Monthly Review September 2020

Basic materials Sector

The basic materials sector seems to come out on top during the sanitary crisis,
by Samuel Ouvrard

The economic impacts of Covid-19 are colossal and many financial sectors are having a hard time regaining the value they had accumulated before the crisis. Eight out of eleven sector indexes of the TSX did not achieve their 52-week high they had before the pandemic. Five of them did not even reach their 52-week low from before the pandemic. Even though the S&P/TSX Capped Consumer Discretionary Index [INDEX/TSX: TTCD], the S&P/TSX Capped Consumer Staples Index [INDEX/TSX: TTCS], the S&P/TSX Capped Industrials Index [INDEX/TSX: TTIN], and the S&P/TSX Capped Utilities Index [INDEX/TSX: TTUT] are on the right track to regain their pre-pandemic value, the energy sector as well as the health care, financial, real estate, and communications sectors are not going in the same direction.

Nevertheless, two sectors seem to have been highly advantaged by this situation. Despite the temporary loss of their sector index value, the information technology sector as well as the materials sector have soared high above their 52-week high before the pandemic. The S&P/TSX Capped Information Technology Index [INDEX/TSX: TTTK] is now worth a little over 20% more than its 52-week high before the crisis. Although the IT sector evidently seems to have benefited from the transition to working and learning from home, it’s not the only sector that seems to have benefited from the crisis. The S&P/TSX Capped Materials Index [INDEX/TSX: TTMT] has gained a little over 21% compared to its 52-week high before the pandemic.

 

Industrial Sector

SCN-Lavalin : new contract for Hanford cleanup to start in October,
by Félix Moreau

SNC-Lavalin (TSX: SNC) has recently expanded its nuclear activities in order to increase its long-term revenues. On Thursday September 17th, the Central Plateau Cleanup Company, in which SNC-Lavalin holds 22% of the shares, announced the awarding of a contract to clean up the Hanford nuclear complex in Washington, D.C. over approximately 10 years. The contract includes the decontamination and decommissioning of installations of a former complex that produced plutonium from 1943 to 1987. This complex has been a source of problems since its closure due to several spills of hazardous materials in 2016. So, the challenges that come with the new contract justifie the value of the contract of $200 billion for 10 years. Moreover, the contract is a little less risky since the compensation is performance-based. SNC-Lavalin estimates the benefits of the project at about $30 million per year, which represents a 30% increase over 2019. SNC-Lavalin’s share price varied by +3.4% that day and therefore closed at $23.77. 

 

Consumer Cyclical Sector

5 times rather than one,
by Alexandre Lanctôt-Laurin

Tesla, the American producer of electric vehicles, recently made the first split in its history on the stock market since 2010. Claiming that the share price was too high, Elon Musk ruled the dilution of the shares of the firm at a rate of 5 to one, which lowered the TSLA share price by 80% and increased the number of shares available on the market by 5. This split also offers the opportunity for more investors to be shareholders in the company. Indeed, certain psychological effects on investors, such as the appearance that the stock is cheaper or more affordable, could lead to more buying of the stock. With an all-time see-saw profit, Tesla just posted 4 consecutive quarters of profits against expectations, which greatly affected the rise in the share price.

Here are some highlights from Tesla:

  • Since 2010, the share price has climbed 8,500%, or 850% on average per year. By comparison, the S&P 500 has seen an increase of about 120%, or about 12% per year.
  • TSLA’s price-to-earnings (P/E) ratio is 1,085. On average, a conservative investor would buy stocks with a price-to-earnings ratio of around 15.
  • Since March 31, the date of the split, the share has fallen from $ 467 to $ 419, a decrease of 10.3%.
  • Tesla has announced that it will be able to produce electric vehicles under $ 25,000 within 3 years.
  • Tesla is currently suing the US government for the increase in certain tariffs from China.
  • Goldman Sachs Earned Over $ 100 Million with TSLA Stock.

 

Energy Sector

The upsurge in COVID-19 around the world and Libya’s return to business are impacting the price of oil,
by Seydou Fofana

Over the past few months, the values on the oil exchange have undergone significant changes both upward and downward.

