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Thursday’s TSX breakouts: A stock to watch, yielding 6% with a unanimous buy call

On Wednesday, the Canadian benchmark tumbled while U.S. markets were mixed.

In the U.S., the Dow Jones Industrial Average advanced 0.22 per cent, the S&P 500 index fell 0.10 per cent, and the Nasdaq composite index lost 0.41 per cent.

In Canada, the S&P/TSX composite index plunged 210 points or 1.36 per cent. There were just 33 securities in the TSX Index that advanced, 213 securities declined in value, and four stocks closed the day unchanged. Only two sectors closed in mildly positive territory while nine sectors declined led by a downdraft in resource stocks. The price of oil dropped 3.7 per cent, breaking below $45 (U.S.) a barrel and remained under pressure this morning.

Year to date, the TSX Index is down 0.77 per cent. In the U.S., the Dow Jones Industrial Average is up 8.16 per cent, the S&P 500 index has increased 8.89 per cent, and the Nasdaq composite has rallied 15.08 per cent.

On today's TSX Breakouts report, there are 12 stocks on the positive breakouts list (stocks with positive price momentum), and 74 stocks are on the negative breakouts list (stocks with negative price momentum). The soaring number of stocks on the negative breakouts list can be used to highlight potential future buying opportunities as stock valuations compress.

Discussed today is a stock that is two per cent away from appearing on the negative breakouts list as its share price steadily drifts lower. It is one to closely watch as falling oil prices could continue to dampen investor sentiment for this stock given its exposure to the oil patch through its energy products segment. Lower and unstable energy prices can negatively impact demand from its energy product customers due to potential lower rig count and drilling activities. For that reason, the current downtrend in the stock price may continue, creating a future buying opportunity. The stock offers investors an attractive 6 per cent yield. Analysts on the Street are bullish on the stock anticipating a 25 per cent price return over the next year (over 30 per cent total return if you include the dividend). The stock has a unanimous buy recommendation. The security highlighted below is Russel Metals Inc. (RUS-T).

The company

Russel Metals is one of North America's largest metals distribution companies. The company's three core business segments are steel distributors, metals service centers, and energy products.

Before the market opened on May 3, the company reported better-than-expected first quarter financial results that sent the share price rallying 3.5 per cent on very high volume. Over 1-million shares traded, well above the three-month historical daily average trading volume of approximately 340,000 shares. The company reported revenue of $804-million, up from $662-mililon reported during the same period last year and exceeding the consensus estimate of $787-million. Earnings per share came in at 48 cents, handily beating the Street's expectations of 36 cents. A key driver was strengthening steel prices, which expanded the company's margins.

In the earnings release, the chief executive officer Brian Hedges commented on the strong financial results, "Our first quarter results are significantly better this year. Our operating teams across the business leveraged higher 2017 steel prices, which were largely the result of improvements in steel mill outlook, stronger demand and the easing of imports. Stable oil prices resulted in increased drilling activity and, just as importantly, the inventory overhang in the North American market was substantially reduced."

Dividend policy

Russel Metals pays its shareholders a quarterly dividend of 38 cents per share, or $1.52 on a yearly basis. This equates to an annualized dividend yield of 6.2 per cent. Management has maintained its dividend at this level since mid-2014.

Analysts' recommendations

There are six analysts covering this company, and all six analysts have buy recommendations.

The firms providing research coverage are as follows in alphabetical order: EVA Dimensions, GMP, Raymond James, RBC Capital Markets, Scotia Capital, and TD Securities.

Financial forecasts

The consensus earnings before interest, taxes, depreciation and amortization (EBITDA) estimates are $196-million in 2017, rising 12 per cent to $220-million in 2018. The Street is forecasting earnings per share of $1.60 in 2017, climbing 15 per cent to $1.84 in 2018.

Earnings expectations have been steadily increasing. To illustrate, four months ago, the consensus EBITDA estimates for 2017 and 2018 were $176-million and $202-million, respectively. The Street was forecasting earnings per share of $1.37 in 2017 and $1.69 in 2018.

Valuation

According to Bloomberg, the stock is trading at a price-to-earnings (P/E) multiple of 13.3 times the 2018 consensus estimate, slightly below its five-year historical average of 13.7 times. On an enterprise value-to-EBITDA basis, the stock is trading at a multiple of 7.8 times the 2018 consensus estimate, just below its five-year historical average of 8.2 times.

The average one-year target price is $30.55, implying the stock price may have 25 per cent upside potential. Individual target prices provided by five analysts are as follows in numerical order: $28.75, $30, two at $31, and $32.

Revised recommendations

Several analysts have recently revised their recommendations – all higher. Earlier this week, Michael Tupholme from TD Securities upgraded the stock to a 'buy' from a 'hold' and maintained his $30 price target. Last month, Sara O'Brien, the analyst from RBC Capital Markets, raised her target price to $32, the high on the Street, from $31. Frederic Bastien from Raymond James lifted his target price by $1 to $31.

Insider transaction activity

There have been two recent purchases in the market by insiders, both relatively small transactions. On June 6, William O'Reilly, who sits on the board of directors, bought 400 shares at an average price per share of $23.77. Prior to that, on May 15, James Dinning, director and chair of the board, purchased 1,500 shares at an average price per share of $25.89.

