MARKET OUTLOOK:

Consistently favorable December seasonality is colliding with heightened inflation and virus variant concerns, igniting long-subdued volatility in the markets in recent weeks. 

Our outlook for the economy and the Canadian stock market remains favorable, buoyed by expected ongoing above-trend real growth in 2022 (consensus forecasts call for 4.1 per cent real GDP growth) and by extension above-trend growth in corporate profits (consensus forecasts call for 19 per cent growth in S&P TSX index earnings) all while valuations remain undemanding, with the S&P/TSX index trading below 16x 2022 earnings forecasts and yielding 2.6 per cent.  

Nevertheless, with persistently high inflation, we favour price makers over price takers, we favour companies that can substitute capital and productivity enhancing technology for labour and we favour companies whose products and services address the mass market over those that address mainly the affluent.

TOP PICKS:

Brookfield Asset Management (BAM/A TSX)
Brookfield is among the world’s foremost managers and operators of long duration real assets like real estate, private equity, infrastructure, renewable energy, and utilities with deep expertise in sourcing transactions and surfacing value.  

With significant assets in Canada, the United States, the U.K., Australia, Brazil, and India among other areas, the company has tremendous reach and geographic diversity. Brookfield’s size and scale allow them to field expert teams with deep operating experience across industry verticals and geographic areas, and moreover their financial strength and variety of funding sources afford them the advantage of being among the first calls sellers of world class assets make when looking to consummate a transaction.  

Flows into alternative assets are outstripping flows into stocks and bonds, as institutions like pension funds increase their allocations to these less efficient markets which better match their long duration liabilities. Accordingly, Brookfield enjoys consistently strong inflows and now manages over $650B. The company has generated a compound annual return for shareholders of 19 per cent over the last twenty years, such that $1 invested in their shares is now worth over $31, courtesy of these many structural advantages. 

Parex Resources (PXT TSX)
Parex is a mid-sized company producing approximately 49,000 barrels of oil per day in Colombia. Parex enjoys some of the highest netbacks (operating margins) of any mid-to-large sized Canadian energy producer.  

The company has grown production by 58 per cent over the last five years. Crucially (and refreshingly, for a resource company) the management team is very focused on profitability, such that cash flow per share grew 367 per cent over the last five years, and rare among oil producers, it remained profitable during 2020. 

With no debt and $361m of cash on their books, Parex is well positioned to continue their pattern of returning of cash to shareholders, something they have done prolifically the last four years, deploying over $640M to retire 22 per cent of their outstanding shares in the process accreting value to remaining shareholders.  

Moreover, poised to earn record profits this year the company recently initiated a 12.5 cent/quarter dividend such that the shares now also sport a 2.4 per cent dividend yield, which was further bolstered by a 25 cent special dividend last month.

CGI (GIB/A TSX)
CGI Group is Canada’s largest IT services firm, providing systems integration, business process outsourcing and consulting solutions across a wide array of verticals, including government, banking, telecommunications, energy, utilities, manufacturing and retailing.  

The company is accelerating its organic growth and also achieved record operating margins in fiscal 2021 despite tight labour markets, continuing a decade long string of steady margin improvement.  

With an underleveraged balance sheet and a long history of making highly accretive acquisitions, the company is actively closing and integrating small to mid-sized transactions and remains on the hunt for a larger transformational deal to further fuel their growth. With a 5-year compound earnings growth rate of 9 per cent and similar growth expected in 2022, we see good value and growth prospects in the shares which trade at 18x earnings.

PAST PICKS: December 2, 2020

Bank of Nova Scotia (BNS TSX) 

• Then: $66.15
• Now: $82.51
• Return: 25%
• Total Return: 30%

Manulife Financial (MFC TSX)

• Then: $22.43
• Now: $23.07
• Return: 3%
• Total Return: 8%

Alimentation Couche-Tard (ATD/B TSX)

• Then: $44.07
• Now: $45.94
• Return: 4%
• Total Return: 5%

Total Return Average: 14%