TFI International Inc T.TFII

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Canadian Small Cap Model Portfolio Industrials

Equity markets continue to rotate away from "stay-at-home" sectors (e.g. technology, defensives, and communication) and into "economic recovery" sectors (e.g. resources, industrials, consumer discretionary, and financials). As a result, over the past several weeks, we have maintained overweights and/ or added exposure to these recovery sectors in our small-cap model portfolio. Last week, we increased our financials exposure to an overweight by raising our position in Canaccord Genuity Group Inc. (CF-T, portfolio weight 3.8%) and lowered our technology exposure with the removal of Enghouse Systems Ltd. (ENGH-T). This week, we are rotating our exposure within the industrials sector by adding a position in ATS Automation Tooling Systems Inc. (ATA- T) at 3.0% and removing our position in Cargojet Inc. (CJT-T, portfolio weight 2.8%). This portfolio switch further enhances our exposure to the economic recovery and away from the stay-at-home beneficiaries. The addition of ATS Automation also maintains our relatively high overweight to the industrials sector relative to the S&P/TSX Small Cap Index (18.2% vs 12.9%).

We believe that the industrials sector will continue to be led higher by a recovery in the global economy. In the U.S., the relative performance of the industrials closely follows the U.S. Manufacturing PMI, which has sharply recovered from its mid-2020 bottom. However, the relative performance of the industrials sector has lagged and we believe that industrial stocks will see further relative upside (Exhibit 1). In our Canadian Quantitative Growth Model (QGM), many names within the industrials sector have moved up in rank, led by large-caps TFI International Inc. (TFII-T), Finning International Inc. (FTT-T), and Stantec (STN-T). Among the small-caps, ATS Automation ranks highly (QGM rank, 27) on its positive 12-month forward earnings growth (Exhibit 2), along with recently added Cervus Equipment Corp. (CERV-T, portfolio weight 2.0%, QGM rank 35). ATS Automation also offers exposure to a recovering U.S. economy, with approximately 35% of revenues generated within the U.S. In exhibits 3-5, we chart ATS Automation relative to industrial comps Rockwell Automation Inc. (ROK-US), Stantec Inc. (STN-T), and WSP Global Inc. (WSP-T). Relative to each, earnings momentum compares favourably for ATS Automation. As a result, we are adding a position in ATS Automation after its share-price consolidation over the past several weeks toward its 50-day moving average.