With the start of the new year, BMO Capital Markets released its top stock ideas for 2017 on Monday.
While the S&P/TSX composite index was the top performing equity index in developed markets in 2016, Brian Belski, BMO's chief investment strategist, anticipates this strength will fade in 2017. He anticipates the S&P/TSX composite index will rise just 4.6 per cent, climbing to 16,000 by the end of the year.
Given the moderate outlook for the Canadian benchmark, successful stock selection will be critical in order for investors to achieve strong returns.
The BMO team of equity analysts recommended 33 stocks as their top investment ideas for 2017 in its Canadian edition of the "Best of BMO" report. They are listed below, grouped by four investment strategies – growth, growth at a reasonable price, value, and lastly, those with anticipated catalysts.
For investors seeking growth, the analysts highlight five large-cap stocks and six small-cap stocks for consideration.
Beginning with the large-cap stocks, special situations analyst Stephen MacLeod is pitching Gildan Activewear Inc. (GIL-T) with his target price set at $31 (U.S.). He notes, "With new manufacturing capacity coming online, Gildan is well positioned to leverage its competitive strengths to pursue growth in both the Printwear and Branded Apparel segments."
Fertilizer and chemicals analyst Joel Jackson is recommending shares of Methanex Corp. (MX-T), the world's largest methanol producer, with a target price of $53 (U.S.). He also favours CF Industries Holdings Inc. (CF-N), a fertilizer play in the nitrogen space with a target price of $31 (U.S.) but significant upside potential with a $43 target price if nitrogen prices strengthen.
Analyst Brendan Warn recommends global energy giant Chevron Corp. (CVX-N), with a target price of $120 (U.S.).
Sticking in the energy space, analyst Ray Kwan, recommend an oil-weighted growth company that also offers shareholders income, a 2-per-cent yield, Whitecap Resources Inc. (WCP-T). He notes the stock's attractive valuation, strong balance sheet, and solid future production growth potential. His target price is $16 (Canadian), implying the share price may rise over 30 per cent.
Shifting to small-cap growth stocks, the six recommended stocks are diversified, ranging from real estate investment trusts with stable income distributions to technology and resource stocks.
Canadian real estate analyst Troy MacLean recommends InterRent REIT (IIP.UN-T), with its portfolio of multi-residential properties located primarily in Ontario. He has a target price of $9.
Sticking with the apartment theme, Milestone Apartments REIT (MST.UN-T) is touted by analyst Heather Kirk, with a target price of $23. Milestone offers unitholders exposure to the U.S. market with its portfolio of properties located exclusively in the U.S., mainly in the Southeast and Southwest regions.
Ms. Kirk believes improving U.S. economic conditions, rising oil prices, and a stronger U.S. dollar may all act as potential tailwinds for the REIT.
Another play in the residential real estate industry is Tricon Capital Group Inc. (TCN-T). Analyst Stephen MacLeod anticipates the share price may jump a whopping 34 per cent with his target price set at $13.
Technology analyst Thanos Moschopoulos has bullish expectations for shares of Kinaxis Inc. (KXS-T), with his target price set at $74. He expects this stock's positive price momentum to reaccelerate in 2017, forecasting over 30 per cent revenue growth in 2017 consistent with its recent growth. Recall, last quarter, the company reported 26 per cent year-over-year revenue growth and 25 per cent year-over-year subscription revenue growth.
Oil and gas services analyst Michael Mazar's stock idea is ShawCor Ltd. (SCL-T). He has a target price of $40.
For gold bugs, analyst Andrew Breichmanas, likes mid-tier gold producer, SEMAFO Inc. (SMF-T), with its operations in west Africa. He believes the stock may be re-rated, with its valuation expanding, as production nears from its Natougou project.
GARP STOCKS (Growth at a Reasonable Price)
Turning to stock ideas for investors looking for growth stocks trading at reasonable valuations, there are nine recommendations, seven are large cap stocks, and two are small caps. Here they are beginning with the large caps.
Highly respected analyst Bert Powell recommends Brookfield Asset Management (BAM-N). He has a $43 (U.S.) target price, implying a potential price return of 29 per cent. Mr. Powell asserts that the management could unlock shareholder value by launching, "a successor fund some time in 2017".
He added, "It would seem reasonable that BAM could be in a position to look at successor funds in 2018."
Sticking with financials, of the Big 5 Canadian banks, analyst Sohrab Movahedi is recommending Bank of Nova Scotia (BNS-T) with a target price of $80. The analyst notes the stock's attractive valuation, strong earnings growth, cost cutting initiatives, and strong balance sheet to fund growth opportunities.
Analyst Tim Casey has an "outperform" recommendation on industry leader Cineplex Inc. (CGX-T). For the past 10 months, the share price has been consolidating, trading sideways, principally between $49 and $52; however, Mr. Casey believes the share price can break above this channel, rising to his target price of $55. In the report, he argues, "We are forecasting an earnings before interest, taxes, depreciation and amortization (EBITDA) and earnings per share compound annual growth rate of roughly 10 per cent and 20 per cent, respectively, through 2018, and mid-single digit dividend increases."
Two energy plays recommended are Canadian Natural Resources Ltd. (CNQ-T) and Seven Generations Energy Ltd. (VII-T). Analyst Randy Ollenberger argues, "Canadian Natural is on the brink of significant free cash flow generation with the impending completion of its Horizon growth projects." He has a target price of $52 suggesting the share price may appreciate over 20 per cent.
