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[music] >>Hello I'm Greg Bonnell and welcome to MoneyTalk Live, brought to you by TD Direct Investing.
Every day, I'll be joined by guests from across TD, many of whom you will only see here.
We'll take you through what's moving the markets and answer your questions about investing. Coming up on today show will have a take on the transportation sector and discuss whether the rail stocks are set to outperform versus Airlines. Juliana Faircloth with TD Asset Management joins us. MoneyTalk Live's Anthony Okolie will take a look at the new Bank of Canada survey showing business confidences sweeping to levels we usually only see during a recession.
And in today's WebBroker education segment, Nugwa Haruna will take us through how you can find analyst reports on the platform. Here's how you can get in touch with us just email us at moneytalklive@td.com or Philip of your response box under the video player on WebBroker.
Before we get to your guests of the day let's get you an update on the markets. We have green on the screen of the first trading day of the week. Starting at home with the TSX Composite Index up a fairly solid 142 points or about three quarters of a percent. Among the most actively traded names on the TSX is actually a name to the downside to begin with although it is coming off the lows of the session.
Baytex energy in 592 a share. The broader energies to base space was under pressure with crude rote prices.
Now they are off the lows.
Not so far contributing. But deftly not weighing it down. We do have some tech names including Shopify on both sides of the border in rallying mode today. Let's check in on Shopify at 71, 88 up a little more than 2%. Now, south of the border the banks kicked off earnings season from Wall Street last Friday. A lot more S&P 500 names on deck for this week.
If some green on the screen up a full percent of the S&P 500.
A little shy of 45 points.
The tech heavy NASDAQ, staring at 135 points also percent.
Taking a look at Pfizer, Friday they came out with a full-year sales and profit forecast and the fact that demand for COVID related products has been steadily declining but today, on a conference call with analysts, apparently Pfizer executive saying they're looking for cost-cutting measures into the billions with savings and has the stock rallying.
Up a little more than 5% on Pfizer.
And that's your market update.
If you had a look at the transportation sector the Summer you would've seen the airlines mostly outperforming the rail stocks.
But that trend is seems to be changing as we get further into the fall. Joining us now to discuss is Juliana click for joining us now is Juliana Faircloth VP of portfolio research at TD Asset Management.
>> Thanks for having me.
As you mentioned it's been a volatile year for those two pockets within industrials and transportation. If we look at performance year to date, I think we've brought in a chart that shows both of those segments have at this point underperformed the broader market. If we look at the US market, >> The S&P 500 would be the grey line. The airlines on the rails… At one point I think as we were saying, the airlines outperformed. But now a different story.
>> Exactly. The path is been very different. You see the airlines if you help them till July you were up 40%. The path between those two end markets has been really different. So on the one hand, with airlines we know the travel demand is been really robust. I think anecdotally we can all see that airfares are quite high.
That's pretty positive for the airlines in Q2. They grew earnings over 90%. The US airlines on a broadly.
Delta reported last week and they grew earnings about 35% in Q3.
The flipside of that is the rails where we have been in more of a freak recession.
That's what the rails will tell you.
That's what the truckers will tell you.
From an earnings perspective it's been a bit more challenging for the rails, Q2 earnings, the US rails declined something like 15 or 16%. So again, that compares to over 90% for the airlines. So very divergent paths for two parts of the transportation industry.
>> You use the term freight recession.
Broader in the economy we talked about the shift from goods to services. Is there a bit of that playing into this? Do you have a freight recession?
>> Absolutely.
And I think that concept of the consumer switching from goods to services is very clearly played out between airlines and rails.
So when I say freight recession, I really mean rail volumes have been declining or negative year-over-year of for most of the year 2023. A lot of that is driven by intermodal volumes.
By intermodal we mean just kind of consumer facing volumes and that the rails will move across Canada or across the US.
And those have been negative for a couple of reasons.
The first would be that shift from goods to services that consumers are, you know, not sending as much on furniture anymore and spending more on travel and booking flights with Air Canada.
The other would be inventory destocking.
It's pretty related to the goods to services shift but we know a lot of the big retailers built up huge inventory balances over 2021 and 2022.
It's taken some time to move through that in the system as consumers of spent a little bit less on goods.
>> To so we did have that airline sector outperformance this year. It's been a tough market across the board for a lot of stocks of the past several weeks.
At the same time, when you talk about airlines, it can be a tricky business. Are we starting to see some of that appear, some warnings from the airlines?
>> You are right that it can be a tough sector or industry, I guess, to invest in.
If we look over the long-term, I mean in the last five years, I think we have a chart there as well.
Showing the airlines have underperformed white materially relative to the rails, that orange line, and the broader market, the grey line.
Of course maybe it's not fair to look at that chart specifically.
It includes COVID. That's a very unique shop for the airlines. But even pre-COVID, if we look at the five years from the end of 2014 to the end of 2019, a similar picture.
Airlines have kind of gone nowhere as a sector. Where is the rails of outperformed in the market itself has been up. Over a five-year period pre-COVID. There are a few reasons for that.
I think it highlights an interesting case study in terms of what fundamental investors look for in terms of the quality industry. Obviously, both the airlines in the rails are very capital-intensive. It costs a lot of money to build a rail network. It costs a lot of money to build an airline.
There are a lot of regulatory hurdles for rails and airlines to jump through. There is pressure from labour, from unions. But there are a few key differences that I think are interesting to highlight in terms of structure.
That would be barriers to entry, competitive intensity and customer switching costs.
>> I would think from my point of view, I'm not in a position either to start an airline or a railway. That the barrier to entry would be high. But not so for airlines if you do a deeper dive.
>> Exactly. So if you think about barriers to entry, you're right. It's very expensive.
There's a lot of regulatory pressure in order to start an airline or a railway. I think what's different about the rails is there is a pretty unique infrastructure barrier where there is, I mean it's almost inconceivable to think of a new coast-to-coast rail network being laid down in Canada or the US. The amount of land requirements, work with communities, that all of that would require, is so massive that it creates an insurmountable barrier to entry for the rail network.
Airlines, you know, it is difficult to start an airline but it's not impossible.
Over the last couple of decades we've seen new entrants in this space. We have seen a big boost in growth for low-cost carriers, so there is Ryan air in Europe and in Canada we have seen flare and swoop in some of the smaller low-cost carriers move into the barriers to entry are just structurally a bit lower for airlines.
>> When it comes to the rails, obviously I'm laying out of thesis here. It seems to be a bit more of a stable business over the long-term.
At the same time very much tied to an economy. Is that a near medium-term or longer-term that is to say there is a cycle of the economy goes to a downturn or recession, the rails probably would perform?
>> For sure.
Within the industrial's landscape in general, a lot of those companies are tied to the broader market cycle. It's the sector where the co-relation to PMI's, purchasing manager indices, which is kind of a measure of the economic cycle, is the highest for industrials and any other sector. So the whole space moves with the broader economy.
Rails are no different. They tend to grow volumes alongside a GDP growth. They do have a long-term history of generating positive pricing and if we compare that to the airlines where, you know, air travel tends to be some multiple of GDP growth in general, if were in decline, people are travelling less. Companies are sending people unless conferences and business travel.
Pricing can be a little bit more volatile for the airlines and that can go negative more so that I can for the rails.
>> That makes a lot of sense. If I'm feeling a little discomfort about the economy, perhaps my own job security, I might not buy a TV but my not jump on a plane either. Anything else to think about what investors are doing their homework on these two parts of the industrial space?
The planes of the trains?
>> I think the competition and customer switching cost dynamic is pretty interesting to explore as well.
