Scotia Capital Top Pick Scotia Capital analyst Phil Hardie thinks “increased conviction of a soft landing” has broadened the investment opportunities in his Canadian diversified financial coverage universe.
However, pointing to lingering macroeconomic uncertainties, he recommends investors take “a barbell approach that balances defensive quality plays with attractive value opportunities.”
“The improved macroeconomic outlook and investor risk appetite have likely improved the risk-reward and opened opportunities to include more economic and market-sensitive names,” said Mr. Hardie in a report released Wednesday. “That said, despite a solid market rally, risks and uncertainties remain. Effective stock selection is likely to remain key for generating outperformance given a complicated investing environment. As we kick off 2024, our favoured segments remain P&C insurance and alternative asset managers.
“We believe the P&C insurers look well-positioned for the year ahead. These stocks have relatively low sensitivity to macro factors and can generate solid investor returns in an environment where multiple expansion is limited. Over the past year, elevated cat losses and rising rates created headwinds to book value growth for several insurers. Looking into 2024, we expect these pressures to diminish with book value growth accelerating. Fairfax and Trisura remain our top overall picks for the year. Alternative asset managers such as Onex and Brookfield Business Partners likely trade at significant discounts and are well-positioned to rally as operating conditions improve. Healthier and more stable financial market conditions could open the window for accelerating monetization activity, which would likely serve as a catalyst for these stocks. Regarding the downside, we think these stocks are discounted and therefore already priced in a high degree of risk.”
Ahead of earnings season, Mr. Hardie lowered Toronto-based Propel Holdings Inc. ) to “sector perform” from “sector outperform” with a $17 target, jumping from $11.50. The average on the Street is $16.40.
“Propel has generated strong outperformance with the stock delivering a total return of close to 135 per cent over the past twelve months and doubling over the last few months,” he said. “Following the strong run, we expect the stock to take a breather and with a one-year expected return in the low single digits despite a significant increase to our target price, we are downgrading the stock.”
The analyst named Fairfax Financial Holdings Ltd. and Trisura Group Ltd. his top picks for the year ahead.
Mr. Hardie has a “sector outperform” recommendation for Fairfax shares with a $1,900 target, rising from $1,650 and above the $1,690.54 average on the Street. He also raised his Trisura target to $54, above the $51.43 average, from $50 with a “sector outperform” rating.
“Fairfax has demonstrated resilience through the business cycle and turbulent financial markets, but we view it as a less defensive play than more traditional publicly listed insurers,” he said. “At this stage of the market cycle, this likely provides an attractive balance: downside protection thanks to the relative resilience of insurance operations through a potential recession, and upside potential when markets recover. There have been significant changes at Fairfax that we believe investors have yet to fully recognize. Trisura is our top small-cap idea and we believe the stock offers investors an attractive risk-reward profile. The stock has a strong track record of delivering outsized shareholder returns but came under pressure through 2023 and has likely gone through a transitional re-rate as investors rebalance risks related to managing a high-growth company with upside potential. A string of ‘meet or beat quarters’ with no adverse surprises is likely to support multiple expansions and eventual return to prior valuation levels.”
He also made these target changes:
- CI Financial Corp. (“sector perform”) to $19 from $17. The average is $18.25.
- Definity Financial Corp. ( “sector outperform”) to $46 from $44. Average: $43.75.
- Element Fleet Management Corp. (, “sector perform”) to $25 from $22. Average: $26.06.
- Fiera Capital Corp. ( “sector perform”) to $7 from $6. Average: $6.46.
- First National Financial Corp. ( “sector perform”) to $45 from $44. Average: $42.
- Goeasy Ltd. ( “sector perform”) to $170 from $145. Average: $182.56.
- Guardian Capital Group Ltd. ( “sector outperform”) to $60 from $58. Average: $58.
- IGM Financial Inc. (, “sector perform”) to $44 from $40. Average: $41.17.
- Intact Financial Corp. ( “sector outperform”) to $252 from $232. Average: $226.07.
- Onex Corp. ( “sector outperform”) to $125 from $115. Average: $116.67.
- Power Corp. of Canada ( “sector perform”) to $45 from $44. Average: $40.86.
- TMX Group Ltd. (, “sector perform”) to $36 from $35. Average: $34.