In an attempt to put a constructive spin on the ubiquitous "2013 look ahead" trend article, we took a look at 2012 sector performance in search of buying opportunities in the new year.
As always, the search for bargains begins with the losers. The S&P/TSX Tech Hardware Index was the year's worst performer at -17.2 per cent but, as we are already on record calling Research in Motion a coin toss at this point, let's leave it aside for now.
The Materials and Energy indexes are the second and fourth weakest market sectors respectively in 2012, which is unfortunate because they are two of the largest three sectors in the S&P/TSX Composite. In valuation terms, both sectors will begin 2013 in almost the exact same position as 2012. The aggregate price earnings ratio for Energy actually rose slightly, from 19.5 to 20.2 times, despite the benchmark's 4.6 per cent decline. Materials stocks became only marginally cheaper during the year – the price earnings fell from 16 to 15.4 times.
The aggregate numbers for these sectors provide no investment clues, so further digging is required. The usual caveats apply; the analysis here is by no means sufficient to make investment decisions. There is a story behind every number, and investors should know what it is before committing their hard-earned savings.
That said, this table, which shows every constituent of the S&P/TSX Materials Index ranked by the change in its price-to-earnings ratio in 2012, is full of useful leads. For example, the biggest drop in price earnings ratio for the year was Hudbay Minerals Inc. The company began 2012 with a P/E of 22, and is ending the year with 6.5. As a group, analysts are almost uniformly bullish on the prospects for Hudbay in 2013. Fifteen of the 17 analysts covering the stock rate it as a Buy, with an average target price of $13.07. That's 31 per cent above the current price.
The second table completes the same exercise for the S&P/TSX Energy Index. Here, MEG Energy Corp. is the standout. The stock's price-to-earnings ratio declined 86 per cent in 2012 and, as in the case of Hudbay, analysts are bullish. Ten out of 14 analysts rate MEG Energy a Buy, and the average target price is fully 56 per cent above the stock price.
Again, none of this is conclusive, but it is a decent starting point in the decision-making process. Potentially, the tables above can help identify oversold stocks that have been thrown out with the bathwater amid skepticism about their respective sectors.