So on the competitive side, since Kansas city southern was acquired by Canadian Pacific earlier this year, there's no six class I rails. It sounds like a lot and it sounds like a competitive dynamic. The reality is that most of the rails compete in sort of a regional duopoly. We have the two Canadian rails, there are two East Coast and two West Coast rails in the US.
In the airlines base, we know it's quite a bit more competitive.
If you type in "I'd like to fly from Toronto to New York" a whole list of flights come up.
Across a bunch of different airlines.
That kind of feeds into that switching cost dynamic where it's very easy for me to choose between airline a, airline be, if I fly on one airline and I have a terrible experience, I have options a, B and C for the next time I fly.
It can be a more fickle customer relationship. The rails have sort of longer-term dynamics with their customers.
Partly that's because they're not necessarily dealing with an individual consumer. But a lot of that is kind of structural partnerships between manufacturers and international shippers that have long-term relationships with the rails. That makes it difficult for customers to move from Canadian national to Canadian Pacific for example.
>> Very interesting stuff.
We'll get your questions with Juliana Faircloth for just a moment's time.
Of course you can get in touch with any time by emailing moneytalklive@td.com or follow the viewer response box into the video rub player on WebBroker. Now it's get you update on some of the top stories in the world of business and take a look at how the markets are trading.
There are some M&A activity of the Canadian energy patch to start the week.
Tourmaline oil is buying a Bonavista energy in a cash and stock deal valued at $1. 45 billion.
^...¸Shares of Lululemon are getting a boost D today that on news the athletic apparel company will join the S&P 500 index this Wednesday. Lululemon will replace Activision Blizzard after Microsoft closed its acquisition of the videogame maker.
Often you'll see moves like this included in the S&P 500 and another index. Another I guess, Securities that truck those indexes and add your name to it. A bit of a story there. Let's take a look at Pfizer.
The company says it is navigating what he calls "COVID fatigue". The drugmaker cut its full-year profit and sales forecast on Friday saying demand for its COVID products continues to wane it.
On an investor call today, Pfizer executives said there looking to cut costs aiming to save more than $3 billion through 2024.
Up a little shy of 5%.
A quick check on the markets here on Bay Street with the TSX Composite Index of a fairly 146 points of three quarters of a percent and south of the border, let's check it on the S&P 500.
Getting into the thick of earnings. The big Wall Street banks kicked it off on Friday. A lot more S&P 500 aim showing up this week with results, up 44 points, a little more than 1%.
Back now with Juliana Faircloth of TD Asset Management taking your questions about industrial stocks. Will start this obviously of the headlines, geopolitical risks right now. What can it mean for defence stocks?
>> Last Monday we saw the defenceman stocks move pretty significantly after the conflict broke out in US and Israel. What you tend to look for with defence stocks and what can drive those stocks would be the threat environment, political support of the political environment and the outlook for budgets. So as the threat environment or the perceived threat environment moves higher, the stocks tend to do well.
If there is strong political support for going defence budgets, the stocks tend to do well. And if the longer-term outlook for budget growth is positive, the stocks tend to do well. What we are seeing today is some pretty strong support for defence budgets.
Conflict may or may not move that even higher.
But there is a lot of support in the US.
There is NATO countries still making their way towards that you percent of GDP target for defence budgets.
So that's kind of the backdrop you're working with for defence stocks.
> Is that the key thing with the contracts on the government's willingness to spend on defences? I think geopolitical events, you have humanitarian crisis, people gripped on the headlines but this can be volatile, back and forth in terms of how the market is viewing at longer-term, these companies have to say "where is the political support to pay for what we have to give these governments?
>> For sure. I think often with defence, the geopolitical heads often drive more near-term sentiment, that 8 to 10% bummed that we've seen, I mean so far, has been sustained with that's not always the case historically. You can see a one-time jump in that kind of fizzles out as you know, the environment eases in the political kind of fuel for spending on more dispense more defence rather doesn't necessarily follow through. That's the key thing to watch for defence and it's quite a long term oriented Outlook to have to have but you're looking for budget growth that then flows through to spending with the defence prime is.
>> Okay another question now from the audience.
We have if you were saying "given all the uncertainty, what's your outlook for the construction sector" not sure what uncertainty there referring to but maybe economic uncertainty, we've been talking about an economic recession sometime but one not sure were going to get one.
>> I think it's relative today for the construction sector is the fact that rates have risen so quickly over the last year.
Obviously, financing is a big part of construction project and with rates a significant we higher, that can be difficult and can impact project economics. I think we've already seen for rather Ford cancel a 3.5 billion EV facility they had in the plans.
So were starting to see some construction on large projects get cancelled, probably more likely deferred.
So that's it impacting certain pockets of construction exposed companies.
But it's not always the case. Caterpillar is a very construction exposed company itself and that stock continues to bounce around all-time highs.
>> If I do a little thought experiment with the construction space obviously higher rates, pressuring building, higher costs, the thing that would bring dramatically lower rates in a short period of time would be a very hard landing for the economy.
It seems like in my little thought experiment that could also be a negative in the construction industry. Yet the cheaper sources of funding but because you're in a recession.
>> For sure it's a fine balance.
To your point, that would come with a lower rate environment and perhaps that would be helpful for public spending and perhaps a little more resilient in a slower environment but a lot of that private spending and private investment in construction or development would be definitely impacted by a much weaker economy and a hard landing.
>> You talk in a public spending. Always find it interesting if you get into an election cycle, south of the border, people always talk about infrastructure.
We do know that we have aging infrastructure in the Western Hemisphere, North America. A lot of political promises get made.
How astute did you need to be as an investor to see the follow-through?
It should be a budget that actually lays out money for this country get > The Chips Act, the infrastructure investment and jobs that, the inflation reduction asked, all of that is large fiscal spending. Public spending that is been sort of promise throughout the economy. It's been slow to flow through, we've seen suspending related to the Chips Act about a lot of companies, whether construction related or kind of across the industrial complex, has still yet to see a real spending boost from the inflation reduction asked.
So it takes a while for these things to flow through.
Investors need to balance that long term spending opportunity from a public perspective. With that cyclical nature of industrials and of construction spending.
>> Another question now. One of our viewers wants to get your take on… >> The stock has struggled over the last few months with their earnings reported in July.
The company highlighted an issue with their gear to turbo fan engine, the GTF engine which is a large engine program that Raytheon works on with several partners.
Then a couple months later in September, they announced this is a much larger issue than we had originally anticipated.
anticipated. We need to ground a number of planes with these engines and bring them in, inspect them in quality check them perhaps replace materials… All of that work is estimated by Raytheon to cost 6 1/2 billion dollars.
Raytheon doesn't bear the entire cost of that they have sharing partners of the program. But it's still about $300 billion charge.
And you know, it's difficult to see whether the issue has been ring fenced at this point are there are kind of more shoes to drop I would say.
I would say it's a difficult time to be looking at Raytheon but this dog has moved quite dramatically. So that is the lay of the land for that one.
>> Obviously a bit to show how it's going to play out and hire to get through it.
Beyond that, if there is an upside, what would it be?
Getting back to sort of making inches and not having problems with them?
>> The upside for sure is that the long-term is strategically well-positioned in the aerospace industry. There's not a ton of engine makers in general. You've got Raytheon and then you have GE and saffron in the in France.
So the long-term outlook would be the stocks taken quite a beating over the last couple of months.
And if the issue, as they've outlined it at $3 billion is kind of sad within that stage, now it's really a matter of just executing on the hot and working through kind over the rest of the business that Raytheon has that is not impacted by this issue.
