WEDNESDAY, MARCH 11, 2026 | THE GLOBE AND MAIL G B11 EYE ON EQUITIES DAVID LEEDER AIR CANADA (AC-TSX) CLOSE $17.46, DOWN 32¢ CALIAN GROUP (CGY-TSX) CLOSE $81.76, DOWN 21¢ CONSTELLATION SOFT. (CSU-TSX) CLOSE $2,938.78, DOWN $36.22 AECON GROUP (ARE-TSX) CLOSE $41.93, UP $1.15 NEXUS INDUS. REIT (NXR.UN-TSX) CLOSE $7.59, DOWN 6¢ After “significantly” reducing his 2026 estimates to reflect fuel headwinds, Scotia Capital ana- lyst Konark Gupta downgraded Air Canada to a “sector perform” rating from “sector outperform” previously. “Although valuation remains attractive, in our view, we have grown more cautious due to the recent surge in fuel price,” he said. Target: Mr. Gupta dropped his target for Air Canada shares to a low on the Street of $21 from $27. Consensus is $25.20. Ventum Capital Markets analyst Rob Goff hiked his valuation for Calian Group Ltd., citing the ex- pectation for “a further, positive sector-driven re-rating as de- fence spending tailwinds im- prove long-term demand visibil- ity and financial momentum builds” and seeing forecasts “leave upside to organic outper- formance.” Target: Mr. Goff hiked his target by $10 to a high on Street of $94, keeping a “buy” rating. Consen- sus is $82.24. National Bank Financial analyst Richard Tse is “encouraged” by Constellation Software Inc.’s in- line fourth-quarter 2025 financial results, particularly on capital deployment, however, pointing to the “volatile software environ- ment,” he thinks the current risk- to-reward for its shares “looks balanced at the moment.” Target: Mr. Tse raised his target to $3,400 from $3,200 to “reflect a pickup in capital deployment” with an unchanged “sector per- form” rating. Consensus is $4,053.60. After Aecon Group Inc. ended fiscal 2025 “on a high note” with stronger-than-anticipated fourth-quarter results, driven by the performance of its nuclear segment, RBC Dominion Securi- ties analyst Sabahat Khan thinks its “near-record $10.7-billion backlog (with additional awards following quarter-end) provides a strong outlook for top line growth in 2026 and beyond.” Target: His target jumped to $41 from $30 with a “sector perform” rating. Consensus is $39.95. While its fourth-quarter 2025 fell in line with expectations, Desjar- dins Securities analyst Kyle Stan- ley made a “small reset” to his expectations for Nexus Industri- al REIT, reducing his earnings outlook for 2026 by 5 per cent based on’ “small setbacks on the re-leasing and disposition/delev- eraging front.” Target: Maintaining his “buy” rating, Mr. Stanley cut his target to $8.50, matching the consen- sus, from $9. WHAT ARE WE LOOKING FOR? U.S. aerospace and defence com- panies trading at attractive valu- ations as the country approaches its first-ever trillion-dollar de- fence budget. THE SCREEN As the conflict in the Middle East continues, the U.S. defence bud- get is approaching a historic milestone. President Donald Trump has proposed a fiscal 2026 defence budget of more than US$1-trillion, a 13.4-per-cent in- crease over the prior year. New funding is intended to support shipbuilding, advanced muni- tions, advanced aircraft, and mis- sile defence initiatives. The trend extends beyond U.S. borders, as NATO allies committed at last year’s summit to raising defence spending targets from 2 per cent to 5 per cent of GDP by 2035, ex- panding the market for U.S. de- fence contractors internationally. Using FactSet’s screening tool, I identified U.S. aerospace and defence companies well-posi- tioned to capture this spending growth by applying the following criteria: included in the S&P 500 in- dex market capitalization greater than US$10-billion classified in the aerospace and defence sector, according to FactSet forecast one-year sales growth greater than 5 per cent The nine remaining compa- nies were ranked by a multifactor ranking of five metrics: price to earnings, price to sales, price to free-cash flow, one-year forecast sales growth, and enterprise val- ue to EBITDA. WHAT WE FOUND Lockheed Martin Corp., an aero- space and defence company, ranked first with a price-to-earn- ings ratio of 21.9 times, well be- low the group average of 45.5 times. The company reported full-year 2025 sales of US$75-bil- lion, up 6 per cent year-over-year, and generated US$6.9-billion in free cash flow. Its year-end back- log reached a record US$194-bil- lion, representing approximately 2.5 times annual sales and pro- viding multiyear revenue certain- ty. The company is accelerating production capacity for the F-35 fighter jet and PAC-3 missile de- fence systems, both central to U.S. and allied deterrence strate- gies. Additionally, income inves- tors will be pleased to know that Lockheed has raised its dividend for 23 consecutive years. Honeywell International Inc., a diversified industrial and aero- space technology company, ranked second with a price-to- earnings ratio of 22.2 times and forecast one-year sales growth of 5.7 per cent. Orders grew 23 per cent in its most recent quarter, led by strong demand