Q&A: CIBC’s chief market technician shares his latest Top 10 momentum-driven TSX stock ideas

On Wednesday, stocks experienced an impressive post-U.S. election pop. In the U.S., the Dow Jones Industrial Average, S&P 500 Index and Nasdaq Composite all rallied to record levels. The S&P/TSX Composite Index ended the day less than 1 per cent away from a record close.
The positive market momentum may have room to run, especially with central banks lowering interest rates. Seasonal forces are also at play. November is historically the start of a seasonally strong period for equity markets that carries through to April.
CIBC’s chief market technician Sid Mokhtari has identified 10 stocks with attractive momentum attributes that may participate in a market rally.
Mr. Mokhtari produces a monthly report with his Top 10 stock ideas, selecting stocks from the largest 100 members by market capitalization within the S&P/TSX Composite Index. His disciplined stock selection process has produced strong returns this year. Year-to-date to Oct. 31, his basket of stock recommendations has rallied 22.75 per cent, outperforming the S&P/TSX Composite Index by 7.49 per cent. Last month, his Top 10 stock ideas delivered a 0.69 per cent return, which was relatively in-line with the 0.65 per cent price return for the TSX Index.
For November, his Top 10 stock ideas are: Cargojet (CJT-T), Descartes (DSG-T), Fairfax (FFH-T), First Capital REIT (FCR-UN-T), GFL Environmental (GFL-T), Onex (ONEX-T), Primaris REIT (PMZ-UN-T), Quebecor (QBR-B-T), Sun Life (SLF-T) and Wheaton Precious Metals (WPM-T).
On Tuesday, The Globe and Mail spoke with Mr. Mokhtari and discussed his current basket of momentum driven stocks.
This month, nine new stocks across six sectors surfaced on your Top 10 best ideas list. Are there a few stocks on this list that look particularly interesting to you?
All 10 stocks are good in my opinion. Collectively, we have a basket of 10 stocks that by some measures are non-correlated to one another, albeit they’re all momentum driven.
The one that has been on our list and it is now becoming even more attractive because it has fallen below its 100-day average is Cargojet. Cargojet is tied to transportation. Low energy and fuel prices are supportive for them. We saw a lot of airliners talking about their cargo numbers being better. I think Cargojet does stand out from the perspective that you’re getting back to the trough levels of its RSI [relative strength index]. So that’s one name that is stands out for us.
Another one is Sun Life that has a good backing from an interest rate perspective, has a good backing on a fundamental basis. They have their Investor Day that is coming up. It has the right technical backdrop as well as fundamental backdrop.
We’ve seen a lot of waste management companies, in the U.S. as well, Waste Connections (WCN-T) and Waste Management (WM-N) that are showing very strong relative strength and absolute price momentum. GFL Environmental is a smaller cap company that does have some positive catalysts from a fundamental perspective and that’s another good name.
Another one that stands out for us is Onex Corporation that has entered our improving quad of our matrix process. Onex is another good name, which is buoyed by capital markets, financials and since it has, by some measures, lagged its peers in the financials space, Onex is another very good, convincing name for me. It does have a lot of good upside in my opinion and it’s very well ranked by our fundamental desk as well.
Generally speaking, we still favour made in Canada commodities, particularly tied to gold and silver. I think if we can get exposure to silver or gold made in Canada, it is not a bad idea. We chose WPM, Wheaton Precious Metals, which has streaming and royalty agreements, and has a lower risk background.
What is your outlook on gold?
Gold has been quite strong over the past 12 months plus and has not really altered any directional conditions. We’re dealing with a backdrop that has a strong trending force behind it.
What is interesting to us is that gold stocks are still underperforming relative to the commodity in a big way. We’re probably going to be able to see better surprises on the upside this earnings season. I still want to be very specific in my selections. I want to go after quality, large cap, liquidity, royalties per se so that there is still that defensive narrative of selection within the gold space as well as silver.
Looking at your 30-year average returns for the month of November, 10 of the 11 sectors have positive returns. The only sector with a negative average return during the month is energy, which declined 1.7% on average. What type of returns might investors see in November and are you expecting to see a broad rally with many sectors participating? Can you make any predictions based on your screening?