> Interesting stuff is always at home make sure you do your own research for you make any investment decisions. We'll get back to your questions with Juliana Faircloth on industrial stocks in just a moment's time. Of course a reminder that you can email us anytime at moneytalklive@td.com.
Now it's get to our educational segment of the day.
Analyst reports are saying one tool you may want to uses during a potential investment.
Joining us now is how you can find them on the WebBroker platform is Nugwa Haruna, Senior Client Education Instructor with TD investment.
>> Always a pleasure to be a Greg.
When investors are trying to search what's going on in the markets they can either do some deep diving themselves or they have access to some of the analysts tools that we have within WebBroker it a lot of these reports are created by certified financial analysts so we have a wide variety of those available in WebBroker.
I let her show you were investors can find this information. Once in WebBroker, you can click on the tab that says "research" under "markets" you will civilly go where it says "reports".
If you want to focus on reports created by TD analyst, you have access to that.
This actually focuses on reports, these reports created by the TD analyst daily.
So if you want to be up-to-date with what's going on with the markets, with the analyst ratings and recommendations are, you can do that.
For example, when you pull up this report you're able to see if there's been a change in specific companies in terms of the analyst recommendation.
If they changed with the price target is.
If you want to see why, for instance, part one core has had an increase in its price target. You are able to simply click on the name of the company here.
And you'll be brought to a page, it gives you a summary on the reason why that recommendation was changed. If you want reports outside of TD reports you actually have access to things like MorningStar.
I want to scroll down. For our investors were looking for something more fundamental and heavy. You're able to find information on the Canadian sectors as well as US sectors. I will focus on the Canadian in this instance. The shorter report there. I'm going to right click and open that up.
When you pull this report up, this is a report that we receive monthly. So you have access to this every month.
And what this report does, it's by the MorningStar analyst and it shows you for instance, companies that the MorningStar analyst will consider buying. You'll see information such as with the current market price was when they created the report as well as what they think the fair value for these companies would be. You'll also see things like dividend yields.
So if you want to know what these companies actually provide some sort of dividend payment, you will be able to see that from this report. You'll also be able to see things like holding. These are companies like the MorningStar analyst are saying hey, we are not sure what direction are going to go in watching these.
Finally sometimes able to will find stocks that they'll consider selling.
This is another report that investors have access to.
I do want to point out a couple more. One more report I will point out will be a report for our technical analysts there.
I showed you something for fundamentals.
There's also something for the technicians and it's called the Argus market movers.
This specific report just simply shows technical analysts.
Information such as support and resistance. So investors know potentially worried about their stop orders and where to put limit orders if you're looking to buy specific Securities and you'll actually see a breakdown on the left side of the different indicators that were used to come up with the potential bullish or bearish trend for this specific security.
Now finally, still focusing on the markets as a whole, on the right side of the screen there, if investors are interested in the specific sector, you're also able to pull up something like the MorningStar research sector. If you want to break down for a sector as a whole you can do that.
You'll see different sectors here.
See a summary of how that sectors doing compared to other sectors in comparison to the market as a whole.
>> Going through these broad reports Nugwa, you see a name and think you want to do more research on this. Move beyond the broad reports and focus on security.
What about just what one company?
>> Yes. All they showed us was potentially finding ideas or finding out about a broader sector. But let's say, as you start to do your deep diving, you find a specific company really like. You are able to view some reports made specifically for those companies. So back in WebBroker, I'm going to select a specific company here.
Sticking with the industrials.
I will go Delta Air Lines. We've talked a lot about airlines today so I will pull that up.
Once you have the security on screen, you will see a tab here that says reports.
These reports are dedicated about that specific security you're looking at.
Will find report such as the MorningStar analyst report. I'm an open up that one.
It is a bit of a lengthy report. You don't have to read through it. But I do want to highlight a few things that you'll notice here. You will see what this company is rated by MorningStar.
Companies rated between a one of the five star. You will see information such as what they think the fair value for this company should be. Compared to its last price.
And on a little chart here you will be able to see if they think the company is overvalued. If it's in the orange.
Or if it's undervalued if it's in the blue.
But what I like the most about this report is if you go to the third page, you actually have an opportunity to see that specific company you're looking at compared to its closest peers. So that way you'll be able to see I might be interested in airlines but how is Delta performing compared to its closest competitors?
Which ones are overvalued or undervalued?
This is one of the specific reports you can use. The final one I will point out, would be the… Stock reports. Now, this one is visually appealing because you're able to see all the information you want just by glancing at this report. So for instance you will see the stock will be rated between 01 of the 10 and in this case the stock is rated R9. Please keep in mind these ratings are done weekly so you're able to keep track of that.
But I do want to highlight where analysts are actually tracking the security and what they say about this stock. So for instance, in this case, this 20 analyst tracking the stock and they have a by for this specific security, for this week.
>> You'll also see what the returns are in the last year if you purchased a stock or in the last five years if you bought the stock five years ago. One last thing I will highlight here as well is you are also able to see what these analysts say the price of the security would be in 12 months. So you will see when this report was created.
Delta was selling for 3410 and the analyst is most optimistic anticipates the price of Delta in a year will be 77.
It's almost double what it selling for right now.
So investors can utilize this information and go ahead make a decision on whether they want to purchase, if they want to hold or sell a specific series within WebBroker.
> Great stuff is always Nugwa. Thanks for that.
>> Always a pleasure being here.
>> Nugwa Haruna, Senior Client Education Instructor a TD Direct Investing. I remind her that October is investor education month at TD Direct Investing.
[music] >> We are back with Juliana Faircloth taking your questions about industrial stocks.
Let's get to them. If you are watching a comment on opportunities and waste management stocks.
I think people's sometimes forget that industrials forget the people to take away our trash.
>> That's right industrials is a broad sector.
With a lot of that very cyclical stuff.
There's kind of a complementary component of business and professional services in the waste management companies falling within that.
As you mentioned, it's a little more defensive, it tends to generally grow with GDP in terms of volumes. People are always generating a trash regardless of the economic environment.
Those companies have also a long track record of being able to take pricing kind of one to 2% ahead of inflation.
Which is been positive.
They also typically have pretty clean balance sheets and most of them have a strategy of rolling up quite a fragmented market.
In an industry where scale matters and rolling up that market and building the scale of your network from a rooted density perspective can generate good returns. So over the long term, it falls into what often people think of as a compound or type of bucket.
The stocks have been not superstars this year, I would say.
There has been some rallies to the Spring and Summer that are more cyclical.
We saw airlines rallying pretty strongly throughout the Summer.
That's a lot more cyclical. But from a valuation perspective, the relative valuation of companies in the waste space have become a little bit more interesting, valuations have pulled back relative to the valuation of the broader market is some of those more cyclical parts of the market of rally.
So it could be an interesting time, again, it still is an industry that broadly is tied to the market. Broadly tied to GDP.
So if we had into more troubling economic times, you know, it's not necessarily the perfect place to be.
>> So obviously, a recession if it grows with GDP? It of GDP shrinks maybe their business shrinks to?
What about consolidation?
Certain Canadian names over the past couple of years has really been sort of an acquisition story.
Picking up smaller operations and bringing them into the fold. Is there much more room to run on that?
Or they bought with her can abide?
>> Quite a bit of room to run with that.
The companies, I mean waste connections has outlined kind of loosely a $4 billion opportunity for acquisitions for the company. That's quite a bit.
For them to continue rolling up.
That story is not necessarily finished.
I think it's important to think about it in the context of the environment and in a recession. On the one hand, you know, perhaps a recession allows for a few more of those opportunities to present themselves if companies are struggling, a small family-owned operation is possibly struggling, that's an opportunity for acquisition but at the same time again, you're currently in an environment where rates are higher.
