The longer-term economic backdrop for markets is both problematic and deteriorating and this will make stocks with legitimate, sustainable profit growth even more difficult to uncover.
Screening the S&P/TSX composite, there are five stocks that, for now, are defying the trend of slowing economic growth where analysts are raising profit forecasts.
Doug Porter, chief economist at Bank of Montreal, detailed the increasingly pessimistic outlook for North American and global economic growth in his weekly update published Friday. Mr. Porter noted that the U.S. Federal Reserve had cut their long term gross domestic product growth expectations for the U.S. economy to under 2 per cent.
In Canada, he wrote, "on the ground, the Canadian economy is still just plodding along … the bigger picture is that GDP is still headed for a second straight year of little more than 1-per-cent growth in 2016 (and consensus for 2017 is starting to drift in that direction, albeit still around 2 per cent for now)." Globally, economists expect 2016 growth will end up at 2.9 per cent, which would be the slowest expansion since 2009.
Slowing economic growth will, in all likelihood, reduce the number of companies generating year-over-year profit growth. The accompanying chart shows a selection of S&P/TSX companies that, despite the economic outlook, have seen analysts raise profit forecasts in the past month.
I put a number of conditions on the results of my screen. Companies had to have positive earnings in the past 12 months, and consensus forecasts for profit growth in the current fiscal year. Earnings per share outlooks had to be nominally meaningful – companies didn't get credit for a one penny increase in forecasts that raised profit growth 100 per cent to 2 cents per share.
The end result was a short list of five companies led by Fortis Inc. Analysts covering the stock have raised their earnings per share expectations by 3.48 per cent in the past month. Descartes Systems Group Inc. is next, with analyst profit forecasts rising by 3.1 per cent. Descartes price-to-earnings ratio (not shown), however, is a daunting 68.5 times trailing earnings.
Bank of Nova Scotia is next as analyst raised earnings per share by 1.75 per cent, followed by TMX Group's 1.1-per-cent improvement.
The last name on the list is forestry products provider Interfor Corp. Analysts have raised profit estimates by 1.09 per cent but, as with Descartes, the trailing P/E ratio is high, at 60.1 times.
The screen is intended as a starting point for further fundamental research that confirms to investors, or not, that the factors driving the recent upgrades in outlook are sustainable.
Overall, I think that screens such as these will become increasingly important in the months ahead as more and more domestic companies fail to grow earnings as the economy slows back down. The current quarter is expected to be strong for the Canadian economy – experts predict 3.3 GDP growth – but much of that is a snapback from the problems caused by the Alberta wildfires. Fourth quarter growth is expected to slow right back down to 2.0 per cent.
Scott Barlow, Globe Investor's in-house market strategist, writes exclusively for our subscribers at Inside the Market online. Subscribe to Globe Unlimited at globeandmail.com/globeunlimited.