The two benchmark oil prices Brent and WTI each recorded an increase of 4% due to a drop in crude stocks in the United States as well as the disturbances caused by Hurricane Sally in the Gulf of Mexico. Thus, the price of a barrel of Brent from the North Sea for delivery in November ended at 43.30 dollars, registering an increase of 2.56% from its last close, while the price of a barrel of US WTI has gained only 2.02% to reach $ 40.97. 

Due to the COVID-19 situation, concerns are rising about travel restrictions that are unlikely to be put in place soon as we see an increase in the number of new cases around the world. Thus, a fear around global demand sets in as nations announce their return to containment.

Furthermore, the announcement after the meeting of the OPEC of the Libyan National Oil Company NOC on the resumption of exports of their productions is causing huge enthusiasm around the world. It causes major players to fear an overabundance of the oil market at a time when demands are uncertain due to the restrictions linked to the pandemic.

The various facts observed in recent weeks directly impact the demand for oil and make the market more and more confused even if the price of barrels of Brent and WTI were still negotiating above their prices.

 

Technology Sector

Lightspeed tries its luck in New York,
by William Bouchard

On September 11, Lightspeed, a Montreal-based company listed on the New York Stock Exchange. Lightspeed is a company that produces and distributes point of sale systems and e-commerce softwares. It provides solutions primarily to small and medium-sized businesses operating in the retail and restauration industry. In an effort to improve the company’s profile and to be able to consider making acquisitions, the Montreal-based company has tried its hand at the New York Stock exchange.

The strategy of the Quebec company has not yet had the desired effect considering that the stock has seen a slight increase of 0.37% since the IPO, compared to the information technology index of the TSX (TTTK) which saw its price increase by 2.61%.

Despite its disappointing New York IPO, the Montreal-based company announced the mobilization of US $ 305 million that will be used in cloud technology activities to help small businesses accept payments. It will therefore be very interesting to follow Lightspeed over the next few months to find out where this new capital will be invested.

 

Communication Services

Bell and 5G: A strategy to get out of the clutches of COVID-19?
by Hermann Noubissie Noussa

Generally considered to be a non-cyclical sector, the communications services sector is known to have stable demand, which makes it independent of fluctuations in the business cycle. It is sometimes even considered to be part of the utilities sector if one sticks to the RGS (Russell Global Sectors) classification in the United States. However, it goes without saying that the crisis caused by the Covid-19 virus calls into question the non-cyclical nature of the sector and that this sector is no exception in its perilous effect on the financial markets (around 30% in yield losses between March and April 2020 in the communication services sector).

In Canada, Bell Canada (TSX : BCE) has the largest market capitalization in the communications services industry (around 25%). Since the onset of the crisis last March, the share price has fallen drastically with losses reaching no less than 30% over a 6-month period. Also, according to the Montreal newspaper, Bell has continued to lay off hundreds of employees since the start of the crisis to reduce the burden of costs. Several licensees see a strategy adopted by the company to move its cost centers to other territories where the costs are lower. In other words, the company is severely affected by the crisis.

However, a few days before the end of September, the share price is on a positive course. Earlier this year, Bell announced the launch of the 5G technology. Bell Canada has taken a competitive advantage over its 6 other TSX competitors by presenting itself as the very first to promote 5G technology in Canada. Besides, on October 1st, Bell will launch the all-new Samsung Galaxy S20 FE 5G in several colors for less than $ 1000.

 

Health Care Sector

The race to develop a vaccine and the hunt for winning stocks,
by Yoaquim Tiacoh

Just under a year after the first case of COVID-19, countries around the world are still failing to contain the pandemic; without a vaccine, we are far from seeing the light at the end of the tunnel.

To date, more than 31 million cases of SARS-CoV-2 have been identified and we are approaching the one million mark worldwide. Economic statistics are equally alarming with the United States which recorded at an annualized rate a collapse of its GDP by more than 30% and Canada lost almost 40% by the end of the second quarter.

Regarding the international stock market, some sectors have benefited from the effects of the pandemic such as gaming, online sales and communication. The health sector has also been pushed by the pandemic as most companies’ stocks in this industry have performed exceptionally in the last months.