So the stream a balance sheet can be a little bit more demanding.
>> Juliana the last time you robbed this person must've been watching.
We talked about artificial intelligence and what it meant for industrials. We have something asking about that.
Has much changed in the sense of people saying "it goes into everything.
>> I think that's typically the story within industrials and I think about it from an industrial perspective but also just broadly for businesses. I mean the opportunities for AI on the cost side as well as the revenue side are pretty interesting.
On the cost side, there's a lot of opportunity for automation if we think about within the industrial landscape, there's a lot of manufacturing companies where they will see a big benefit from being able to automate some of the functions within their facilities.
That in turn is also a revenue opportunity for companies to provide robotics or so automation tools, control systems.
So that's kind of over the long term, potential growing on market within industrials related to AI. The other end market where, I think we've seen some activity that is quite AI driven is on data centre's. So, companies in the industrial landscape that are exposed to data centre's, whether they sell electrical equipment, whether they sell heating and cooling that goes into data centre's, that generate a lot of heat, that's being a topical part of the industrial landscape as it relates to AI as well.
We are seeing growth there from a data centre perspective.
>> I recently saw a stock photo of robots using tape guns to tape boxes and I thought maybe that's one use.
But I think what you're talking about is probably more what we should be thinking about his investors.
We will get back to your questions with Juliana Faircloth in just a moment's time.
Make sure you do your own research before making any investment decisions and a reminder you can get in touch with us at any time.
>> Do you have a question about investing or what is driving the markets?
Our guests are eager to hear what's on your mind so send us your questions.
send them to us here at MoneyTalk Live.
You can send your questions two ways: you can send us an email any time at moneytalklive@td.com or you can use the question box at the bottom screen right here on WebBroker just type your question and hit "send". We will see if one of our guests can get you the answer right here at MoneyTalk Live!
>> With his latest business Outlook survey saying their indicator fell in the third quarter companies are expecting sales growth to slow over the coming year.
Anthony Okolie has been digging into the numbers and seeing the applications for monetary policy. Anthony.
>> Thanks Greg. You mention the new Bank of Canada slumped in the third quarter and suggested the most Canadian businesses expect sales growth to slow over the coming year.
The business Outlook indicator fell down to 3 1/2 points in the third quarter.
That's down from just over two points in the second quarter. Actually now it sits at its lowest level in over a decade.
Except for the brief. Early in the COVID-19 pandemic. Now, the decline reflects the dead negative effects of rising interest rates which are spreading.
With more businesses thinking that higher rates will curb their spending sorry, their sales, and investment plans over the next 12 months. More than half of the firms surveyed believes the extent the effects of the past market tightening on their business is far from over.
In addition, a majority of firms believes the impacts of the tightening monetary policy for the Bank of Canada are just starting.
On the labour front, intentions to hire are actually below their historical average in a larger share of firms, more than in the previous survey said they have adequate staffing levels given their sales outlook and fewer businesses need to fill vacancies which is a dramatic shift from the past.
Now, well fewer firms reported upward pressure on wage growth, some firms are still pretty uncertain about when wage growth will return back to normal.
Finally, regarding inflation expectations, this is key. An increasing share of business and are confident that the Bank of Canada will be able to get inflation within their target range of 2% over the next 1 to 2 years. However, expectations for inflation of the next two years is still above pre-pandemic levels due to a couple of things.
Labour costs, commodity and housing prices. Greg?
>> This is the Bank of Canada's own survey, of course this is also the Bank that is been raising interest rates quite aggressively with the past year and 1/2.
What could it mean for their monetary policy?
>> This survey does incorporate the reaction of the two most recent rate hikes on the survey shows the rising cost of financing is beginning to weigh on businesses and consumers as well. There confidence in terms of future projects.
Now TD Economics continues to expect that the Bank of Canada will remain on pause next week at their next meeting.
Keeping the pause rate of 5%. Again bearing a significant upward surprise from tomorrow's inflation report.
So that will be key and we will look closely tomorrow to see what that inflation report says and it's impact on rather potential impact on monetary policy going forward.
>> Wow October is almost gone.
>> It goes quickly.
> Thanks Anthony.
>> My pleasure.
>> MoneyTalk Live's Anthony Okolie. Now for an update of the markets.
We are having look at TD's advanced dashboard design for active traders.
This is the heat map function.
Lots of different ways you can screen.
Let's the TSX 60 by price and by volume.
You want to check on the energy names because if you were them or to the downside because we have West Texas intermediate also to the lower side. A bit of a mixed bag there a bit off the lows of the session. Clearly if you're looking for green of the screen, you can find that in the material section. You have First Quantum FM up, also tech and Shopify also getting a bit of a bid today as well.
To start the trading week. Let's take a look the S&P 100 and try to figure out what's going on on Wall Street right now.
Pfizer had an interesting story coming out and saying they are seeing waning demand for their COVID products and cutting their full-year sales but then coming out today and saying they're going to find at least $3 billion of savings over the next year and 1/2 or so. So it's been getting a bit.
You've got Schwab to the upside… And you can get more information by visiting td.com.
We are back with Juliana Faircloth with TD Asset Management squeezing some questions before the end of the show. If you are wants your thoughts on Caterpillar.
>> Sure a link to the construction discussion we've had so far today, Caterpillar over kind of a trailing 12 month period has grown earning something I think like 65%.
That's quite a lot. There are a few dynamics going on there. there. there.
there. through 2021 and 2022.
As the company moves through that, there's been a big volume tailwind from being able to finally get machinery out the door and restocking their dealer networks. So Caterpillar has a network of dealers that sells their machinery. So restocking the inventory levels of the dealers has been quite positive. Pricing is but a big driver for Caterpillar.
They've taken pricing well into the teens which is you know, unusually high.
Covering some of those inflationary pressures in large costs and then we've seen some strong demand from different parts of Caterpillar's portfolio. There is the construction side of course, which is been helped by the Chips Act and manufacturing for semiconductors that was growing nicely. There's the resource library seen strong commodity prices over the last couple years and that the energy side is also been pretty positive as well.
Ask so definitely some stuff working in Caterpillar's favour is always risk it everything.
What could trip Caterpillar up?
>> Exactly.
I think what investors kind of look for with some of the very cyclical parts of industrials like machinery, is you would like to try and avoid the peak earnings scenario.
So what I've described is very strong volumes. Very strong pricing.
And very strong demand for Caterpillar. As we look forward, investors need to think about what is that volume trajectory look like? We know the dealers back to a normal inventory level.
His Caterpillar to be able to take pricing well into the teens for a second year in a row?
Maybe or maybe not.
And what is the backdrop for a kind of broader demand for the industry? We started to see some of those construction projects getting pushed out of potentially cancelled. So that's something to keep in mind as you think about the direction of Caterpillar's earnings next year and into 2025.
>> We've run out of time for questions but before you go I want to get your views on overall, if investors are doing their homework, a bit of a tough space for stocks lately but we still have some time left in 2023. What should we be think about?
>> I think the important thing to think about when investing in industrials is it's a very broad sector. There's a lot of different and markets. So getting an understanding of what's happening in those then markets whether it's construction and markets, energy, whether it's more consumer facing air markets like airlines, taking a pulse of where you as an investor think we are in some of those and market cycles is important and that should gonna be a starting point guide for how you think about the industrial space.
>> Juliana great having you here and great conversation looking for to the next one.
> Thank you.
>> Our thanks to Juliana Faircloth, VP of portfolio research at TD Asset Management.
As always make sure to do your own research before making any investment decisions.
