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Tuesday’s TSX breakouts: A stock with tailwinds to support steady price appreciation

On today's TSX Breakouts report, there are 12 stocks on the positive breakouts list (stocks with positive price momentum), and 41 stocks are on the negative breakouts list (stocks with negative price momentum).

Discussed today is a bank stock that we last featured in March, 2016, and since then, the share price has increased 24 per cent. A rising interest rate environment, solid financial results, dividend growth, and future share buyback activity provides a potentially positive backdrop for this stock that may lift the company onto the positive breakouts list in the future. The security highlighted below is National Bank of Canada (NA-T).

A brief outline is provided below that may serve as a springboard for further fundamental research.

The Company

Montréal-based National Bank is the sixth largest bank in Canada by assets. As at April 30, the bank had total assets of $239-billion. The company has four main business segments: personal and commercial, wealth management, financial markets, and U.S. specialty finance and international.

On May 31, National Bank reported better-than-expected second quarter financial results. Adjusted earnings per share came in at $1.30, beating the Street's forecast of $1.26. The bank's president and chief executive officer Louis Vachon highlighted in the earning's release that, "Each business segment posted double-digit earnings growth, contributing to the Bank's excellent performance for the second quarter of 2017." The common equity tier 1 (CET1) capital ratio was 10.8 per cent as at the end of the second quarter, up from 10.1 per cent reported six months ago.

On the earnings conference call, Mr. Vachon highlights four key objectives within its capital deployment strategy stating, "No. 1, to maintain our CET1 ratio above 10.75 per cent; No. 2, invest to stimulate business growth in our core markets; No. 3, invest to capture significant efficiency gains and generate operating leverage above 1 per cent for 2017; and lastly, No. 4, return capital to our shareholders through predictable dividend growth and disciplined share buybacks."

On May 31, management announced that its Board authorized a normal course issuer bid to purchase for cancellation up to 6 million shares. In terms of timing with the share buyback program, Mr. Vachon indicated on the earnings call, "Hopefully, over the next weeks or months, we'll start moving on the buyback." Share repurchases may provide the stock price with downside support.

The company is scheduled to report its third-quarter financial results on Aug. 30.  The consensus earnings per share estimate is $1.31.

Dividend Policy

National Bank pays shareholders a quarterly dividend of 58 cents per share, or $2.32 cents a share per year, equating to an annualized yield of 4.2 per cent. The company has steadily been raising its dividend, announcing dividend increases every other quarter since the end of 2010. The most recent dividend hike was announced in May. Based on its historical pattern, the next dividend increase is expected to be announced in December.

The payout ratio was 42 per cent in the second quarter, excluding specific items, indicating there is room for further dividend increases.

Analysts' Recommendations

The stock has five buy recommendations (from the analysts at Barclays, Eight Capital, EVA Dimensions, RBC Capital Markets, and Scotia Capital), seven hold recommendations, and two sell recommendations (from the analysts at Credit Suisse and Veritas Investment Research).

Financial Forecasts

The Street is forecasting earnings per share of $5.29 in fiscal 2017, rising 5 per cent to $5.55 in fiscal 2018.

Over the past several months, earnings forecasts have increased. To illustrate, three months ago, the Street was anticipating earnings per share of $5.22 in fiscal 2017 and $5.51 in fiscal 2018.

Valuation

According to Bloomberg, the stock is trading at a price-to-earnings (P/E) multiple of 9.9 times the fiscal 2018 consensus estimate, slightly above its three-year historical average of 9.5 times but below its peak multiple of over 11 times during this period.

Comparing National Bank's valuation to the other major Canadian banks, Royal Bank is trading at a P/E multiple of 12 times the consensus 2018 estimate. CIBC is trading at a P/E multiple of 9.7 times, Scotiabank is trading at 11.3 times, shares of the Bank of Montreal are trading at 11.4 times and TD Bank is trading at a P/E multiple of 11.4 times.

The consensus one-year target price is $59.09, implying the stock price may appreciate 7 per cent over the next 12 months, providing a respectable total return (including the dividend yield) of approximately 11 per cent. Individual target prices provided by 11 firms are as follows in numerical order: $53, $57, two at $58, two at $59, two at $60, three at $62.

