Insurers flush while investors wait for bank stock recovery

Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
While many Canadian investors wait for the major banks to outperform again, the life insurance stocks are very healthy according to BMO analyst Tom MacKinnon,
“Excess capital positions remain robust for the Canadian Lifecos. At $10B for MFC, an estimated $7B for SLF (or $4B post an estimated $3B 2025 outlay related to SLC buy-ups), $1.1B for IAG and $250mm for GWO (lower as it reflects GWO’s outsized 29% leverage), they provide ample financial flexibility. This is a high class problem, especially after also taking into account the group’s strong organic capital generation. In light of this, and testament to management’s increasing confidence in continued strong organic capital generation, it’s of no surprise that share buybacks have picked up. And with valuations still attractive, with the Canadian lifecos trading at 9.7x NTM [next 12 months] EPS versus their 10.2x average since the GFC (with much better ROEs/capital and still higher/more favourable longer-term interest rates) and an attractive 8% FCF [free cash flow] yield on 2025E organic capital generation, we see this trend continuing. Excess capital positions are exceptionally strong for the Canadian lifecos, except GWO … FCF [yields on 2025E are 8% for each of GWO, MFC and SLF and 10% for IAG”
AIG, Sun Life and Manulife are all buying back shares thanks to strong capital positions. Analysts, like Darko Mihelic at RBC, continue to favour insurance stocks over banks.
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RBC Capital Markets analyst Rishi Jaluria uncovers the software stocks with the biggest room for growth,
“In this primer, we focus on TAM (total addressable market). TAM is one of the four key pillars we see for a company’s path to profitability (the other three being gross margins, sales efficiency, and net retention). TAM is arguably the most important, but also the most nebulous and difficult to measure of the four … We also analyze TAMs for 68 companies in our combined coverage universe, providing our own assessments on management’s estimates and, when possible, build our own TAM estimates. • Ultimately, even if TAMs are overstated, what matters is which companies have the greatest ability to grow within a realistic TAM. We favor companies that are underpenetrated today, but have the ability to grow faster than the market and gain share, ideally in a growth market, as opposed to market leaders in declining markets with worsening competitive dynamics. • Within our coverage universe, we believe CRWD, HUBS, MDB, MSFT, NET, NICE, NOW, VEEV, and WDAY have the most compelling TAM stories”
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Morgan Stanley analyst Stephen Byrd outlined a host of underappreciated investment opportunities arising from the AI buildout,
“Dynamic #1: The upcoming severe shortage of powered US Data Center capacity … our concern that a looming US Data Center shortage is evident from a few data points: (A) the mismatch in magnitude between our 2025 base case required US Data Center new build number to absorb the volume of GenAI chips being sold (>10 gigawatts) and the volume of Data Centers under construction in the US … Companies that may benefit include: owners of US merchant nuclear power sites Constellation Energy (CEG.O), Vistra (VST.N), and Public Service Enterprise Group (PEG.N) … Given our projected rapid growth in Data Center volumes required in the US to house the GenAI chips that are in high demand, we are seeing early signs of a shortage of Data Center development and construction capabilities … Companies that may benefit include: Equinix (EQIX.O), Digital Realty Trust (DLR.N), Applied Digital (APLD.O), TeraWulf (WULF.O), Galaxy Digital (GLXY.TO), IREN (IREN.O), Cipher Mining (CIFR.O), Bitdeer (BTDR.O), and Hut8 (HUT.O) … Dynamic #4: The potential divergence in Data Center power strategies pursued by GenAI companies and Data Center owners — specifically, the potential for some of these players to choose natural gas-fired power options … We believe the market has not priced in the likely extensive usage of the REIT structure as a source of financing (and ultimate ownership) of Data Centers … Dynamic #6: Growing demand for electric transmission and transformer capacity … Potential beneficiaries rated OW by our analysts include: AEP (AEP.O), GE Vernova (GEV.N), Siemens Energy (ENR1n.DE), Prysmian (PRY.MI), and NARI Tech (600406.SS), who provide power equipment required for grid enhancement and Data Center development”
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Diversion: “Are homeless encampments legal in public spaces?” – CBC