Stay tuned on Tuesday, Michael O'Brien managing director at a core Canadian equities at TD Asset Management and he will be taking your questions about Canadian stocks. A reminder you can get a head start by emailing MoneyTalk Live a td.com. That's all for our show take care and we will see you tomorrow.
[music]
Every day, I'll be joined by guests from across TD, many of whom you will only see here.
We'll take you through what's moving the markets and answer your questions about investing. Coming up on today show will have a take on the transportation sector and discuss whether the rail stocks are set to outperform versus Airlines. Juliana Faircloth with TD Asset Management joins us. MoneyTalk Live's Anthony Okolie will take a look at the new Bank of Canada survey showing business confidences sweeping to levels we usually only see during a recession.
And in today's WebBroker education segment, Nugwa Haruna will take us through how you can find analyst reports on the platform. Here's how you can get in touch with us just email us at moneytalklive@td.com or Philip of your response box under the video player on WebBroker.
Before we get to your guests of the day let's get you an update on the markets. We have green on the screen of the first trading day of the week. Starting at home with the TSX Composite Index up a fairly solid 142 points or about three quarters of a percent. Among the most actively traded names on the TSX is actually a name to the downside to begin with although it is coming off the lows of the session.
Baytex energy in 592 a share. The broader energies to base space was under pressure with crude rote prices.
Now they are off the lows.
Not so far contributing. But deftly not weighing it down. We do have some tech names including Shopify on both sides of the border in rallying mode today. Let's check in on Shopify at 71, 88 up a little more than 2%. Now, south of the border the banks kicked off earnings season from Wall Street last Friday. A lot more S&P 500 names on deck for this week.
If some green on the screen up a full percent of the S&P 500.
A little shy of 45 points.
The tech heavy NASDAQ, staring at 135 points also percent.
Taking a look at Pfizer, Friday they came out with a full-year sales and profit forecast and the fact that demand for COVID related products has been steadily declining but today, on a conference call with analysts, apparently Pfizer executive saying they're looking for cost-cutting measures into the billions with savings and has the stock rallying.
Up a little more than 5% on Pfizer.
And that's your market update.
If you had a look at the transportation sector the Summer you would've seen the airlines mostly outperforming the rail stocks.
But that trend is seems to be changing as we get further into the fall. Joining us now to discuss is Juliana click for joining us now is Juliana Faircloth VP of portfolio research at TD Asset Management.
>> Thanks for having me.
As you mentioned it's been a volatile year for those two pockets within industrials and transportation. If we look at performance year to date, I think we've brought in a chart that shows both of those segments have at this point underperformed the broader market. If we look at the US market, >> The S&P 500 would be the grey line. The airlines on the rails… At one point I think as we were saying, the airlines outperformed. But now a different story.
>> Exactly. The path is been very different. You see the airlines if you help them till July you were up 40%. The path between those two end markets has been really different. So on the one hand, with airlines we know the travel demand is been really robust. I think anecdotally we can all see that airfares are quite high.
That's pretty positive for the airlines in Q2. They grew earnings over 90%. The US airlines on a broadly.
Delta reported last week and they grew earnings about 35% in Q3.
The flipside of that is the rails where we have been in more of a freak recession.
That's what the rails will tell you.
That's what the truckers will tell you.
From an earnings perspective it's been a bit more challenging for the rails, Q2 earnings, the US rails declined something like 15 or 16%. So again, that compares to over 90% for the airlines. So very divergent paths for two parts of the transportation industry.
>> You use the term freight recession.
Broader in the economy we talked about the shift from goods to services. Is there a bit of that playing into this? Do you have a freight recession?
>> Absolutely.
And I think that concept of the consumer switching from goods to services is very clearly played out between airlines and rails.
So when I say freight recession, I really mean rail volumes have been declining or negative year-over-year of for most of the year 2023. A lot of that is driven by intermodal volumes.
By intermodal we mean just kind of consumer facing volumes and that the rails will move across Canada or across the US.
And those have been negative for a couple of reasons.
The first would be that shift from goods to services that consumers are, you know, not sending as much on furniture anymore and spending more on travel and booking flights with Air Canada.
The other would be inventory destocking.
It's pretty related to the goods to services shift but we know a lot of the big retailers built up huge inventory balances over 2021 and 2022.
It's taken some time to move through that in the system as consumers of spent a little bit less on goods.
>> To so we did have that airline sector outperformance this year. It's been a tough market across the board for a lot of stocks of the past several weeks.
At the same time, when you talk about airlines, it can be a tricky business. Are we starting to see some of that appear, some warnings from the airlines?
>> You are right that it can be a tough sector or industry, I guess, to invest in.
If we look over the long-term, I mean in the last five years, I think we have a chart there as well.
Showing the airlines have underperformed white materially relative to the rails, that orange line, and the broader market, the grey line.
Of course maybe it's not fair to look at that chart specifically.
It includes COVID. That's a very unique shop for the airlines. But even pre-COVID, if we look at the five years from the end of 2014 to the end of 2019, a similar picture.
Airlines have kind of gone nowhere as a sector. Where is the rails of outperformed in the market itself has been up. Over a five-year period pre-COVID. There are a few reasons for that.
I think it highlights an interesting case study in terms of what fundamental investors look for in terms of the quality industry. Obviously, both the airlines in the rails are very capital-intensive. It costs a lot of money to build a rail network. It costs a lot of money to build an airline.
There are a lot of regulatory hurdles for rails and airlines to jump through. There is pressure from labour, from unions. But there are a few key differences that I think are interesting to highlight in terms of structure.
That would be barriers to entry, competitive intensity and customer switching costs.
>> I would think from my point of view, I'm not in a position either to start an airline or a railway. That the barrier to entry would be high. But not so for airlines if you do a deeper dive.
>> Exactly. So if you think about barriers to entry, you're right. It's very expensive.
There's a lot of regulatory pressure in order to start an airline or a railway. I think what's different about the rails is there is a pretty unique infrastructure barrier where there is, I mean it's almost inconceivable to think of a new coast-to-coast rail network being laid down in Canada or the US. The amount of land requirements, work with communities, that all of that would require, is so massive that it creates an insurmountable barrier to entry for the rail network.
Airlines, you know, it is difficult to start an airline but it's not impossible.
Over the last couple of decades we've seen new entrants in this space. We have seen a big boost in growth for low-cost carriers, so there is Ryan air in Europe and in Canada we have seen flare and swoop in some of the smaller low-cost carriers move into the barriers to entry are just structurally a bit lower for airlines.
>> When it comes to the rails, obviously I'm laying out of thesis here. It seems to be a bit more of a stable business over the long-term.
At the same time very much tied to an economy. Is that a near medium-term or longer-term that is to say there is a cycle of the economy goes to a downturn or recession, the rails probably would perform?
>> For sure.
Within the industrial's landscape in general, a lot of those companies are tied to the broader market cycle. It's the sector where the co-relation to PMI's, purchasing manager indices, which is kind of a measure of the economic cycle, is the highest for industrials and any other sector. So the whole space moves with the broader economy.
Rails are no different. They tend to grow volumes alongside a GDP growth. They do have a long-term history of generating positive pricing and if we compare that to the airlines where, you know, air travel tends to be some multiple of GDP growth in general, if were in decline, people are travelling less. Companies are sending people unless conferences and business travel.
Pricing can be a little bit more volatile for the airlines and that can go negative more so that I can for the rails.
>> That makes a lot of sense. If I'm feeling a little discomfort about the economy, perhaps my own job security, I might not buy a TV but my not jump on a plane either. Anything else to think about what investors are doing their homework on these two parts of the industrial space?
The planes of the trains?
>> I think the competition and customer switching cost dynamic is pretty interesting to explore as well.
