Only posted for the stocks that I own. GLTA Equity analysts at Desjardins Securities revealed their top stock picks for Canadian investors in 2024, warning there is still a strong possibility for an economic recession followed by a pullback from recent market momentum.
“After a turbulent and complicated 2022, the rebound in 2023 was very welcomed by investors,” they said. “While many (all?) signs pointed to a recession in 2023, it has yet to happen; that said, it does seem a recession must occur at some point, doesn’t it? What did happen is that 2023 was a continuation of the wrestling match between inflation and rate hikes; surprisingly, the winner was the investor, who enjoyed a rebound in the NASDAQ (up 40 per cent), the S&P (up 23 per cent) and, to a lesser degree, the TSX (up 6 per cent) — which was welcomed following a challenging 2022 (down 33 per cent, 18 per cent and 8.5 per cemt, respectively).
“As we enter 2024, it looks like inflation is generally considered to be in check and that rates have plateaued, resulting in market moves which have almost erased their 2022 losses. With that momentum and now universal agreement (in the market) that rates will be marched down over the next two years, we can rightfully expect not only a continued buoyant outlook for equities, but also a deluge of capital markets activity as two years’ worth of pent-up demand starts to find receptive market conditions and open-minded investors. Time will tell—be sure to hold on tight.”
Royce Mendes, the firm’s managing director and head of macro strategy, said macroeconomic risks in Canada “remain skewed to the downside as the economy is expected to enter a recession next year.”
“Furthermore, mortgage renewals will weigh on household finances into 2025 and 2026, providing a medium-term headwind to consumption and economic growth,” he said. “The U.S. economy is expected to continue to outperform the Canadian economy. While a slowdown is likely, the U.S. is forecast to avoid a recession. Labour markets are slowly normalizing in both jurisdictions. Strong population growth in Canada has sped up the process relative to the US. Still, easing labour market tightness has helped inflation move closer to target in both countries.”
In a research report released before the bell, Desjardins analysts selected 26 equities “that should perform best given expected strong growth opportunities and catalysts.
They are:
Consumer Staples/Consumer Discretionary
* Alimentation Couche-Tard Inc. with a “buy” rating and $85 target. The average target on the Street is $86.25.
Analyst Chris Li: “ATD remains our preferred idea given: (1) improving macro conditions and easing of cigarette headwinds next year should reaccelerate merchandise SSSG [same-store sales growth], which we believe is a key near-term catalyst; (2) continuing strong fuel margins and cost reductions are more than offsetting c-store sales softness; (3) funds flow to staples with torque to an economic recovery and less exposed to disinflationary/commodity risks; (4) a robust pipeline of growth initiatives supporting attractive organic EBITDA growth; (5) M&A environment is becoming more favourable; and (6) reasonable valuation at 16.5 times forward P/E (vs 17.5 times average).”
Diversified Industries
* Ag Growth International Inc. with a “buy” rating and $82 target. Average: $76.44.
Analyst Gary Ho: “We favour AFN given (1) solid progress across its three strategic initiatives—operational excellence (driving 250 basis points margin improvement in 2023), product transfers (benefiting 2024), and aftermarket parts and services (benefiting 2025/26); (2) robust growth in International (Brazil, India); (3) deleveraging (2.5 times by mid-2024); and (4) attractive valuation.”
Savaria Corp. with a “buy” rating and $20.50 target. Average: $19.29.
Mr. Tremblay: “We like SIS because (1) 2024 should be a pivotal year which starts with a CEO transition and continues with the implementation of performance enhancement initiatives through the Savaria One program; (2) positive momentum in North America to continue while a recovery in Europe takes place; (3) significant potential upside to our and consensus adjusted EBITDA estimate for 2025, with upward revisions possibly triggered by a first-ever investor day in 1H24 and quarterly results; and (4) attractive valuation — trading at a significant discount to its 10.7 times EBITDA average, and would trade at an astonishing 6.6 times if management’s 2025 ambitions are reached!”
Financial Services
Lifecos
Sun Life Financial Inc. with a “buy” rating and $75 target. Average: $73.50.
Analyst Doug Young: “There are four themes we like. First, its medium-term underlying ROE target of 18 per cent plus, which is peer-leading (compares favourably with the Canadian banks). Second, we see several earnings growth drivers over the coming year— DentaQuest (DQ) in the U.S., getting to scale and continued momentum in Asia, SLC Management hitting its stride, as well as potential capital deployment. Third, by our math, SLF has $6.0-billion in excess capital and debt capacity, and generates an attractive amount of excess capital annually, partially from MFS. Fourth, MFS has been performing well even in volatile equity markets.”
Oil & Gas
* ARC Resources Ltd. with a “buy” rating and $31 target. Average: $27.58.
Analyst Chris MacCulloch: “We have previously highlighted that sanctioning of Attachie Phase I was a watershed moment for ARX following years of anticipation and delay, a perspective which was validated in early May when the project was sanctioned prior to the company’s outline of an updated five-year plan at its 2023 investor day in Toronto. During the presentation, ARX detailed, among other things, an ambitious organic growth profile with corporate production forecast to expand to 425 mboe/d in 2028 (from 350 mboe/d currently), although we should note that it remains contingent on the sanctioning of Attachie Phase II (35–40 mboe/d). Temporarily casting aside longer-term growth prospects, we continue to believe that the market is largely discarding the positive impact of Attachie Phase I on corporate FCF generation when the project starts up in late 2024/early 2025.”
* Cenovus Energy Inc. with a “buy” rating an $34 target. Average: $32.50.
Mr. MacCulloch: “We believe that headwinds can (and will) turn into tailwinds given that the past misfortunes were not structural in nature. In fact, with a slew of upstream growth projects currently in the pipeline, including the Sunrise optimization project and the return of the Terra Nova FPSO (10 mboe/d), we expect production to begin hitting full stride in 2024, with operational momentum moving into the late 2020s. Furthermore, reconciliation of past events provides greater understanding of a discounted stock valuation which is now far too lucrative to ignore, in our view. For reference, the stock is currently trading at an estimated 2025 EV/DACF multiple of 4.7 times at strip prices, a significant discount vs its oil-weighted large-cap peers (6.4 times) while offering a 10.6-per-cent FCF yield (vs peers at 9.3 per cent). Obviously, the full restoration of downstream segment contributions will provide a meaningful uplift to corporate cash flow to the extent that crack spreads remain elevated from a historical perspective, even following the recent pullback in gasoline prices. However, we also believe that the market is discounting the company’s upstream business, specifically the potential benefit of narrowing WTIWCS differentials. Based on our sensitivity analysis, CVE retains the second-highest torque to WCS prices within the Desjardins E&P coverage universe (trailing only ATH), which suggests considerable upside to our expectations for supportive long-term heavy oil fundamentals as western Canadian pipeline takeaway constraints abate next year when TMX comes online.”
Real Estate
* InterRent REIT with a “buy” rating and $16 target. Average: $14.34.
Analyst Kyle Stanley: “With its concentration in key urban markets that have benefited from healthy market rent growth, IIP is poised to deliver sector-leading FFOPU [funds from operations per unit] growth in 2024.”2