Revised Recommendations

Analysts have made minor revisions to their price targets. For instance, last month, Meny Grauman, the analyst from Cormark Securities, raised his target price by $2 to $58. In May, Doug Young, the analyst at Desjardins Securities trimmed his target price to $58 from $59. Mario Mendonca from TD Securities reduced his target price to $59 from $62. Sumit Malhotra from Scotia Capital dropped his target price to $60 from $64. Stephen Theriault from Eight Capital upgraded the stock to a 'buy' with a $62 target price from a 'neutral' and $60 target price.

Insider Transaction Activities

On June 7, Lino Saputo Jr., who sits on National Bank's board of directors, and is the chief executive officer of the publicly traded firm Saputo Inc., purchased 20,000 shares at an average price per share of over $53.

On June 5, in a relatively small transaction, fellow board member Andrée Savoie purchased 650 shares at an average cost per share of $53.67, increasing her portfolio's position to 3,194 shares.

Chart Watch

Year-to-date, National Bank is one of the three 'Big 6' banks with a positive price return, along with Royal Bank and Scotiabank. However, National's price return is negligible at just 1 per cent.

The share price has been making a recovery, steadily rising since mid-May. On May 17, the share price closed at $51.77, and since then, the share price has increased 6 per cent.

In terms of key resistance and support levels, the stock has significant overhead resistance around $59, close to it record close of $58.75 set back in March. There is solid downside support around $53, close to its 50-day moving average (at $53.65) and its 200-day moving average (at $53.28).

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.

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Tuesday's TSX Breakouts

Price
Positive Breakouts10-Jul
AC-TAir Canada $20.37
CAE-TCAE Inc $22.76
CF-TCanaccord Genuity Group Inc $6.08
CHR-TChorus Aviation Inc $7.71
CCA-TCogeco Communications Inc $82.09
ITX-TIntertain Group Ltd $11.50
LNR-TLinamar Corp $65.53
MTL-TMullen Group Ltd $16.15
QBR.B-TQuebecor Inc $43.59
RCH-TRichelieu Hardware $31.34
SVC-TSandvine Corp $4.49
WEF-TWestern Forest Products Inc $2.45
Negative Breakouts
AOI-TAfrica Oil Corp $1.87
ACR.UN-TAgellan Commercial REIT $10.41
AIF-TAltus Group Ltd $27.41
AYA-TAmaya Inc $22.19
AX.UN-TArtis REIT $12.88
ATH-TAthabasca Oil Corp $0.93
ATP-TAtlantic Power Corp $3.04
BCE-TBCE Inc $57.97
BXE-TBellatrix Exploration Ltd $3.08
BDI-TBlack Diamond Group Ltd $2.35
CAR.UN-TCanadian Apartment Properties REIT $32.44
REF.UN-TCanadian REIT $45.03
CPX-TCapital Power Corp $23.96
CSH.UN-TChartwell Retirement Residences $15.22
CHP.UN-TChoice Properties REIT $13.28
CSW.A-TCorby Spirit and Wine Ltd $21.00
CRH-TCRH Medical Corp $6.75
CRR.UN-TCrombie REIT $13.54
ELD-TEldorado Gold Corp $3.11
EXF-TEXFO Inc $5.73
HNL-THorizon North Logistics Inc $1.26
HSE-THusky Energy Inc $13.63
IRG-TImvescor Restaurant Group Inc. $3.54
IPL-TInter Pipeline Ltd $24.65
KMP.UN-TKillam Apartment REIT $12.32
KPT-TKP Tissue Inc $13.55
LUG-TLundin Gold Inc $5.13
MRD-TMelcor Developments Ltd $14.30
MRT.UN-TMorguard REIT $14.24
NAL-TNewalta Corp $1.34
NWC-TNorth West Co Inc $30.31
ONR.UN-TOneREIT $3.68
PHX-TPHX Energy Services Corp $2.14
RBA-TRitchie Bros Auctioneers Inc $34.77
RSI-TRogers Sugar Inc $6.16
SJR.B-TShaw Communications Inc $27.72
SOX-TStuart Olson Inc $5.08
SU-TSuncor Energy Inc $36.53
THO-TTahoe Resources Inc $6.43
UNS-TUni-Select Inc $28.67
WRG-TWestern Energy Services Corp $1.60

Source: Bloomberg

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