Desjardins Top Pick In a report previewing 2024 for their Canadian diversified industries coverage universe, Desjardins Securities analysts Frederic Tremblay and Gary Ho touted the prospects for small-cap stocks.
“While our top picks from a year ago had a strong 2023, the same cannot be said for small caps in general as equity investors flocked to more liquid, larger companies with perceived stable/defensive attributes,” he said. “As we look to 2024, we believe that the recent widening of the small caps’ valuation discount, the likelihood of interest rate cuts and M&A/takeout activity provide a constructive backdrop for small caps, especially those with resilient businesses, solid cash flow generation and alignment with global trends.”
The analyst selected four stocks as their “preferred names” for the year ahead.
Their top pick for the diversified industries sector is Ag Growth International Inc. with a “buy” rating and $82 target. The average on the Street is $76.44.
“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,” they said.
For diversified financials, the analysts named Brookfield Business Partners LP ) as their top pick with a “buy” rating and $29 target, exceeding the US$26.57 average.
“BBU is our top pick in the diversified financials space due to (1) Clarios IPO/monetization catalyst (world’s largest vehicle battery manufacturer, should be well-positioned for an IPO after deleveraging),” the said. “We estimate it could represent US$10–12 NAV/share (while accounting for approximately 25 per cent of BBU EBITDA), implying the rest of BBU trades at US$6/share; (2) improved sentiment on interest rate cuts; (3) sale of Westinghouse reduces 40 per cent of its corporate debt; and (4) attractive valuation—trading at a 57-per-cent discount to NAV.”
For lithium stocks, they selected Lithium Ionic Corp. with a “buy” rating and $4.50 target, down from $5.25 and below the $5.50 average.
“Lithium prices declined sharply in 2023 due to a market surplus and slower-than-expected growth in EV sales,” the analysts said. “Lowering our near-term price forecasts had only a limited impact on our companies under coverage as only Sayona (SYA) is currently in production. Furthermore, we believe that the current price environment could prompt changes in global supply intentions, especially for highercost and/or more challenging projects. EV sales growth should remain positive and could get a boost from interest rate cuts. We like LTH given (1) the low capex and low costs of the Bandeira project; (2) fast-tracked permitting and quick path to production; (3) resource growth potential; and (4) attractive valuation.”
The analysts also picked Savaria Corp. as a top pick with a “buy” rating and $20.50 target. The average is $19.29.
“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.”