Industrial Alliance reveals its top 16 stock ideas for 2018

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The Industrial Alliance Securities Research Group revealed their best Canadian investing ideas for 2018 in a report released Monday.

The list is comprised of 16 equities spread across nine different sectors.

Their picks are:

Real Estate and REITs

Analyst Brad Sturges chose a trio of stocks for his top 2018 ideas.

He named Pure Multi-Family REIT LP (RUF.U-X) as his value pick. He currently has a "strong buy" rating and $7.50 (U.S.) target price for the REIT, which focuses on U.S. multi-family real estate properties.

The average target on the Street is $6.92, according to Bloomberg data.

"Although Pure Multi's 2017 FD AFFO results were reported below investor and analyst expectations, we view the nature of Pure Multi's operational challenges experienced during the year to be more short-term in nature, and reflect the culmination of several temporary issues that have negatively impacted Pure Multi's reported fully diluted funds from operations per unit and fully diluted adjusted funds from operations per unit during the year," he said. "However, Pure Multi successfully completed several key initiatives during in 2017, including: the internalization of its property management called PURE Management (PURE) at the end of Q3/17; deployment of equity capital raised into accretive U.S. multifamily property acquisitions; and improving its average occupancies, including for its non-stabilized assets that have been recently acquired in the past two years.

"In 2018, Pure Multi could experience a potential recovery in its US Sunbelt property portfolio physical occupancy levels, which could position Pure Multi for improved rent rate growth prospects in 2018. Furthermore, integration of Pure Multi's property management platform was completed in 2017."

Mr. Sturges selected InterRent Real Estate Investment Trust (IIP.UN-T) as his growth pick. He has a "strong buy" rating and $10.25 target currently, versus an average target of $9.86.

"Affordable housing options in existing Ontario property markets including the GTA and the NCR (Ottawa and Gatineau) remain fairly limited, creating favourable demand and supply dynamics in the Ontario apartment market that may translate into continued upward pressure on Ontario apartment market rental rates in 2018," he said. "We believe that the stabilization of InterRent's portfolio (as 45 per cent of the REIT's apartment suites are in various stages of repositioning) may translate into significant AFFO/unit and NAV/unit growth in the next few years."

Nexus Real Estate Investment Trust (NXR.UN-X) is Mr. Sturges's income pick. He has a "strong buy" rating and $2.30 target, while the average target is $2.42.

"Nexus is well positioned to execute its internal and external growth strategies, due to: the REIT's fairly stable operating cash flow base that reflects its relatively limited near-term lease expiry profile and high average occupancy; its fully internalized asset and property management trust structure; and Nexus' sturdy capital structure that reflects below-average financial leverage and AFFO payout ratios employed in comparison to its small capitalization diversified commercial REIT peers," he said.

Power and Utilities

Analyst Jeremy Rosenfield emphasized a pair of stocks.

Algonquin Power & Utilities Corp. (AQN-T/AQN-N) was his "best growth idea." Mr. Rosenfield currently has a "strong buy" rating and $17 target for its stock. The average is $15.88.

"We view AQN as the most well-balanced investment option in the Power & Utilities sector. Our investment thesis is supported by the Company's (1) diversified business model (power & utilities), (2) leverage to multiple investment themes (i.e., investments regulated utilities and non-regulated power), (3) healthy near-term organic and M&A-based growth (forecasted 8-10-per-cent EPS and FFO per share growth, and 15-per-cent-plus free cash flow per share growth through 2021), and (4) attractive dividend growth (10 per cent per year)," he said.

Mr. Rosenfield selected Brookfield Renewable Partners LP (BEP.UN-T/BEP-N) as his "best income idea." He has a "buy" rating and $36 (U.S.) target for its stock. The average is $34.97.

"We view BEP as the most compelling income-oriented investment idea in the Canadian Power & Utility sector for 2018," he said. "Our view is supported by BEP's unparalleled size, high-quality assets, and near-term growth drivers. The Company continues to target 12-15-per-cent annual total shareholder returns, including a steady 5-9 per cent per year dividend growth objective."

Metals and Mining

Analyst George Topping also selected a pair of stocks for 2018: HudBay Minerals Inc. (HBM-T) and Wesdome Gold Mines Ltd. (WDO-T).

Mr. Topping currently has a "buy" rating and $13.30 target for HudBay shares. The average on the Street is $12.82.

"Hudbay is a quality producer with a proven track record," he said. "The company is through the worst in terms of repairing its balance sheet. As Manitoba's 777 Mine winds down over the next five years, its free cash flow component should increase as development and capex is curtailed prior to being offset by an expanded Lalor and Rosemont. The recent tough times caused by Constancia's build and commissioning at a time of falling copper prices have necessitated a leaner, more focused company that should work well in today's improved metal markets."

Mr. Topping has a "buy" rating and $5 target for Wesdome. The analyst average target is $4.26.