I do believe that at a minimum six out of the 11 sectors are likely to produce positive results this month. It’s a net positive month to me, it’s particularly back-end loaded. It does pick up a lot more strength as you go into the back end of the month, which follows through into December.
We do assume that the general course of the market trajectory will remain positively skewed, particularly in the back end of November and as we go into December.
What do the technicals look like for the Canadian dollar?
It has at best been a range bound currency.
If you look at the Canadian Dollar/U.S. Dollar, for instance, in technical terms, we have been seeing a general area of support at about 72 cents. So, the Canadian dollar has been in a range bound condition with 72 cents on the downside and then the upper band being marked at about 74 cents.
Throughout the past call it two years, we’ve seen nothing but persistent downside pressure against 72 cents on the lower band, and every rally attempt to the topside has been truncated at a lower high. So, it is forming what is typically an element of more downside pressure.
We estimate that the general bias would be that dollar should eventually breakdown below that 72 cents support level and ultimately pierce lower toward 70 cents or potentially as low as 68 cents as we go forward.
When we spoke last month, you indicated that your official target for the S&P/TSX Composite Index is 25,700 over the next three to nine months, and that the TSX Index could hit 25,000 possibly by year-end. Are you sticking with those forecasts?
Yes, we don’t see any deviation from a trend trajectory for the TSX Index.
Financials are a big part of the TSX Index composition from a weight perspective. Capital markets in both the U.S. and Canada are showing quite well. Rates are still very friendly. The yield curve is still very friendly for financials, in general.
We’re also seeing that over 50 per cent of the TSX energy sector is showing positive traction. And if we get a weaker Canadian dollar, we should probably be able to see better price action out of the energy space as well because they tend to move in the opposite direction by historical measures. And that’s probably going to give the Index better buoyancy as we go into year-end. As we go into December and enter the first quarter of next year, energy should be able to produce better results.
But you don’t have any energy stocks on your Top 10 best ideas list?
Yes, that’s correct.
We do have a general notion that the energy sector should be able to participate as we go into the month of December. But we don’t have that reading in our matrix that gives us the signal to add to the energy sector. At this point, we have seen some participation but not to the extent that we want.
There aren’t any banks on your Top 10 best ideas list anymore, there was one bank stock last month. Are bank stocks deteriorating or are they just consolidating?
We run stocks against one another and those that come up in our tables, they tend to be selected based on the relative performance. Onex, for instance, is in an emerging backdrop, Sun Life is in an emerging backdrop, Fairfax is in an emerging backdrop, as they are showing better relative strength acceleration. So, within financials, it’s not that banks are not doing too well, that is not at all the call, it’s just that these three companies are now collectively showing better potential for relative strength acceleration. And that means these stocks are probably going to produce better alpha relative to the banks that have done quite well over the past six months.
According to your screening process should investors be buying defensive stocks or growth stocks?
We run a matrix process for different factors and our factor analysis shows that there are more growth and momentum factors that are coming into the picture as well as quality. Breadth has improved to a great extent, it’s fair to say that many things have been working.
So, I would say growth and momentum are probably going to be the right call. We’re not necessarily suggesting walking away from defensive names but we think if you want to generate alpha, you probably want to have better exposure to growth and momentum and quality factors.
Is there anything we haven’t discussed that you think is important to mention?
What stands out for us are the shapes of the 10-year U.S. Treasury as well as Canadian yield curves. Both are reaching levels that are suggesting that yields on long bonds are closer to overbought conditions. Yield metrics are getting very overbought, and we should assume as we go forward that yields are probably going to start to stagnate and come back down again.
Based on our work, we’re getting to levels where mean reversion indicators are reaching peak conditions that are often a precursor for another period of mean reversion lower. And that would mean rates would come off, and that would buoy some of these interest rate sensitive names that have been consolidating in the past two months per se. We are seeing some names that are beginning to produce alpha like Primaris REIT as well as First Capital REIT.
This Q&A has been edited and condensed for brevity and clarity.