(October 2 – 09:30 ET) – Nortel Networks has suffered a deep slide over the past few weeks, taking the tech sector and the rest of the TSE with it. But according to Merrill Lynch, techs are still pricey.
Merrill notes that Nortel is down 25% from its peak and that in September it fell below its key 200-day moving average for the first time since 1998. Nortel has naturally taken the market down with it, but Merrill says that even though the market is off substantially from its highs, it remains a relatively expensive stock. “Even after the recent slide, Canada’s tech sector is still priced at a premium relative to its global peers. Canada’s tech space still commands a trailing P/E multiple of 70x, a 47% premium over the global average. The macro fundamentals unquestionably look solid, but investors are becoming justifiably concerned over how much of the good news is already priced.”
Merrill suggests that sectors with “earnings visibility” should benefit as investors get nervous about profit growth. It points to financials, food processing & retailing, pipelines, and printing & publishing are possible beneficiaries, but touts the energy sector strongest. “In our view, this is still the early stages of what will prove to be a multi-year bull market in the energy sector, primarily natural gas, which has emerged as the fastest growing segment of global fuel consumption. Oil services are a huge beneficiary from the positive implications on the energy capital spending front.”
The firm remains generally bullish on Canada. “As painful as the September selloff has been, we believe that the bulk of the decline is already behind us,” Merrill notes, “While there is always a chance that the TSE 300 could test its 200-day moving average (currently 9,700), that would in all likelihood mark the absolute downside, in our opinion.”
-IE Staff