So on the competitive side, since Kansas city southern was acquired by Canadian Pacific earlier this year, there's no six class I rails. It sounds like a lot and it sounds like a competitive dynamic. The reality is that most of the rails compete in sort of a regional duopoly. We have the two Canadian rails, there are two East Coast and two West Coast rails in the US.
In the airlines base, we know it's quite a bit more competitive.
If you type in "I'd like to fly from Toronto to New York" a whole list of flights come up.
Across a bunch of different airlines.
That kind of feeds into that switching cost dynamic where it's very easy for me to choose between airline a, airline be, if I fly on one airline and I have a terrible experience, I have options a, B and C for the next time I fly.
It can be a more fickle customer relationship. The rails have sort of longer-term dynamics with their customers.
Partly that's because they're not necessarily dealing with an individual consumer. But a lot of that is kind of structural partnerships between manufacturers and international shippers that have long-term relationships with the rails. That makes it difficult for customers to move from Canadian national to Canadian Pacific for example.
>> Very interesting stuff.
We'll get your questions with Juliana Faircloth for just a moment's time.
Of course you can get in touch with any time by emailing moneytalklive@td.com or follow the viewer response box into the video rub player on WebBroker. Now it's get you update on some of the top stories in the world of business and take a look at how the markets are trading.
There are some M&A activity of the Canadian energy patch to start the week.
Tourmaline oil is buying a Bonavista energy in a cash and stock deal valued at $1. 45 billion.
^...¸Shares of Lululemon are getting a boost D today that on news the athletic apparel company will join the S&P 500 index this Wednesday. Lululemon will replace Activision Blizzard after Microsoft closed its acquisition of the videogame maker.
Often you'll see moves like this included in the S&P 500 and another index. Another I guess, Securities that truck those indexes and add your name to it. A bit of a story there. Let's take a look at Pfizer.
The company says it is navigating what he calls "COVID fatigue". The drugmaker cut its full-year profit and sales forecast on Friday saying demand for its COVID products continues to wane it.
On an investor call today, Pfizer executives said there looking to cut costs aiming to save more than $3 billion through 2024.
Up a little shy of 5%.
A quick check on the markets here on Bay Street with the TSX Composite Index of a fairly 146 points of three quarters of a percent and south of the border, let's check it on the S&P 500.
Getting into the thick of earnings. The big Wall Street banks kicked it off on Friday. A lot more S&P 500 aim showing up this week with results, up 44 points, a little more than 1%.
Back now with Juliana Faircloth of TD Asset Management taking your questions about industrial stocks. Will start this obviously of the headlines, geopolitical risks right now. What can it mean for defence stocks?
>> Last Monday we saw the defenceman stocks move pretty significantly after the conflict broke out in US and Israel. What you tend to look for with defence stocks and what can drive those stocks would be the threat environment, political support of the political environment and the outlook for budgets. So as the threat environment or the perceived threat environment moves higher, the stocks tend to do well.
If there is strong political support for going defence budgets, the stocks tend to do well. And if the longer-term outlook for budget growth is positive, the stocks tend to do well. What we are seeing today is some pretty strong support for defence budgets.
Conflict may or may not move that even higher.
But there is a lot of support in the US.
There is NATO countries still making their way towards that you percent of GDP target for defence budgets.
So that's kind of the backdrop you're working with for defence stocks.
> Is that the key thing with the contracts on the government's willingness to spend on defences? I think geopolitical events, you have humanitarian crisis, people gripped on the headlines but this can be volatile, back and forth in terms of how the market is viewing at longer-term, these companies have to say "where is the political support to pay for what we have to give these governments?
>> For sure. I think often with defence, the geopolitical heads often drive more near-term sentiment, that 8 to 10% bummed that we've seen, I mean so far, has been sustained with that's not always the case historically. You can see a one-time jump in that kind of fizzles out as you know, the environment eases in the political kind of fuel for spending on more dispense more defence rather doesn't necessarily follow through. That's the key thing to watch for defence and it's quite a long term oriented Outlook to have to have but you're looking for budget growth that then flows through to spending with the defence prime is.
>> Okay another question now from the audience.
We have if you were saying "given all the uncertainty, what's your outlook for the construction sector" not sure what uncertainty there referring to but maybe economic uncertainty, we've been talking about an economic recession sometime but one not sure were going to get one.
>> I think it's relative today for the construction sector is the fact that rates have risen so quickly over the last year.
Obviously, financing is a big part of construction project and with rates a significant we higher, that can be difficult and can impact project economics. I think we've already seen for rather Ford cancel a 3.5 billion EV facility they had in the plans.
So were starting to see some construction on large projects get cancelled, probably more likely deferred.
So that's it impacting certain pockets of construction exposed companies.
But it's not always the case. Caterpillar is a very construction exposed company itself and that stock continues to bounce around all-time highs.
>> If I do a little thought experiment with the construction space obviously higher rates, pressuring building, higher costs, the thing that would bring dramatically lower rates in a short period of time would be a very hard landing for the economy.
It seems like in my little thought experiment that could also be a negative in the construction industry. Yet the cheaper sources of funding but because you're in a recession.
>> For sure it's a fine balance.
To your point, that would come with a lower rate environment and perhaps that would be helpful for public spending and perhaps a little more resilient in a slower environment but a lot of that private spending and private investment in construction or development would be definitely impacted by a much weaker economy and a hard landing.
>> You talk in a public spending. Always find it interesting if you get into an election cycle, south of the border, people always talk about infrastructure.
We do know that we have aging infrastructure in the Western Hemisphere, North America. A lot of political promises get made.
How astute did you need to be as an investor to see the follow-through?
It should be a budget that actually lays out money for this country get > The Chips Act, the infrastructure investment and jobs that, the inflation reduction asked, all of that is large fiscal spending. Public spending that is been sort of promise throughout the economy. It's been slow to flow through, we've seen suspending related to the Chips Act about a lot of companies, whether construction related or kind of across the industrial complex, has still yet to see a real spending boost from the inflation reduction asked.
So it takes a while for these things to flow through.
Investors need to balance that long term spending opportunity from a public perspective. With that cyclical nature of industrials and of construction spending.
>> Another question now. One of our viewers wants to get your take on… >> The stock has struggled over the last few months with their earnings reported in July.
The company highlighted an issue with their gear to turbo fan engine, the GTF engine which is a large engine program that Raytheon works on with several partners.
Then a couple months later in September, they announced this is a much larger issue than we had originally anticipated.
anticipated. We need to ground a number of planes with these engines and bring them in, inspect them in quality check them perhaps replace materials… All of that work is estimated by Raytheon to cost 6 1/2 billion dollars.
Raytheon doesn't bear the entire cost of that they have sharing partners of the program. But it's still about $300 billion charge.
And you know, it's difficult to see whether the issue has been ring fenced at this point are there are kind of more shoes to drop I would say.
I would say it's a difficult time to be looking at Raytheon but this dog has moved quite dramatically. So that is the lay of the land for that one.
>> Obviously a bit to show how it's going to play out and hire to get through it.
Beyond that, if there is an upside, what would it be?
Getting back to sort of making inches and not having problems with them?
>> The upside for sure is that the long-term is strategically well-positioned in the aerospace industry. There's not a ton of engine makers in general. You've got Raytheon and then you have GE and saffron in the in France.
So the long-term outlook would be the stocks taken quite a beating over the last couple of months.
And if the issue, as they've outlined it at $3 billion is kind of sad within that stage, now it's really a matter of just executing on the hot and working through kind over the rest of the business that Raytheon has that is not impacted by this issue.
