In this edition of Market Factors we start with why the depressed natural gas sector may turn out to be a huge opportunity. In part two, a prominent strategist is seeing cracks in the megacap market leadership. And the diversion looks at my favourite movie soundtracks.
A pump jack in a farmer’s field just north of Calgary.Todd Korol/The Globe and Mail
Investing ideaNatgas inventories to flip from surplus to low levels
I’ve been touting the growth story in natural gas while the commodity price hovers near 25-year lows, so I suppose I owe readers an explanation. I not only believe in the story, but also think things are progressing in a way that will be extremely lucrative for investors if the 2026 demand outlook unfolds as predicted.
Natural gas production has significantly exceeded demand this year and this successfully smothered the commodity price. The current end of summer inventory levels are close to record highs thanks to year-to-date production increases of over a billion cubic feet per day.
On Tuesday, BofA Securities commodity strategist Clifton White wrote that since 2019, Western Canada natural gas demand growth has come almost exclusively from industrial companies and utilities. Demand from these sources has flagged, increasing oversupply conditions.
Now for the good news for investors. Historically the only outlets for domestic natural gas production were pipelines flowing to the U.S. and Eastern Canada. Now, however, the LNG Canada facility on the B.C. coast is operational and gives Canadian gas producers access to global markets.
Mr. White believes that LNG Canada “will cause Western Canada inventories to flip from near record highs this fall to near 10-years lows by the end of summer 2026 [and this] … will lead to stronger AECO prices and fewer Canadian exports to the U.S. next year.”
For the natural gas sector, business conditions are bad now and forecast to get much better next year. Theoretically, an investor might be able to find a related stock at depressed prices now, and benefit as conditions improve. We should have a few months of research to attempt to uncover this opportunity.
The table below using RBC Capital Markets data can provide a guide to further study. Each stock’s leverage to gas prices, valuations in terms of enterprise value to debt-adjusted cash flow and recent performance are included.
As always, there are risks for investors. Global natural gas demand, operational issues at LNG Canada and excess production are only three potential events that could screw up this potentially profitable trade. It is still worth further study in my opinion.
TrendsCracks in the megacaps
Megacap stocks have dominated markets since 2015 but one strategist now sees cracks in the trend. A shift in the market cycle from a downturn stage into recovery means smaller cap stocks will retake market leadership, according to BofA’s Savita Subramanian.
Ms. Subramanian grouped the S&P 500 into deciles and noted that the last Nifty Fifty run – significant outperformance by the largest 50 companies – occurred in the late 1990s. Back then, the outperformance lasted six years and the largest companies outperformed the broader benchmark by 71 percentage points.
Currently the biggest 50 stocks have outperformed the benchmark by 73 percentage points since 2015. The average balance sheet quality of today’s top 50 is well below the late 1990s. Average valuations are near record highs while growth expectations are, despite the substantial growth forecasts for the magnificent seven, unspectacular overall.
The switch to a recovery market cycle historically means that economically sensitive, higher beta (market sensitivity), smaller market cap stocks outperform. Ms. Subramanian expects stocks with lower valuations (in terms of forward PE ratios), above median beta, below median market cap and buy-rated at BofA to outperform. Her screen by these factors uncovered United Airlines Holdings Inc., Halliburton Co., Expedia Group Inc. and lululemon athletica Inc.
DiversionsFavourite soundtracks from every era
The MakeUseOf site posted their picks for most underrated movie soundtracks and there are some interesting selections. I hadn’t thought of The Last American Virgin as having great music but on review the soundtrack looks great.
My picks for favourite soundtracks begin with John Hughes movies, notably the Eric Stoltz and Mary Stuart Masterson classic Some Kind of Wonderful. The Flesh for Lulu song I Go Crazy seals it for Some Kind of Wonderful because that song was impossible to find at the time. (The phenomenon of being completely unable to listen to a song you like must be inexplicable to modern generations. Led Zeppelin’s Say Hey Woman was another example).
Classics like Wizard of Oz and Singin’ in the Rain must be mentioned when the soundtrack topic comes up. For the ‘80s Purple Rain and then in the ‘90s there’s Singles. The High Fidelity soundtrack is quirky and amazing. Donnie Darko, Trainspotting, Grease, Saturday Night Fever are all notable. I just thought of The Commitments for the first time in at least 25 years because of its terrific and timeless music.
What are your favourites?
The essentials
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Globe Investor highlights
A look at how this week’s inflation report has shifted market and economist views for future Bank of Canada rate cuts
The latest Reuters polling of equity strategists and portfolio managers finds a bullish bunch when it comes to the TSX – but less so for the S&P 500
Jamie McGeever takes a closer look at how markets and Donald Trump are in a delicate policy dance
Reuters’ Ron Buosso on why the Ukraine outcome is insignificant for oil markets
What’s up next
The data calendar starts with industrial product prices for July on Thursday when economists expect a 0.3 per cent month-over-month increase. Retail sales for June follows the next day and consensus is looking for a 1.5 per cent rise for the headline number and 0.8 per cent jump ex-autos.
Bank earnings are the highlight for Canadian investors in the coming week. Bank of Montreal ($2.942 per share expected) and Bank of Nova Scotia ($1.73) report Tuesday. Royal Bank ($3.317) and National Bank ($2.675) post numbers Wednesday. Dollarama ($1.152) also reports next Wednesday.
American economic data of importance begins Thursday with S&P Global U.S. Manufacturing PMI (49.7 expected), which provides an early look at August results. The leading index for July (-0.1 per cent month over month) is also out Thursday but that index has been providing deceptively negative results of late.
Preliminary durable goods orders for July (-4.0 per cent month over month) will be released next Tuesday.
We’ll get corporate results from Walmart Inc. ($0.733) on Thursday and the 27th will see earnings reports from Crowdstrike Holdings Inc. ($0.832) and the big one, Nvidia Corp. ($1.005).
See our full earnings and economic calendar here