Chart watch

Year to date, the share price is down 4 per cent, steadily drifting lower but not on large volume.

The stock price has initial overhead resistance around $25, near its 50-day moving average (at $25.85) as well as its 200-day moving average (at $24.92). After that, there is a ceiling of resistance around $29, just below the $30 mark.

Looking at downside support, shares of Russel Metals have solid technical support around $20.

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The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company's dividend policy, analysts' recommendations, financial forecasts, and provides a brief technical analysis for a security to provide readers with more information.

If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.

Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indices that have a minimum market capitalization of $200-million.

A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.

If you want to receive an automatic link to all reports that I write, follow me on Twitter at @jennifer_dowty

TSX breakouts

Positive BreakoutsJune 14 close
CJT-TCargojet Inc $48.36
DNA-TDalradian Resources Inc. $1.71
ECN-TECN Capital Corp. $4.03
ET-TEvertz Technologies Ltd $17.62
FIH.U-TFairfax India Holdings Corp. $15.05
GWR-TGlobal Water Resources Inc. $13.00
SEC-TSenvest Capital $204.99
SJR.B-TShaw Communications Inc $30.16
TCL.A-TTranscontinental Inc $25.75
VNR-TValener Inc $23.08
WCN-TWaste Connections Inc. $131.37
WPRT-TWestport Innovations Inc $2.42
Negative Breakouts
AAV-TAdvantage Oil & Gas Ltd $8.09
AIM-TAimia Inc $1.53
HOT.UN-TAmerican Hotel Income Properties REIT LP $10.06
ADW.A-TAndrew Peller Ltd $10.60
ARX-TARC Resources Ltd $16.57
AKG-TAsanko Gold Inc $1.94
ATH-TAthabasca Oil Corp $1.05
AUP-TAurinia Pharmaceuticals Inc $7.92
AVO-TAvigilon Corp $14.10
ABX-TBarrick Gold Corp $21.10
BTE-TBaytex Energy Corp $3.48
BIR-TBirchcliff Energy Ltd $5.87
BDI-TBlack Diamond Group Ltd $2.88
BNE-TBonterra Energy Corp $15.48
CFW-TCalfrac Well Services Ltd $3.13
CEU-TCanadian Energy Services & Technology Co $6.05
CNQ-TCanadian Natural Resources Ltd $37.36
REF.UN-TCanadian Real Estate Investment Trust $47.85
CTC.A-TCanadian Tire Corp Ltd $147.27
CS-TCapstone Mining Corp $0.88
CJ-TCardinal Energy Ltd $4.87
CLS-TCelestica Inc $18.32
CPG-TCrescent Point Energy Corp $11.17
CR-TCrew Energy Inc $3.80
CRH-TCRH Medical Corp $7.21
ELD-TEldorado Gold Corp $3.56
ENB-TEnbridge Inc $49.81
ENF-TEnbridge Income Fund Holdings Inc $31.91
EDR-TEndeavour Silver Corp $3.86
EIF-TExchange Income Corp $32.48
XTC-TExco Technologies Ltd $10.78
FRU-TFreehold Royalties Ltd $12.56
G-TGoldcorp Inc $17.46
GTE-TGran Tierra Energy Inc $2.97
GXO-TGranite Oil Corp $4.50
GC-TGreat Canadian Gaming Corp $23.38
HBC-THudson's Bay Co $8.59
IPL-TInter Pipeline Ltd $25.73
JE-TJust Energy Group Inc $6.75
KEL-TKelt Exploration Ltd $6.05
GUD-TKnight Therapeutics Inc $9.68
KPT-TKP Tissue Inc $14.86
LUG-TLundin Gold Inc $5.80
DR-TMedical Facilities Corp $14.68
MEG-TMEG Energy Corp $4.30
MX-TMethanex Corp $54.21
NAL-TNewalta Corp $1.76
NDQ-TNovadaq Technologies Inc $8.24
OTEX-TOpen Text Corp $42.47
PONY-TPainted Pony Petroleum Ltd $4.43
PXT-TParex Resources Inc $14.55
PGF-TPengrowth Energy Corp $1.07
PWT-TPenn West Petroleum Ltd $1.76
PTM-TPlatinum Group Metals Ltd $1.35
PVG-TPretium Resources Inc $11.55
P-TPrimero Mining Corp $0.48
PLI-TProMetic Life Sciences Inc $2.00
RFP-TResolute Forest Products Inc. $5.89
REI.UN-TRioCan Real Estate Investment Trust $25.11
SAP-TSaputo Inc $41.91
SEA-TSeabridge Gold Inc $13.23
SES-TSecure Energy Services Inc $8.71
SCL-TShawCor Ltd $28.31
SSO-TSilver Standard Resources Inc $12.14
SPE-TSpartan Energy Corp $2.01
TOY-TSpin Master Corp. $35.96
SU-TSuncor Energy Inc $39.40
SPB-TSuperior Plus Corp $11.55
TECK.B-TTeck Resources Ltd $22.42
TOG-TTORC Oil & Gas Ltd $5.03
TOT-TTotal Energy Services Inc $12.90
TGL-TTransGlobe Energy Corp $1.68
TDG-TTrinidad Drilling Ltd $1.96
YRI-TYamana Gold Inc $3.30

Source: Bloomberg

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