Investors are rushing to buy biotech and pharmaceutical companies’ shares, especially those working on developing a SARS-CoV-2 vaccine. Over thirty clinical trials are underway with leading companies such as Moderna (MRNA), BioNTech (BNTX), Novavax (NVAX), Johnson & Johnson (JNJ) and Pfizer (PFE). As stated previously, some companies such as Novavax, Vaxart, Trillium and Genprex have seen the price of their shares climb by more than 1000% since the start of 2020 as the following graph shows:

Figure 1: Evolution of the share price of Novavax (NVAX), Vaxart (VXRT), Trillium Therapeutics (TRIL) and Genprex (GNPX) in percentage from January to the end of September 2020.

However, UBS analysts seem convinced that, in the long run, it will be small and mid-cap stocks that will benefit the most from vaccine advances and discoveries.

If you haven’t yet invested in the stocks of companies related to vaccine development, it is probably not too late. Prices appear to have stabilized for a few weeks after experiencing big spikes during the first months of the pandemic. Keep in mind, however, that this is a very volatile market and that even the smallest updates about the state of vaccine research could trigger sudden stock movements.

 

Financial Services Sector

The pandemic puts pressure on the banking sector,
by Étienne Allaire

The Big Six Canadian banks have released their third quarter 2020 earnings and the effects of the Covid-19 pandemic were evident. Bank of Nova Scotia’s net income decreased from $1.98 billion for the same period last year to $1.3 billion. The same goes for BMO, who has seen its net profit decline from $1.557 billion in 2019 to $1.232 billion this year. Still, all of the Big Six Canadian banks had a profitable third quarter. The net profit decline is mainly due to higher provisions for credit losses. Financial institutions must put aside massive amounts of cash to cover potential bad loans. In recent months, some measures to help Canadians get through the pandemic, such as mortgage and loan deferrals, have forced banks to set aside even more money to cover bad loans. Thus, credit-loss provisions for Bank of Nova Scotia and Bank of Montreal were $2.18 billion and $1.05 billion in the third quarter, respectively, compared to $ 713 million and 306 million at the same period last year.

Meanwhile, on September 9, the Bank of Canada reiterated its intention to hold its policy interest rate steady at 0.25 per cent until the Canadian economy has fully recovered from the COVID-19 crisis. For Canadian banks, a low-rate environment means lower profits. The margin compression is another factor that has put pressure on the financial sector in recent months.

 

References :

TMX. (2020). S&P/TSX Capped Materials Index. TMX Money.  https://money.tmx.com/en/quote/%5ETTRE ​

Énergie Nucléaire. (2020). Snc-Lavalin. https://www.snclavalin.com/fr-fr/markets-and-services/markets/energy/nuclear 

Arsenault, J. (2020). Un gros contrat pour SNC-Lavalin aux États-Unis. Le Devoir. https://www.ledevoir.com/economie/586210/un-gros-contrat-pour-snc-lavalin-aux-etats-unis 

Complexe nucléaire de Hanford. (2020, août 14). Wikipedia.  https://fr.wikipedia.org/wiki/Complexe_nucl%C3%A9aire_de_Hanford 

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The Associated Press. (2020). Tesla to split stock 5-to-1 at the end of August. CBC. https://www.cbc.ca/news/business/tesla-stock-split-1.5683056#:~:text=Tesla%20will%20split%20its%20stock%20for%20the%20first,following%20a%20meteoric%20rise%20in%20its%20market%20value

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Boily, A. (2020, septembre 24). Nouveau Galaxy S20 FE 5G de Samsung, l’entrée de gamme 5G à moins de 1000$. Le journal de Québec.  https://www.journaldequebec.com/2020/09/24/nouveau-galaxy-s20-fe-5g-de-samsung-lentree-de-gamme-5g-a-moins-de-1000

Jolicoeur, M. (2020, septembre 23). Des centaines d’employés de Bell remerciés. Le journal de Montréal.  https://www.journaldemontreal.com/2020/09/23/des-centaines-demployes-de-bell-remercies

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