Desjardins Top Picks for 2021 The equity research team at Desjardins Securities revealed its 2021 outlook and top stock picks in a research note released Friday before the bell.
With an eye toward the lingering effects of the COVID-19 pandemic, the firm selected 25 equities with “the best growth prospects and/or the largest number of expected catalysts” for 2021.
“2020 is a year many of us would like to forget, given the COVID-19 pandemic,” the firm said. “The stock market saw a late-1Q plunge which was followed by an immediate bounce and recovery, aided by quick government intervention and decisive action taken by many companies to shore up balance sheets, cut costs and rein in capital expenditures. While markets have generally trended up following the rally to almost pre-pandemic highs, the upside was capped by a resurgence in COVID-19 cases and a divisive, colourful U.S. presidential campaign. Some sectors, such as IT, fared well during the pandemic as we adapted to work, learn and play at home; others, such as energy, suffered—for obvious reasons—as demand for oil dried up.
“We believe the set-up for 2021 is strong, with a broad recovery expected in the economy and markets. Tailwinds in 2021 include the development of multiple vaccines in record time to address the COVID-19 crisis, a recovery in GDP, greater political certainty and low interest rates. We expect a return to a more traditional sector recovery, with materials, energy, industrials and consumer staples/ discretionary likely to benefit, while IT and communication services could face headwinds. Moreover, we believe the growing focus on ESG/sustainable investing will continue to gather steam and become more of a key focus of investor decisions exiting the pandemic.”
Seeing “winning the battle” against the pandemic as the overarching economic objective heading into the new year, the firm expects “sluggish” growth for the Canadian economy in the first quarter followed by a “strong pickup” through the remainder of 2021.
“We still expect some of the sectoral dislocations caused by COVID-19 to be glaring in 2021,” it said. “Sectors such as aerospace, commodity extraction and commercial real estate will probably not obtain an automatic bailout post-vaccine. Sectors already vulnerable to technological change (ie physical retail) prior to COVID-19 will struggle to find their footing.”
Here are the firm’s equity picks for 2021:
Lifecos
Sun Life Financial Inc. (SLF-T, “buy”) with a $66 target
Analyst Doug Young: “There are four themes we like. (1) It was able to generate a 14.3-per-cent underlying ROE in 2020 (year-to-date to 3Q20) despite all the market disruption (equity market volatility, decline in interest rates, COVID-19, etc), a significant amount of excess capital (and lower-than-target debt to capital ratio) and SLC Management not contributing its full potential. (2) We see several drivers of earnings growth over the coming year—its US group insurance business, getting to scale in Asia, expense management, SLC Management hitting the inflection point and potentially capital deployment. (3) By our math, SLF has just over $4-billion in excess capital and debt capacity, and generates an attractive amount of excess capital annually, partially from its ownership stake in MFS. (4) MFS seems to be bucking industry trends with improving net fund inflows, and margins have been at the top end of management’s guidance.”