Smaller means better on the TSX

Smaller is better this year as Canada’s biggest stock sectors such as energy, financials and industrials continued to underperform the broader index in the first quarter.

Health-care stocks, which make up just 5.3% of the S&P/TSX composite index, are the biggest winners, up 28% this year. Concordia Healthcare Corp leads the pack with an 82.1% gain, while Valeant Pharmaceuticals International Inc. is up 50.4%.

Canada’s tiny tech sector (2.45% of the index) has also been on fire, up 7.85%, with Constellation Software Inc. posting its biggest return, climbing 26.7%.

Consumer discretionary stocks, which make up 6.6% of the index, are the third best segment, up 5.6% on the year. Consumer staples, utilities and materials stocks have also racked up gains.

The two biggest losers have been financials and telecom, down 3% and 4.1%, respectively. Energy stocks have also continued their slide from last year, down another 1.6% in 2015.

Analysts say that the rally in Canada’s smallest sectors has in part been fuelled by money leaving energy stocks and sectors indirectly tied to energy, such as financials. Given that those two sectors account for half of the TSX, it is no surprise that smaller sectors have been winning out.

Of course, now that valuations in the smaller sectors have been driven up as a result of the shift in capital, investors might be tempted to start returning to the downtrodden energy space.

“We are staying with our overweight recommendation for the Canadian Energy sector,” National Bank Financial analysts said in a note to clients. “Equity analysts have slashed their earnings expectations for Canada’s energy producers to the point where the consensus now expects profits to collapse to their level of 2002. In our view, much bad news has now been priced in.”