Scotia Capital analyst Phil Hardie continues to see opportunities across the Diversified Financials space, recommending investors take a “a barbell approach that balances quality defensive plays with attractive value opportunities.”
“We continue to believe that stock selection will be key to generating outperformance in 2023,” he said. “Average year-to-date stock performance across the Diversified Financials space has modestly lagged the S&P/TSX Index, however returns across the group have been uneven with a number generating a significant amount of alpha. Value-oriented names have generally outperformed while growth names lagged across our coverage universe. The failure of Silicon Valley Bank, the collapse of Credit Suisse and an apparent crisis of confidence in U.S. regional banks have likely kept risks at the forefront for financial services investors. These developments and encouraging inflationary trends have also likely contributed to a major shift in investor expectations for how the interest rate environment unfolds through 2023. We expect the investment environment and risk appetite to improve over the next 12 months but given lingering uncertainties, we continue to recommend a barbell approach that balances defensive plays with attractive value opportunities.
“We believe that Fairfax Financial (Sector Outperform) is well-positioned to navigate the current environment, and it remains our top pick for 2023. 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. 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 recognized.”
In a research report released Friday, he made a series of target price adjustments to stocks in his coverage universe ahead of first-quarter earnings season. They are:
* Brookfield Business Partners LP ( “sector outperform”) to US$26 from US$30. The average is US$27.86.
* Definity Financial Corp. (“sector outperform”) to $50 from $46. Average: $43.23.
* Fairfax Financial Holdings Ltd. ( “sector outperform”) to $1,350 from $1,100. Average: $1,211.31.
* First National Financial Corp. (“sector perform”) to $40 from $38. Average: $38.50.
* Intact Financial Corp. (“sector outperform”) to $225 from $220. Average: $220.29.
* TMX Group Ltd. ( “sector perform”) to $159 from $160. Average: $150.71.
Mr. Hardie noted: “Top ideas by investment style: Fairfax remains our top pick for 2023. For defensive quality, our top name remains Intact, and for small-cap growth, we like Trisura. We continue to like Definity and believe it is attractive for GARP investors looking for a defensive mid-cap play with solid growth prospects. Our other top-value ideas include Guardian Capital, Onex and Brookfield Business Partners. goeasy is on our radar but we still think it’s a bit early and believe that reduced risk to the economic outlook, improved earnings visibility and a broader shift in risk appetite are likely needed for the stock to sustain a meaningful rebound.”