for its aerospace technologies and ener- gy and sustainability solutions, pushing the company’s backlog to a record US$37-billion. Honey- well is pushing forward plans to spin off its aerospace division as an independent publicly traded company in the third quarter of 2026, a move expected to create one of the world’s largest pure- play aerospace and defence enti- ties. The information in this article is not investment advice. The au- thor assumes no liability for any consequence relating directly or indirectly to any action or inac- tion taken based on the informa- tion contained above. Nine U.S. defence stocks with attractive valuations Defence leaders RANK NAME TICKER PRICE ($) MKT. CAP. ($ MIL.) YTD. TTL. RTN. (%) 1Y TTL. RTN. (%) DIV. YLD. (%) P/ E P/ SALES P/ FCF 1Y. ESTIM. SALES GROWTH (%) EV/ EBITDA 1 Lockheed Martin Corp. LMT-N 664.15 152,807.80 38.0 44.1 2.1 21.9 1.9 23.2 5.4 15.0 2 Honeywell International Inc. HON-Q 237.59 151,030.20 22.4 20.1 2.0 22.2 3.8 29.6 5.7 17.2 3 L3Harris Technologies Inc. LHX-N 371.26 69,342.55 26.9 72.5 1.3 30.5 2.9 22.8 7.1 18.4 4 RTX Corp. RTX-N 208.23 279,504.50 13.9 64.9 1.3 29.9 3.0 32.3 5.5 20.1 5 TransDigm Group Inc. TDG-N 1,277.93 72,169.27 -3.9 1.8 0.0 30.5 7.0 30.5 13.3 18.3 6 Boeing Co. BA-N 225.00 176,703.10 3.6 45.9 0.0 111.1 1.8 58.7 8.7 33.0 7 GE Aerospace GE-N 321.93 337,644.60 4.7 67.3 0.6 42.1 6.9 39.8 13.6 29.6 8 Howmet Aerospace Inc. HWM-N 254.14 101,894.90 24.0 104.8 0.2 53.4 10.8 59.9 12.3 35.7 9 Axon Enterprise Inc. AXON-Q 559.06 44,947.12 -1.6 6.2 0.0 67.5 11.9 143.2 29.1 46.4 Source: FactSet ARJUN DEIVA NUMBER CRUNCHER CFA, and a MBA Candidate at the University of California, Berkeley, Haas School of Business A ctive investors like to com- pare stock prices to funda- mental metrics like earn- ings per share, namely using valu- ation ratios, to get a sense of ex- pected returns. The most popular valuation ratio for forecasting the long-run performance of stocks, especially as it relates to the direc- tion of the stock market in aggre- gate, is what is known as the cycli- cally adjusted price-earnings (CAPE) ratio. Well-known economists John Campbell and Nobel Prize winner Robert Shiller introduced the CAPE ratio in 1988 and calculated it by dividing an index, such as the S&P 500, by the total earnings of all component stocks. Total earn- ings are averaged over the previ- ous 10 years to prevent recessions from depressing earnings and bi- as analysis. They find a strong negative correlation between the CAPE ratio and future 10-year stock returns, that is, when CAPE is high, future expected returns are low, and when CAPE is low, fu- ture expected returns are higher. In recent times, however, the reliability of the CAPE ratio as a predictor seems to have lost some of its lustre. For example, with a CAPE ratio of 25.1 times in 2015 (being 55 per cent higher than its historic average), one would have expected low forward returns. Instead, stock prices have been on a tear between 2016 and 2025, producing an average rate of re- turn of 13.6 per cent per year (in- cluding dividends). Is CAPE outdated? Do structur- al changes in the markets make CAPE unreliable? Does the CAPE ratio need a modification? A re- cent paper, by four academics from Australia and New Zealand (titled “CAPE Ratios and Long Term”), argues that a potential problem of CAPE is the way the traditional CAPE is calculated, namely scaling the current S&P 500 index by the average annual total index earnings reported over the previous 10 years. But be- cause stocks are regularly added to and deleted from the S&P 500 index, on annual basis, this re- sults in a mismatch between the stocks included in the index in the numerator, i.e., the ones used to calculate price level, and the historical stocks in the denomina- tor, i.e., those from which histor- ical earnings are derived. For example, between 1997 and 2025 the number of U.S. public companies declined by 55 per cent, which highlights the degree of mismatch between the num- ber of companies included in the current value of the S&P 500 and the number of companies used for the calculation of the average earnings over the previous 10 years. As a result, they suggest that in- vestors should better estimate the CAPE ratio by aligning stocks cur- rently in the index with those stocks’ historical earnings. This involves obtaining the his- torical reported earnings for each current stock component of the index each year and using these to calculate historical S&P 500 in- dex earnings. They estimate the CAPE ratio by ensuring index alignment between the compo- nent stocks in the price numer- ator and earnings denominator. They label this approach the Component CAPE ratio. More specifically, the Compo- nent CAPE ratio is put together by market-value weighting the CAPE ratios of individual stocks in the S&P 500 Index. In contrast, the traditional approach is more closely aligned with an earnings- weighted measure of individual stock CAPE ratios. The researchers compare the