“To every thing there is a season, and a time to every purpose under the heaven: A time to be born, and a time to die; a time to plant, and a time to pluck up that which is planted.” Who knew Ecclesiastes was ‘nom de plume’ for seasonal investment analyst? Horizon ETFs’ Brooke Thackray is a modern day adherent of seasonal analysis. He says energy stocks and automobile (parts) manufacturing stocks enjoy seasonal rallies at this time of year.
We can trust that spring will always follow winter, just as spring leads to summer and autumn follows; it is on those certainties that seasonal analyst Brooke Thackray relies.
Mr. Thackray’s specialty is deciding the best time to plant seeds and the best time to harvest gains from the stock market. He serves as the lead research analyst on the Horizons Seasonal Rotation ETF (TSX─HAC) at Horizons ETFs Management (Canada). In addition, the analyst releases a book annually that examines seasonal market trends along with the companies and sectors that are likely to be affected.
True to its name, seasonal trends in industries such as electrical generation or aerospace are the main force driving what goes into HAC, the exchange-traded fund that Mr. Thackray manages. From those general patterns, he looks to technical and fundamental data to narrow down potential selections and decide which specific companies or ETFs to buy.
While Mr. Thackray describes seasonal analysis as a “long-term discipline”, he underlines the need to be flexible as well. “We’re trying to capture that sweet spot. The seasonal cycles don’t always happen. These are just trends that are more persistent,” he says.
The analyst points out that current events and market sentiment can offset overall historic trends in the short run. He says an average trade might last two to three months in the HAC portfolio. “It’s done on an as-needed basis. If it’s not working, we exit.”
Strong outperformance over TSX
The analyst’s first ‘best buy’ pick, Linamar Corp. (TSX─LNR), machines and assembles a variety of automotive vehicle parts, including engines, transmissions, and chassis components. Mr. Thackray notes that Linamar made it into his book for the first time this year.
According to the analyst, between 1996 and 2015, Linamar’s historic period of seasonal strength fell between Feb. 24 and May 12. In that period, it produced an average 20.8 per cent annual return and has been positive 75 per cent of the time. Like many peers, the company faced major problems in the 2008 economic downturn and even seemed close to bankruptcy in 2009.
However, Mr. Thackray notes that the auto sector is cyclical and thus volatile by nature. He suggests investors look to the frequency of such weak periods. From 1996 until last year, the company outperformed the TSX as a whole 85 per cent of the time.
“That’s what we’d call a very strong seasonal trend.”
Since its past troubles, Linamar has regrouped admirably, says Mr. Thackray. Market sentiment improved with strong auto sales last year and demand seems healthy in 2016.
While he admits the stock fell more than peers during the January market downturn, he says the depressed price presented a buying opportunity. The analyst expects to sell the stock around May 12 but Horizons attaches a four-week window to the beginning and end of seasonal strong periods so it can pounce on the best prices.
Oil and gas stock adapts to environment
Mr. Thackray’s second ‘best buy’ is former market darling Crescent Point Energy Corp. (TSX─CPG). The company is a crude oil producer, mainly in southern Saskatchewan.
Based on the NYSE Arca Oil & Gas Index’s (NYSE─XOI) historical data, the analyst says the sector produced an average return of 7.1 per cent annually and was positive 84 per cent of the time between 1984 and 2015. The index has beaten the S&P 500 78 per cent of the time. Energy stocks generally enjoy their seasonal heyday from Feb. 25 until May 9, says the analyst.
Energy stocks, including Crescent Point, began to outperform the S&P 500 again in late January as less negative news came out, eventually giving way to greater optimism. “It really was a sentiment change that we started to see,” says Mr. Thackray.
He attributes the renewed investor interest in energy stocks to factors such as imminent higher oil demand in the months preceding the summer driving season. Global supplies remain high, but the effect of that knowledge is already priced into stocks. Crescent Point has already hedged on much of its 2016 production, and the overall outlook for demand is favourable, Mr. Thackray asserts.
“We’re still producing more than we’re using. If you do the math, you know those lines are going to cross at some point.”
Crescent Point has cut expenses and its dividend twice, adapting to low oil prices. Thus, the company can quickly raise production and buy more assets as appropriate, Mr. Thackray adds.
Investor’s Digest of Canada, MPL Communications Inc.
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