**This article is a transcription of the video above. Check out our video on 3 Top Canadian Stocks We’re Not Buying In June directly on Youtube here**
Hey everyone, and welcome to another video (or article).
Today, we’re going to look at a few Canadian stocks that investors might want to avoid considering the current market conditions.
And what we mean by current market conditions is that the TSX Index has officially entered overbought territory. This means that the markets in general may be due for a short term pull back after such a great month of May.
Here at Stocktrades, we are firm believers that investors should never try and time the market. We believe that time in the market beats time out of the market.
That being said, there are also times when investors can pick their entry points
This is why we are big fans of what is called the 14 day relative strength index, or 14 day RSI for short.
This is a short term momentum indicator that highlights whether or not the stock or market is in oversold or overbought territory.
When an asset has an RSI of 30 or below, it is a sign that the stock is oversold, or due for a short term bounce.
The opposite is also true, when an asset has an RSI of over 70, it means the stock is overbought, and due for a short term correction.
So in my personal opinion, when I am researching a stock and want to start a position, where it be a growth stock or Canadian dividend stock, I always check the 14 day RSI. If it’s above 70, I’ll stay away. I will wait until the position consolidates or perhaps corrects, at which point in time I”ll buy the stock.
The 14 day RSI is simply a momentum indicator, it has nothing to do with fundamentals. Granted, an RSI below 30 may be a sign that the company’s fundamentals are deteriorating and the stock is being sold off. So keep an eye on this.
I am typically very comfortable picking up a stock anywhere from 30-70.
I mentioned that the TSX has entered overbought territory. As of filming, it has a 14 day RSI of 72. This is the highest it has been since late February, right before the latest market crash.
Given this, investors should be extra cautious when they start investing in this type of frothy environment, and maybe stick to recession proof Canadian stocks if they’re unsure.
Now, along with the TSX index, there are several stocks that are now in overbought territory.
Investors want to be very careful before entering a position. Is a stock you’re considering in overbought territory? I have 3 for you that you might want to avoid.
Canadian Natural Resources (TSX:CNQ)
Investors looking to buy oil and gas have to realize it is very volatile.
This is why we prefer oil majors such as Imperial, Suncor and Canadian Natural Resources (TSX:CNQ). Canadian Natural is one of the lowest cost producers in the country.
This has enabled it to keep the dividend and its status as a Canadian Dividend Aristocrat steady despite the record pace of dividend cuts across the sector.
In fact, Suncor recently cut its dividend after 17 years of straight dividend growth. Canadian Natural owns the longest dividend growth streak in the industry at 24 years.
Due to its low cost profile, the company is in a great position to maintain that dividend, especially considering prices have started to rebound.
However, investors looking to take a position in the company may want to consider waiting. The company now has a 14 day RSI of 77. This is the first time in 2020 that the company has entered overbought territory. Likewise, the entire industry is in overbought territory.
Over the past month, Canadian Natural has gained over 35% and it’s still down over 30% year to date.
Investors will also want to be careful, as the prices of WTI is only expected to reach $45 a barrel by the end of 2020. This assumes the economy can reopen without a hitch. This assumes we don’t hit a second or third wave, and that the economy continues to slowly re open and returns to normal.
Any hiccups and we could see the price of WTI crater yet again.
We like the company. We think it is a strong long term play. We just think investors should take a cautious approach and take advantage of a pullback we feel is coming.
Ceridian Holdings (TSX:CDAY)
Next stock is Ceridian Holdings (TSX:CDAY). You may not be familiar with Ceridian. It is a Canadian technology company that operates in the human resources industry.
Its platforms are what we call Human Capital Management, or HCM systems. They allow corporations to manage everything from payroll to benefits to talent management. So everything around human resources.
The company has been quite a strong player. In 2020, the stock has gained approximately 24%. However, most of those gains have come over the last month or so, which has lead to the company once again, entering overbought territory.
The company has an RSI of 82, which makes it one of the most overbought companies on the TSX Index.