Mr. Ollenberger also sees strong upside potential for Seven Generations, noting the company "holds one of the most attractive land positions within the Montney and is trading at an unjustified discount to the group." His target price is $39, implying the stock price may rally over 30 per cent.
Two non-domestic securities recommended are Rio Tinto (RIO-LSE) with a target price of £44, and Union Pacific Corp. (UNP-N), a North American railroad operator covering 23 states, with a target price of $115 (U.S.).
Turning to small cap GARP stocks, utility stock, Boralex Inc. (BLX-T) has a bright outlook according to analyst, Ben Pham. He has a target price of $24, anticipating the share price could potentially rise 23 per cent. Mr. Pham stresses the company's attractive growth profile, inexpensive valuation relative to its peers, and a potential dividend hike in early 2017. Looking abroad, Faroe Petroleum (FPM-LSE) is recommended by analyst David Round. He has a £1.20 target price.
Focusing first on domestically-listed large-cap stocks, Canadian Tire Corp. Ltd. (CTC.A-T), West Fraser Timber Co. Ltd. (WFT-T), and Detour Gold Corp. (DGC-T) all made the cut. Top ranked analyst, Peter Sklar, believes, "Canadian Tire presents a compelling opportunity for investors due to its low valuation and consistent improvement of results." His target price is $159, implying the share price may appreciate 13 per cent over the next 12 months.
Timber and wood products analyst Mark Wilde anticipates a solid 25-per-cent increase for the stock price of West Fraser with his target price at $57, fuelled higher by an improving U.S. housing market. He also highlights the company's strong balance sheet and stock's inexpensive valuation.
For investors seeking gold exposure without geopolitical risks, Detour Gold is a gold producer recommended by analyst Brian Quast, with its 100-per-cent interest in the Detour Lake mine located in Ontario. He has a $23 target price, implying 12-per-cent upside potential. Mr. Quast notes that the stock will have to regain investor confidence given the occurrence of "some operational missteps". He added: "Over the course of 2017, we expect that production results will restore investor confidence, starting with the Q4/16 (fourth quarter of 2016) results to be released in early 2017. Any resolution of the Detour West permitting will also be a significant positive catalyst."
Continuing with the gold vein of thought, large cap gold producer, Newmont Mining Corp. (NEM-N), is a top idea from analyst, Andrew Kaip. He has a target price of $40 (U.S.), anticipating a potential low double-digit return over the next year. In addition, Mr. Kaip, also recommends Royal Gold Inc. (RGLD-Q). Royal Gold acquires and holds a portfolio of gold-focused royalty interests and streams. One significant benefit of this business model is that the company does not incur exploration costs (with the exception of the Peak Gold joint venture) or have to contribute to operating costs. The analyst has a target price of $88 (U.S.), implying over 30 per cent upside potential in the share price.
Lastly, London-based mining company, Anglo American PLC (AAL-LSE), is recommended. The company produces copper, platinum, diamonds, iron ore, coal, and nickel. The analyst has a target price of £18.
In terms of small-cap value stocks, three stocks are recommended, one Canadian-listed, the other two listed on the London Stock Exchange.
Calgary-based, Birchcliff Energy Ltd. (BIR-T) is a gas-weighted, low cost producer with operations focused in the Peace River Arch region of Alberta. Seymour Schulich is a large shareholder. Two months ago, in November, management announced the initiation of a quarterly dividend for its common shares in 2017. Analyst, Joe Levesque, has a target price of $13, implying a potential price return of 45 per cent. He notes two potential catalysts, "A potential acquisition of the AltaGas Gordondale gas plant and a potential sale of the Worsley property in Alberta."
Two international stocks recommended are Anglo Pacific Group PLC (APF-LSE) with a price target of £1.50, and Ophir Energy PLC (OPHR-LSE) with a price target of £1.10.
CATALYST DRIVEN STOCKS
Lastly, there are five stocks identified as having potential catalysts in 2017.
Respected analyst Tom MacKinnon has an "outperform" recommendation on ECN Capital Corp. (ECN-T) with a target price of $4.80, suggesting a spectacular potential gain in excess of 50 per cent. He notes that, "Management recently disclosed it is reviewing three buy and two build opportunities in excess of $5-billion and as small as $500-milllion, in the U.S. mid-market finance space."
The remaining ideas are resource stocks.
Analyst Andrew Mikitchook believes the share price of this stock may more than double over the next year. He has a target price of $5.75 on Ivanhoe Mines Ltd. (IVN-T), and highlights a catalyst, "Kakula-Kamoa high-grade copper project in particular is already among the largest undeveloped projects worldwide and is continuing to expand in scale with the next PEA (preliminary economic assessment) due in Q1/17 (first quarter of 2017) guiding for a doubling of throughput."
The analyst also has great expectations for Osisko Mining Inc. (OSK-T), forecasting a potential 52-per-cent gain with his target price set at $4, with exploration drilling updates and a resource update at the Windfall property in Québec identified as potential catalysts.
More modest expectations are held for Precision Drilling Corp. (PD-T). Analyst Michael Mazar has a target price of $8.50. He notes three main catalysts: "Increases in North American rig counts, increases in commodity prices, (and) increases in E&P (exploration and production) spending."
Finally, mentioned earlier in the value category was West Fraser Timber Co. Ltd. (WFT-T), "International Trade Commission preliminary determinants on anti-dumping and countervailing duties" may act a catalyst to lift the stock price.
Read BMO's disclosures on its equity recommendations here