Heading into earnings season for Canadian diversified financial companies, Scotia Capital analyst Phil Hardie said he continues to recommend investors take a “barbell approach that balances defensive quality with attractive value-oriented opportunities.”
“Effective stock selection is likely to remain key for generating outperformance given a complicated investing environment,” he said “An aggressive tightening cycle appears poised to finally slow global economies, however, the dominant narrative regarding interest rates appears to be ‘higher for longer.’ Global geopolitical risk also appears to be on the rise. Stock performance across our coverage universe in the non-bank financial space has significantly outperformed the S&P/TSX Financials Index although stock performance has been uneven. An uncertain environment and investor risk aversion likely favour quality defensive names even it if means reduced upside potential as “winning by not losing” becomes the mantra. That said, the valuation disparity between the defensive quality and value names remains too hard to ignore.”
While he expects “the investment environment and risk appetite to improve over the next 12 months,” however he warned of “lingering uncertainties,” making several target price adjustments with his “most significant” changes for asset managers to reflect updated assets under management outlooks following the recent market downturn.
His changes are:
- CI Financial Corp. ( “sector perform”) to $17.50 from $20. The average on the Street is $18.25.
- First National Financial Corp. (“sector perform”) to $44 from $43. Average: $41.83.
- Fiera Capital Corp. ( “sector perform”) to $6 from $8.25. Average: $6.61.
- Guardian Capital Group Ltd. ( “sector outperform”) to $55 from $56. Average: $52.
- Goeasy Ltd. ( “sector perform”) to $145 from $150. Average: $171.50.
- Intact Financial Corp. ( “sector outperform”) to $227 from $222. Average: $219.82.
- IGM Financial Inc. ( “sector perform”) to $40 from $45. Average: $44.
- Power Corp. of Canada (POW-T, sector perform”) to $42.50 from $43.50. Average: $41.64.
Mr. Hardie reaffirmed Fairfax Financial Holdings Ltd. as his “top pick,” seeing it “well-positioned to navigate the current environment.” He kept a “sector outperform” rating and $1,500 target for its shares. The average target on the Street is $1,485.09.
“Fairfax has demonstrated resilience through the business cycle and turbulent financial markets, but we view it as a less-defensive play than more traditional publicly listed insurers,” he said. “At this stage of the market cycle, this likely provides an attractive balance: downside protection thanks to the relative resilience of insurance operations through a potential recession, and upside potential when markets recover. There have been significant changes at Fairfax that we believe investors have yet to fully recognize.”
“Fairfax remains our top pick overall. For defensive quality, our top idea is Intact, and for small-cap growth, we like Trisura. We continue to like Definity and believe it is attractive for GARP investors looking for a defensive mid-cap play with solid growth prospects. Our other top-value ideas include Guardian Capital, Onex and Brookfield Business Partners. Power Corp is on our radar given what we view as an unjustifiably wide NAV discount and attractive dividend yield. Our holdback relates to a relatively tepid consensus outlook for Great-West shares.”