> Interesting stuff is always at home make sure you do your own research for you make any investment decisions. We'll get back to your questions with Juliana Faircloth on industrial stocks in just a moment's time. Of course a reminder that you can email us anytime at moneytalklive@td.com.
Now it's get to our educational segment of the day.
Analyst reports are saying one tool you may want to uses during a potential investment.
Joining us now is how you can find them on the WebBroker platform is Nugwa Haruna, Senior Client Education Instructor with TD investment.
>> Always a pleasure to be a Greg.
When investors are trying to search what's going on in the markets they can either do some deep diving themselves or they have access to some of the analysts tools that we have within WebBroker it a lot of these reports are created by certified financial analysts so we have a wide variety of those available in WebBroker.
I let her show you were investors can find this information. Once in WebBroker, you can click on the tab that says "research" under "markets" you will civilly go where it says "reports".
If you want to focus on reports created by TD analyst, you have access to that.
This actually focuses on reports, these reports created by the TD analyst daily.
So if you want to be up-to-date with what's going on with the markets, with the analyst ratings and recommendations are, you can do that.
For example, when you pull up this report you're able to see if there's been a change in specific companies in terms of the analyst recommendation.
If they changed with the price target is.
If you want to see why, for instance, part one core has had an increase in its price target. You are able to simply click on the name of the company here.
And you'll be brought to a page, it gives you a summary on the reason why that recommendation was changed. If you want reports outside of TD reports you actually have access to things like MorningStar.
I want to scroll down. For our investors were looking for something more fundamental and heavy. You're able to find information on the Canadian sectors as well as US sectors. I will focus on the Canadian in this instance. The shorter report there. I'm going to right click and open that up.
When you pull this report up, this is a report that we receive monthly. So you have access to this every month.
And what this report does, it's by the MorningStar analyst and it shows you for instance, companies that the MorningStar analyst will consider buying. You'll see information such as with the current market price was when they created the report as well as what they think the fair value for these companies would be. You'll also see things like dividend yields.
So if you want to know what these companies actually provide some sort of dividend payment, you will be able to see that from this report. You'll also be able to see things like holding. These are companies like the MorningStar analyst are saying hey, we are not sure what direction are going to go in watching these.
Finally sometimes able to will find stocks that they'll consider selling.
This is another report that investors have access to.
I do want to point out a couple more. One more report I will point out will be a report for our technical analysts there.
I showed you something for fundamentals.
There's also something for the technicians and it's called the Argus market movers.
This specific report just simply shows technical analysts.
Information such as support and resistance. So investors know potentially worried about their stop orders and where to put limit orders if you're looking to buy specific Securities and you'll actually see a breakdown on the left side of the different indicators that were used to come up with the potential bullish or bearish trend for this specific security.
Now finally, still focusing on the markets as a whole, on the right side of the screen there, if investors are interested in the specific sector, you're also able to pull up something like the MorningStar research sector. If you want to break down for a sector as a whole you can do that.
You'll see different sectors here.
See a summary of how that sectors doing compared to other sectors in comparison to the market as a whole.
>> Going through these broad reports Nugwa, you see a name and think you want to do more research on this. Move beyond the broad reports and focus on security.
What about just what one company?
>> Yes. All they showed us was potentially finding ideas or finding out about a broader sector. But let's say, as you start to do your deep diving, you find a specific company really like. You are able to view some reports made specifically for those companies. So back in WebBroker, I'm going to select a specific company here.
Sticking with the industrials.
I will go Delta Air Lines. We've talked a lot about airlines today so I will pull that up.
Once you have the security on screen, you will see a tab here that says reports.
These reports are dedicated about that specific security you're looking at.
Will find report such as the MorningStar analyst report. I'm an open up that one.
It is a bit of a lengthy report. You don't have to read through it. But I do want to highlight a few things that you'll notice here. You will see what this company is rated by MorningStar.
Companies rated between a one of the five star. You will see information such as what they think the fair value for this company should be. Compared to its last price.
And on a little chart here you will be able to see if they think the company is overvalued. If it's in the orange.
Or if it's undervalued if it's in the blue.
But what I like the most about this report is if you go to the third page, you actually have an opportunity to see that specific company you're looking at compared to its closest peers. So that way you'll be able to see I might be interested in airlines but how is Delta performing compared to its closest competitors?
Which ones are overvalued or undervalued?
This is one of the specific reports you can use. The final one I will point out, would be the… Stock reports. Now, this one is visually appealing because you're able to see all the information you want just by glancing at this report. So for instance you will see the stock will be rated between 01 of the 10 and in this case the stock is rated R9. Please keep in mind these ratings are done weekly so you're able to keep track of that.
But I do want to highlight where analysts are actually tracking the security and what they say about this stock. So for instance, in this case, this 20 analyst tracking the stock and they have a by for this specific security, for this week.
>> You'll also see what the returns are in the last year if you purchased a stock or in the last five years if you bought the stock five years ago. One last thing I will highlight here as well is you are also able to see what these analysts say the price of the security would be in 12 months. So you will see when this report was created.
Delta was selling for 3410 and the analyst is most optimistic anticipates the price of Delta in a year will be 77.
It's almost double what it selling for right now.
So investors can utilize this information and go ahead make a decision on whether they want to purchase, if they want to hold or sell a specific series within WebBroker.
> Great stuff is always Nugwa. Thanks for that.
>> Always a pleasure being here.
>> Nugwa Haruna, Senior Client Education Instructor a TD Direct Investing. I remind her that October is investor education month at TD Direct Investing.
[music] >> We are back with Juliana Faircloth taking your questions about industrial stocks.
Let's get to them. If you are watching a comment on opportunities and waste management stocks.
I think people's sometimes forget that industrials forget the people to take away our trash.
>> That's right industrials is a broad sector.
With a lot of that very cyclical stuff.
There's kind of a complementary component of business and professional services in the waste management companies falling within that.
As you mentioned, it's a little more defensive, it tends to generally grow with GDP in terms of volumes. People are always generating a trash regardless of the economic environment.
Those companies have also a long track record of being able to take pricing kind of one to 2% ahead of inflation.
Which is been positive.
They also typically have pretty clean balance sheets and most of them have a strategy of rolling up quite a fragmented market.
In an industry where scale matters and rolling up that market and building the scale of your network from a rooted density perspective can generate good returns. So over the long term, it falls into what often people think of as a compound or type of bucket.
The stocks have been not superstars this year, I would say.
There has been some rallies to the Spring and Summer that are more cyclical.
We saw airlines rallying pretty strongly throughout the Summer.
That's a lot more cyclical. But from a valuation perspective, the relative valuation of companies in the waste space have become a little bit more interesting, valuations have pulled back relative to the valuation of the broader market is some of those more cyclical parts of the market of rally.
So it could be an interesting time, again, it still is an industry that broadly is tied to the market. Broadly tied to GDP.
So if we had into more troubling economic times, you know, it's not necessarily the perfect place to be.
>> So obviously, a recession if it grows with GDP? It of GDP shrinks maybe their business shrinks to?
What about consolidation?
Certain Canadian names over the past couple of years has really been sort of an acquisition story.
Picking up smaller operations and bringing them into the fold. Is there much more room to run on that?
Or they bought with her can abide?
>> Quite a bit of room to run with that.
The companies, I mean waste connections has outlined kind of loosely a $4 billion opportunity for acquisitions for the company. That's quite a bit.
For them to continue rolling up.
That story is not necessarily finished.
I think it's important to think about it in the context of the environment and in a recession. On the one hand, you know, perhaps a recession allows for a few more of those opportunities to present themselves if companies are struggling, a small family-owned operation is possibly struggling, that's an opportunity for acquisition but at the same time again, you're currently in an environment where rates are higher.
