In his earnings preview for diversified financial stocks, Scotia Capital analyst Phil Hardie said he sees “solid opportunities across the non-bank financial space,” pointing to an average one-year expected return of 26 per cent.
“The sector has outperformed the S&P/TSX Composite and S&P/TSX Financial indices by a wide margin over the past twelve months and year-to-date in 2024,” he said. “Stock performance has been uneven. This is not surprising because of the diverse range of companies and business models under our coverage but likely underscores the importance of stock selection given current market conditions.”
Pointing to “lingering uncertainties,” Mr. Hardie recommends investors take “a barbell approach” to investing in the space.
“We believe improved risk appetite and receding macro-related risks have broadened the opportunity set across our universe, however, given several lingering uncertainties, we recommend a barbell approach that balances defensive quality plays with attractive value opportunities,” he said. “we think effective stock selection will remain key to generating outperformance against the backdrop of a complicated investing environment. Our favoured segments remain P&C insurance and alternative asset managers. We are sensitive to valuation but are tilting our bias toward quality.
“Given the backdrop and lingering uncertainties, investors will likely be cautious about making big bets on stocks with a high degree of macro sensitivities or those relying on material multiple expansion to drive upside. We believe this will create a preference for stocks offering attractive returns with upside driven by a combination of growth in underlying earnings or book value, and dividend yields.”
Mr. Hardie made one rating change, upgrading Element Fleet Management Corp. to “sector outperform” from “sector perform” with a $26 target (unchanged). The average on the Street is $27.33.
“The company has demonstrated solid earnings momentum with strong growth expected for 2024 and 2025, yet the stock price has weakened and lagged the S&P/TSX Index year-to-date and over the last six months,” he said. “We believe Element Fleet offers a relatively rare combination of resilience and attractive growth potential. We expect the combination of EPS growth and dividend yield to drive an almost 17-per-cent return over the next twelve months with modest multiple expansion likely to boost the total expected return to 24 per cent.”
He also made these target adjustments:
- CI Financial Corp. ( “sector perform”) to $21 from $20. Average: $20.06.
- Definity Financial Corp. ( “sector outperform”) to $52 from $51. Average: $47.55.
- Goeasy Ltd. ( “sector perform”) to $190 from $183. Average: $210.78.
- IGM Financial Inc. (“sector perform”) to $45 from $44. Average: $42.
- Propel Holdings Inc. ( “sector perform”) to $21 from $19. Average: $24.30.
- TMX Group Ltd. ( “sector perform”) to $39 from $38. Average: $38.44.
“Fairfax Financial [”sector outperform” and $2,000 target] and Trisura Group [”sector outperform” and $59 target] remain our top picks for 2024,” said Mr. Hardie. “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 recognize. Trisura remains our top small-cap idea. The stock has a strong track record of delivering outsized shareholder returns but came under pressure through most of 2023 as the stock went through a transitional re-rate as investors rebalanced risks related to managing a high-growth company with upside potential. Our investment thesis is playing out well with the company delivering solid operating results, avoiding negative surprises for investors. The stock has rebounded almost ~45% from its recent lows but we continue to see further upside potential. A.M. Best recently revised Trisura’s credit outlook back to where it stood prior to the Q4/22 write-down which sparked the sell-off in the stock. We believe this serves as an external validation point that the recent changes have improved Trisura’s Enterprise Risk Management capabilities, internal process, and governance which we expect to further underpin investor confidence. We expect a clean set of results characterized by robust earnings growth to drive solid investor returns over the coming twelve months.
He added: “Top ideas by investment style: Fairfax remains our top pick overall. For defensive quality, our top idea is Intact, and for small-cap growth, we like Trisura. We believe Element Fleet and Definity are attractive for GARP investors looking for mid-cap plays that balance resiliency and growth potential. Our other top value ideas include Onex, Brookfield Business Partners, and Guardian Capital. Power Corp is also on our radar given what we view as an unjustifiably wide NAV discount and attractive dividend yield. Our holdback relates to a relatively tepid consensus outlook for Great-West shares.”