Component CAPE ratio to the equivalent traditional CAPE ratio. Their modification materially im- proves return predictions of the CAPE ratio. They show that the CAPE ratio, as modified, is much more effective at forecasting long- term equity returns than previ- ously thought of. They use in-sample and out-of- sample estimations. (The former tests the researcher’s model by using data from a specified peri- od, while the latter tests the valid- ity of the model with data follow- ing the specified period.) The in- sample period for the CAPE ratio is 1961 to 1978. The 10-year period of forecasting returns is 1979 to 1998. They find that while the tra- ditional CAPE ratio has no predic- tive ability, consistent with recent studies, the Component CAPE ra- tio produces much better fore- casts. They repeat the analysis out of sample for the period 1974 to 2024 with similar results. And here is the interesting finding, as it was communicated to me by the authors: The Com- ponent CAPE ratio at the end of 2024 (the last year it was availa- ble) stood at 56 times versus a his- toric average (1961 to 2024) of 30 times. Stock values have in- creased since then, undoubtedly pushing up the Component CAPE ratio even further. Talk about a bearish reading, especially since the Component CAPE ratio fore- casts 10-year forward stock re- turns better than the traditional CAPE! In other words, to par- aphrase Mark Twain, reports of the CAPE ratio’s death are greatly exaggerated! A modified CAPE ratio is more reliable, and investors should be spooked by it GEORGE ATHANASSAKOS OPINION Professor of finance and holds the Ben Graham Chair in Value Investing at the Ivey Business School, Western University. His latest book is Value Investing: From Theory to Practice Elon Musk’s rocket and satellite maker SpaceX is leaning to- ward listing its shares on the Nasdaq for what could rank as the biggest initial public offering of all time, according to four people familiar with the company’s thinking. SpaceX wants early inclusion on the Nasdaq 100 index , making it a necessary condition for a potential listing on the tech-heavy exchange, two of the people said. Its plans could still change, said the people, who asked not to be identified because the discussions are confidential. Reuters has previ- ously reported that SpaceX is planning an IPO, as early as June. The New York Stock Exchange is also competing for the list- ing, and neither exchange has been informed of a decision ei- ther way, multiple people said. The Nasdaq 100, owned by Nasdaq Inc, is seen as a premier blue-chip index by large institutional investors and serves as a barometer for the health of most of the world’s biggest publi- cly traded names, including megacap technology stocks such as Nvidia, Apple and Amazon.com. The Nasdaq 100 gained about 21 per cent last year and is slightly lower so far this year. Nasdaq proposed a new rule last month that could poten- tially speed up the addition of newly listed megacap compa- nies to the Nasdaq 100 index. The proposed change, which is not final and could take sev- eral months to take effect, is designed to entice richly valued private companies such as SpaceX, Anthropic and OpenAI, among others, to list on the exchange. Under the Nasdaq’s proposed “Fast Entry” rule, a newly listed company would be eligible for accelerated inclusion in just under a month if its market capitalization ranks among the index’s top 40 current members. SpaceX is seeking a valuation of around US$1.75-trillion for the IPO, one of the people said, which would make it the sixth- largest company by market value in the U.S., based on the lat- est share prices. Newly listed companies currently have to wait up to a year before they are eligible for entry into major indexes like the S&P 500 or the Nasdaq 100, first needing to demonstrate to investors that they are stable enough to handle the volume of buy orders from institutional investors. Admission to a blue-chip index like the Nasdaq 100 or the S&P 500 gives companies increased access to the deep-pock- eted institutional investors who typically buy sizable posi- tions for their own index funds, broadening their shareholder base and improving liquidity over time. While the NYSE has a similar index that tracks its 100 large- st U.S. stocks, it is less widely followed by investors, making inclusion in the Nasdaq 100 especially influential for megacap IPOs. For executives and early investors, that deeper liquidity could reduce the market impact of large sell orders once lock- up periods expire, typically 90 to 180 days after an IPO, though it is no guarantee that a large wave of insider selling will not still weigh on the share price. SpaceX did not return requests for comment. Reuters reported in February that advisers for SpaceX have reached out to major index providers including Nasdaq to dis- cuss joining key indexes sooner than normal. REUTERS Musk’s SpaceX weighs Nasdaq listing after seeking early index entry REPORT ON BUSINESS |