So the stream a balance sheet can be a little bit more demanding.
>> Juliana the last time you robbed this person must've been watching.
We talked about artificial intelligence and what it meant for industrials. We have something asking about that.
Has much changed in the sense of people saying "it goes into everything.
>> I think that's typically the story within industrials and I think about it from an industrial perspective but also just broadly for businesses. I mean the opportunities for AI on the cost side as well as the revenue side are pretty interesting.
On the cost side, there's a lot of opportunity for automation if we think about within the industrial landscape, there's a lot of manufacturing companies where they will see a big benefit from being able to automate some of the functions within their facilities.
That in turn is also a revenue opportunity for companies to provide robotics or so automation tools, control systems.
So that's kind of over the long term, potential growing on market within industrials related to AI. The other end market where, I think we've seen some activity that is quite AI driven is on data centre's. So, companies in the industrial landscape that are exposed to data centre's, whether they sell electrical equipment, whether they sell heating and cooling that goes into data centre's, that generate a lot of heat, that's being a topical part of the industrial landscape as it relates to AI as well.
We are seeing growth there from a data centre perspective.
>> I recently saw a stock photo of robots using tape guns to tape boxes and I thought maybe that's one use.
But I think what you're talking about is probably more what we should be thinking about his investors.
We will get back to your questions with Juliana Faircloth in just a moment's time.
Make sure you do your own research before making any investment decisions and a reminder you can get in touch with us at any time.
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Our guests are eager to hear what's on your mind so send us your questions.
send them to us here at MoneyTalk Live.
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>> With his latest business Outlook survey saying their indicator fell in the third quarter companies are expecting sales growth to slow over the coming year.
Anthony Okolie has been digging into the numbers and seeing the applications for monetary policy. Anthony.
>> Thanks Greg. You mention the new Bank of Canada slumped in the third quarter and suggested the most Canadian businesses expect sales growth to slow over the coming year.
The business Outlook indicator fell down to 3 1/2 points in the third quarter.
That's down from just over two points in the second quarter. Actually now it sits at its lowest level in over a decade.
Except for the brief. Early in the COVID-19 pandemic. Now, the decline reflects the dead negative effects of rising interest rates which are spreading.
With more businesses thinking that higher rates will curb their spending sorry, their sales, and investment plans over the next 12 months. More than half of the firms surveyed believes the extent the effects of the past market tightening on their business is far from over.
In addition, a majority of firms believes the impacts of the tightening monetary policy for the Bank of Canada are just starting.
On the labour front, intentions to hire are actually below their historical average in a larger share of firms, more than in the previous survey said they have adequate staffing levels given their sales outlook and fewer businesses need to fill vacancies which is a dramatic shift from the past.
Now, well fewer firms reported upward pressure on wage growth, some firms are still pretty uncertain about when wage growth will return back to normal.
Finally, regarding inflation expectations, this is key. An increasing share of business and are confident that the Bank of Canada will be able to get inflation within their target range of 2% over the next 1 to 2 years. However, expectations for inflation of the next two years is still above pre-pandemic levels due to a couple of things.
Labour costs, commodity and housing prices. Greg?
>> This is the Bank of Canada's own survey, of course this is also the Bank that is been raising interest rates quite aggressively with the past year and 1/2.
What could it mean for their monetary policy?
>> This survey does incorporate the reaction of the two most recent rate hikes on the survey shows the rising cost of financing is beginning to weigh on businesses and consumers as well. There confidence in terms of future projects.
Now TD Economics continues to expect that the Bank of Canada will remain on pause next week at their next meeting.
Keeping the pause rate of 5%. Again bearing a significant upward surprise from tomorrow's inflation report.
So that will be key and we will look closely tomorrow to see what that inflation report says and it's impact on rather potential impact on monetary policy going forward.
>> Wow October is almost gone.
>> It goes quickly.
> Thanks Anthony.
>> My pleasure.
>> MoneyTalk Live's Anthony Okolie. Now for an update of the markets.
We are having look at TD's advanced dashboard design for active traders.
This is the heat map function.
Lots of different ways you can screen.
Let's the TSX 60 by price and by volume.
You want to check on the energy names because if you were them or to the downside because we have West Texas intermediate also to the lower side. A bit of a mixed bag there a bit off the lows of the session. Clearly if you're looking for green of the screen, you can find that in the material section. You have First Quantum FM up, also tech and Shopify also getting a bit of a bid today as well.
To start the trading week. Let's take a look the S&P 100 and try to figure out what's going on on Wall Street right now.
Pfizer had an interesting story coming out and saying they are seeing waning demand for their COVID products and cutting their full-year sales but then coming out today and saying they're going to find at least $3 billion of savings over the next year and 1/2 or so. So it's been getting a bit.
You've got Schwab to the upside… And you can get more information by visiting td.com.
We are back with Juliana Faircloth with TD Asset Management squeezing some questions before the end of the show. If you are wants your thoughts on Caterpillar.
>> Sure a link to the construction discussion we've had so far today, Caterpillar over kind of a trailing 12 month period has grown earning something I think like 65%.
That's quite a lot. There are a few dynamics going on there. there. there.
there. through 2021 and 2022.
As the company moves through that, there's been a big volume tailwind from being able to finally get machinery out the door and restocking their dealer networks. So Caterpillar has a network of dealers that sells their machinery. So restocking the inventory levels of the dealers has been quite positive. Pricing is but a big driver for Caterpillar.
They've taken pricing well into the teens which is you know, unusually high.
Covering some of those inflationary pressures in large costs and then we've seen some strong demand from different parts of Caterpillar's portfolio. There is the construction side of course, which is been helped by the Chips Act and manufacturing for semiconductors that was growing nicely. There's the resource library seen strong commodity prices over the last couple years and that the energy side is also been pretty positive as well.
Ask so definitely some stuff working in Caterpillar's favour is always risk it everything.
What could trip Caterpillar up?
>> Exactly.
I think what investors kind of look for with some of the very cyclical parts of industrials like machinery, is you would like to try and avoid the peak earnings scenario.
So what I've described is very strong volumes. Very strong pricing.
And very strong demand for Caterpillar. As we look forward, investors need to think about what is that volume trajectory look like? We know the dealers back to a normal inventory level.
His Caterpillar to be able to take pricing well into the teens for a second year in a row?
Maybe or maybe not.
And what is the backdrop for a kind of broader demand for the industry? We started to see some of those construction projects getting pushed out of potentially cancelled. So that's something to keep in mind as you think about the direction of Caterpillar's earnings next year and into 2025.
>> We've run out of time for questions but before you go I want to get your views on overall, if investors are doing their homework, a bit of a tough space for stocks lately but we still have some time left in 2023. What should we be think about?
>> I think the important thing to think about when investing in industrials is it's a very broad sector. There's a lot of different and markets. So getting an understanding of what's happening in those then markets whether it's construction and markets, energy, whether it's more consumer facing air markets like airlines, taking a pulse of where you as an investor think we are in some of those and market cycles is important and that should gonna be a starting point guide for how you think about the industrial space.
>> Juliana great having you here and great conversation looking for to the next one.
> Thank you.
>> Our thanks to Juliana Faircloth, VP of portfolio research at TD Asset Management.
As always make sure to do your own research before making any investment decisions.
Stay tuned on Tuesday, Michael O'Brien managing director at a core Canadian equities at TD Asset Management and he will be taking your questions about Canadian stocks. A reminder you can get a head start by emailing MoneyTalk Live a td.com. That's all for our show take care and we will see you tomorrow.
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