Globe Advisor asked three fund managers for their top picks among undervalued, smaller-cap stocks.
Aman Budhwar, portfolio manager, Penderfund Capital Management Ltd. in Toronto
His fund: Pender Small/Mid Cap Dividend Fund
The pick: Aecon Group Inc. ARE-T
The construction and infrastructure development company is getting a tailwind from the energy transition to renewables and a nuclear renaissance, Mr. Budhwar says.
Toronto-based Aecon has contracts to refurbish Ontario’s Bruce Power and Darlington nuclear reactors and expects a similar one for the Pickering facility, which just received Ontario government approval.
Aecon expects its higher-margin nuclear business to grow to 20 per cent of construction revenue in a few years from 15 per cent once a contract to build small nuclear reactors gets booked into revenue, he adds.
Jean-Louis Servranckx, who became chief executive officer in 2018, oversaw the sale of Aecon’s roadbuilding business and brought in Oaktree Capital Management as a minority stakeholder in the utilities business to help accelerate growth. These changes are not reflected in the market’s perception of the business, Mr. Budhwar notes.
Aecon shares suffered in the past due to losses from four legacy, fixed-price lump-sum contracts. His share-price target is $32 by 2026.
The pick: Trisura Group Ltd. TSU-T
Trisura is a compelling play because the company focuses on the higher-return, specialty insurance niche versus the property and casualty business, and is expanding into the U.S. market, Mr. Budhwar says.
The Toronto-based insurer, which was spun out of Brookfield Asset Management Inc. in 2017, has a 17-year history in Canada.
Its domestic business had a high return on equity of about 30 per cent in 2021 and 2022 and was in the 26 to 30 per cent range for the first three quarters of last year, he adds.
Trisura’s U.S. business has been “growing very fast” since 2018, he says. Last year, it bought a U.S. surety business that’s waiting for regulatory approval, and will become another growth avenue, Mr. Budhwar says. So far, it has focused on fronting insurance there. (Fronting is underwriting a policy and ceding most of the risk to reinsurance partners for a fee.)
Its stock took a hit last year because of losses related to a reinsurance contract, but Trisura has since hired a chief risk officer for its U.S. business, he adds. His target price is $55 a share by the end of 2025.