It’s natural to try to be a little upbeat as a new year begins, but economists and analysts at CIBC are having trouble painting the Canadian picture with a bright brush.
The bank’s economics team has already downgraded its Canadian GDP forecast twice, and its portfolio strategists cut their outlook for both the S&P/TSX composite and S&P 500 indexes.
“With the Canadian economy facing another sub-2% GDP year, energy prices likely to stay lower for longer, and the Canadian consumer thought to be tapped out, this is a tough macro environment for cyclical names,” CIBC analyst Kevin Chiang said in a report.
However, Chiang has some recommendations among the companies he covers that should outperform in the current environment.
Four stood out as having relatively defensive attributes, including good earnings visibility, reasonable valuations, and lower exposure to the Canadian economy and commodity prices.
The first is CAE Inc., which CIBC upgraded to sector outperformer from sector performer, along with a price target hike to $17.50 from $16.75.
“The company remains in the penalty box in our opinion given concerns over management’s ability to execute, but looking at recent metrics suggests a company starting to see an upward trend, even if the rate of change is slower than expected,” Chiang said.
He also noted that CAE’s seasonally strong period is approaching, which should help it narrow the gap it trades at versus peers in the North American aerospace and defence sector.
Next up is Chorus Aviation Inc., which the analyst noted is one of few companies that managed to beat earnings expectations in 2015 without much controversy.
Names such as Canadian National Railway Co., Canadian Pacific Railway Ltd., and TransForce Inc. all trimmed their guidance, while Air Canada, Transat AT Inc. and WestJet Airlines Ltd. beat expectations, although much of that appears due to the one-time benefit of low jet fuel prices.
Chorus, meanwhile, signed a new agreement with Air Canada that gives it a fixed fee structure, which Chiang noted provides a lot of earnings protection.
“A big concern in the past for Chorus was counterparty risk given 90+% of its revenue is generated from Air Canada, but we would argue this is no longer an issue given the improved financial health of Canada’s biggest airline,” the analyst said.
New Flyer Industries Inc. also made the list. Although its share price was up more than 100 per cent in 2015, Chiang likes it in a slow growth environment.
Much of this is attributed to the certainty provided by The Fixing America’s Surface Transportation Act, which was signed into law by U.S. President Barack Obama. It suggests more stability in terms of transit bus demand, and it removes the threat of federal funding quickly disappearing.
Finally, Chiang highlighted Progressive Waste Solutions Ltd., a stock that fell by roughly eight per cent in 2015, but appears to have downside protection in 2016.
The analyst noted that concerns about the Canadian economy and Alberta in particular are valid, but the company generates approximately 65 per cent of its revenue in the U.S.
Progressive also doesn’t handle any energy waste, and municipal solid waste volumes are holding up.
“So unlike other Canadian industrial names that face potential top-line pressure with declining energy prices and a softer Canadian GDP print, this is less of a headwind for Progressive,” he said.