential for buying opportunities earlier next year.

The second derivative of U.S. earnings growth has stalled, according to Goldman Sachs chief U.S. equity strategist Ben Snider, and this is likely to cause problems. High or low profit growth do not cause volatility on their own - market values just calibrate to whatever it is. What does cause volatility are changes in the rate of growth - that’s the second derivative of growth. If the steady rise in 2027 earnings expectations has peaked and is about to head lower, the market will follow and the process might not be overly orderly given high trailing valuation levels.

Read this week’s earnings and economic calendar here