This is a company that is now trading near 52 week highs. It’s trading at approximately 7 times book value and 15 times sales, so it’s definitely not cheap, and it’s one of those companies that given its current valuation and its status as being overbought, is prime for a pullback.
Analysts expect the company to grow earnings by approximately 10% annually over the next couple years. Not bad for a technology company, and Ceridian has definitely delivered.
Ceridian is a relative newcomer to the TSX.
It only IPOed 2 years ago in April of 2018. However, since that time it has been a star performer. Shareholders who are lucky enough to have got in on the ground at its IPO would be sitting on gains of 189% today.
That is quite the explosive growth.
Once again, it’s not surprising tech companies are doing so well in this environment. It’s especially true given the current pandemic, where everyone is being forced to work at home.
This means that technology is taking center stage for all companies, and HR platforms are in high demand.
Although we like the company, we just can’t get past current valuations. 7 times book value, 15 times sales, 144 times forward earnings and a PEG of 20. This is very expensive.
This leaves little room for error, and any type of pullback in the technology sector and Ceridian can see its share price crash.
As mentioned, solid company, we just think it’s overbought and a little expensive at these levels.
Total Energy Services (TSX:TOT)
The last stock on our list is Total Energy Services (TSX:TOT). This is a company that has been generating a lot of interest among Stocktrades premium subscribers.
In fact, we’ve been getting several questions on the company on our Q and A feature, which is by far one of our more popular segments.
Investors want to know if Total Energy is a good buy. Well, the company has more than doubled over the last month.
Not surprisingly, the company is catching it big considering the price of oil and gas is on an uptrend.
However, it’s important to note, Total Energy Services is a service company. So it doesn’t benefit directly from a rise in the price of oil. The only way it will benefit is if drilling activity resumes, and we are a ways away from that yet.
Despite them doubling over the last month, the company’s stock price is still down over 42% year to date.
Likewise, Total hasn’t exactly been a stand out performer. In fact, over the past 5 years, the company has been pretty much a dud. Between 2016 to 2018, the stock price has been relatively flat. And since the end of 2018, it has been on a downward spiral.
This means that it was struggling even before the COVID-19 pandemic hit, and before the price war on oil.
This isn’t a company we’d be rushing out to buy. The company is now in overbought territory, with a 14 day RSI of 91. This prices it among the most overbought companies in the country.
Likewise, the company recently cut its dividend. This means it wasn’t generating sufficient cash flows to cover the dividend, so it was suspended. It was a good move on the company’s behalf, however if you’re looking for safe and reliable income, I’d look elsewhere.
Total is not likely to re-instate the dividend anytime soon. The oil and gas producers are still very much focused on preserving liquidity. CAPEX will be slow and gradually returned to normal. This means that Total Energy Services isn’t going to benefit from an immediate rebound in oil and gas prices.
Not to mention, this just simply isn’t a company that has performed all that well over the last few years. With a 14 day RSI of 91, this is definitely a stock we’d stay away from.
A company like Total Energy is for a high risk investor. If you’re looking to play a rebound in oil and gas, stick with the best in class companies like Suncor, Imperial and Canadian Natural’s.
All 3 of those major companies are still trading well below pre-pandemic levels, and assuming all goes well could provide outsized gains. And, if we have some setbacks, they are likely to be less impacted than some of these small to mid-cap companies.
We believe that the TSX Index is getting a little bit ahead of itself
We understand that the economy is starting to rebound. However, we are not yet sure what the future looks like.
There exists considerable uncertainty. That’s why investing in companies that are in overbought territory is riskier than usual. The markets can crash tomorrow, and those that are in overbought territory can correct pretty quickly.
Canadian Natural, Ceridian and Total Energy are 3 Canadian stocks we would suggest waiting for a pullback.
Long term we believe Canadian Natural and Ceridian make excellent investment choices. For its part, total is more of a speculative play. We wouldn’t recommend it, and we wouldn’t rush out and buy it.
Please be safe, like the video on Youtube and subscribe to the channel for more great Canadian content!