Wonder how long they're going to extend credit without seeing returns: Bushell on market spending

Key Concepts

• Earnings Season: The period when publicly traded companies release their financial results.
• Bottoming Pattern: A technical analysis term indicating a stock's price may have reached its lowest point and is starting to recover.
• US Tech Earnings: Financial results from technology companies in the United States.
• OPEC Capacity Additions: Increases in oil production capacity by the Organization of the Petroleum Exporting Countries.
• US Shale: Oil and gas extracted from shale rock formations in the United States.
• Capex Plans: Capital expenditure plans, outlining a company's planned spending on long-term assets.
• Natural Gas Stocks: Shares of companies involved in the production and distribution of natural gas.
• Oil Stocks: Shares of companies involved in the exploration, production, and refining of crude oil.
• Data Centers: Facilities that house computer systems and associated components, such as telecommunications and storage systems.
• Utilities: Companies that provide essential public services like electricity, water, and gas.
• Gold: A precious metal often considered a safe-haven asset during economic uncertainty.

Earnings Results and Market Performance

The discussion begins with an overview of recent earnings results, highlighting that Canadian Natural narrowly beat profit estimates, and its production hit a record. BCE, the parent company of the interviewer, also reported profits that exceeded expectations. Ryan Bushel, CEO and portfolio manager at New Haven Asset Management, noted that while BCE's results weren't particularly surprising, the company's stock has been exhibiting a "nice kind of bottoming pattern" over the last six months, suggesting potential for improvement. Bushel believes BCE is significantly more valuable than the $40 per share offer it received in 2008, citing its extensive infrastructure and wireless network.

Earnings Season Theme and Market Drivers

Bushel identifies a prevailing theme in the current earnings season: it has been "stronger than I think most people would have expected." This strength, particularly from US tech earnings, has been the primary driver of the market through October. Despite significant spending announcements from tech companies, the market has largely overlooked these, even reacting positively, with the exception of Meta. Bushel raises a question about the sustainability of this trend, wondering how much longer the market will "extend credit without seeing return."

Canadian Oil and Gas Sector Performance

Following the US tech earnings, the focus shifts to a "slew of Canadian oil and gas results," which are described as "pretty darn positive" despite a "subdued pricing environment." This positive performance is contrasted with previous instances where crude oil prices dropping below $60 per barrel led to significant negative share price reactions in the Canadian oil and gas sector. This time, however, the stocks have been "holding in nicely," indicating a potential "longer-term trend emerging."

Outlook on Oil and Gas Investments

Bushel expresses a growing positivity towards oil stocks, noting that the "great bulk" of OPEC capacity additions are likely behind us. He estimates around 700,000 barrels per day could come from Saudi Arabia, but emphasizes these are announcements, not necessarily actual production. Russia continues to face challenges due to sanctions and infrastructure attacks. The US shale sector is identified as a "real question mark," with oil at $60 not expected to spur significant drilling activity. Capex plans for the next few months are anticipated to be "pretty subdued," especially in the US.

For Canadian oil and gas stocks, Bushel sees potential for positive outcomes not only in commodity prices and production but also in sentiment. He attributes the recent strong performance of these stocks to their "long-tailed resources" and a potentially "more accommodative government policy backdrop."

Defensive Positioning and Sector Holdings

Despite the positive outlook on oil and gas, Bushel states that his firm is "defensive" broadly, with significant weightings in financials and utilities.

Transalta and Data Center Hype

Regarding Transalta, Bushel clarifies that his firm does not own the stock. The reason is a strategic decision to avoid "concentrated AI bets." He explains that Transalta and, to some extent, Capital Power have seen their share prices "whipped around" by announcements regarding data centers in Alberta. While the economic rationale for data centers in Alberta (energy availability, cooler climate, space) is sound, Bushel questions the political will for such long-term investments given the current geopolitical climate. He notes that Transalta's stock is "just giving back the big rise it had in October" driven by data center hype. While the company's fundamentals are considered "relatively okay, but not great," they wouldn't have justified the stock's rise from $13 to $23.

Preference for Larger Utilities

Instead of companies like Transalta, Bushel's firm is more interested in "larger in place utilities" such as Fortis and Emera, which are expected to deliver "steady incremental growth over a longer period of time."

Gold Holdings

The firm also holds a "smallish weight in gold." Bushel admits he would "rather not own it," as gold performance is often a sign of underlying problems. However, coming out of 2021-2022, with "outsized stimulus" in the market, taking a position in the "largest most liquid player in Canada being Agnico Eagle" was deemed wise and has performed well. The firm is not adding to gold at current levels but would consider investing for new clients if gold prices pull back significantly, for example, to $3,500 or below.

Conclusion

The discussion concludes with a summary of the key takeaways: a generally positive earnings season driven by US tech, a surprisingly resilient Canadian oil and gas sector, and a defensive investment strategy favoring established utilities over speculative bets. While gold is held for diversification, it is not a preferred asset class. The overall sentiment suggests a cautious optimism, with a focus on long-term value and steady growth.