"Wesdome's shares have dropped off significantly from their highs ($4.40 per share) in the first half of 2017 due to a change in a major ETF's mandate, selling by a major shareholder, and tax loss selling," he said. "These issues were/are temporary, and we expect Wesdome to continue its recovery. When compared to competitors on a $/oz basis, Wesdome is greatly undervalued, especially considering it has an already-producing asset."

Financial Services

Analyst Dylan Steuart named Currency Exchange International Corp. (CXI-T) as his best idea. He has a "buy" rating and $32 target for its stock, which is in line with the average.

"Given our view of restrained growth in the domestic lending environment, we look towards growth in niche services in 2018. As such CXI is our best idea for 2018, said Mr. Steuart. "A full service foreign currency exchange company (catering to both retail and wholesale clients across North America), CXI looks poised to build off momentum generated in the back half of 2017 and generate growth into the new year."

Technology

Analyst Blair Abernethy named OpenText Inc. (OTEX-Q, OTEX-T) and Symbility Solutions Inc. (SY-X) his top ideas.

He has a "buy" rating and $38 (U.S.) target for OpenText. The average is $40.17.

"Our top pick in large cap Canadian technology for 2018 is OpenText, which is currently trading at $34.31 U.S. or 14.3 times price-to-earnings on fiscal 2018 estimates, which in our view is undervalued compared to enterprise software comps trading at 20-25 times P/E," the analyst said. "Our positive investment thesis toward OpenText's stock at current levels is based on the following: (1) The opportunity to make medium scale acquisitions; (2) Potential for improved organic license revenue growth in F2018; (3) Traction with the new Magellan artificial intelligence platform; and (4) Improving contributions from last year's ECD acquisition."

Mr. Abernethy has a "buy" rating and 70-cent target for Symbility. He's currently the sole analyst covering the stock, according to Bloomberg

"In our view, Symbility is currently undervalued given its strong organic growth, improved profitability and the opportunity to significantly expand its customer base and TAM by integrating AI technologies," he said.

Consumer and Industrial Products

DIRTT Environmental Solutions Ltd. (DRT-T) was selected by analyst Neil Linsdell. He has a "buy" rating and $8 target for its share. The average on the Street is $7.56.

"Despite significant revenue growth in 2017 we didn't see the same lift in profitability," said Mr. Linsdell. "The good news however is that the increased costs in 2017 (and 2016) were driven by growing interest in DIRTT's products, evident in record attendance (up 15 per cent) at the company's annual Connext event in Chicago and a doubling of visits to its Calgary facilities. Headcount has also increased 5 per cent in the last year and DIRTT incurred extra costs to secure one particular marquee Fortune 100 customer that is rolling out projects around the world that are currently slated for installations through 2018/19 but could be increased in scope significantly

Energy – Oil and Gas

Analyst Michael Charlton selected Birchcliff Energy Ltd. (BIR-T) and Painted Pony Energy Ltd. (PONY-T).

Mr. Charlton has a "buy" rating and $10.20 target for Birchcliff shares. The average is $7.89.

"Despite the company's 38-per-cent production growth this year, it continues to trade at a substantial discount to its estimated $6.69 per share PDP value before 2017 additions," he said. "We believe Birchcliff represents a value play for investors seeking to invest in a maturing company with forecasted production growth of 27 per cent to be done within cash flow, targeting annual production of 80,000 barrels of oil equivalent per day and an exit rate of 100,000 boe/d."

He has also a "buy" rating for Painted Pony shares with a $5 target. The average is $3.92.

"Given some of the past surprises and negative market sentiment for the company, we do expect there may be ongoing surprises down the trail," he said. "In our view, a few bumps on the trail and a bit of hair on the horse is really to be expected when you're talking about valuation metrics this low, but the potential reward is a ride worth taking."

Energy – Services

Analyst Elias Foscolos pointed to Badger Daylighting Ltd. (BAD-T) and Enerflex Ltd. (EFX-T) as his top ideas.

Mr. Foscolos has a "strong buy" rating and $37 target for Badger shares. Consensus is $32.92.

"Although Badger's shares ended 2017 15 per cent lower than at the beginning of the year, we attribute this performance partly due to the sector BAD operates in and partly due to some concerns that Management successfully addressed during the year," he said. "Taking into account the Company's historical growth profile, we believe Badger has the best organic growth potential in our coverage universe. In Q3/17, we saw U.S. revenue increase by 32 per cent on a year-over-year basis, thereby indicating that it is on track to achieve its goal of doubling its US business, from 2016, over the next 2-4 years. Additionally, the U.S. represents a massive underserved market for Badger."

He has a "strong buy" rating and $21 target for Enerflex. The average on the Street is $22.06.

Mr. Foscolos said: "In the last two quarters, EFX's revenue has been slightly above market expectations. Although its EBITDA in Q3/17 was slightly below the Street's projection, we attribute the EBITDA miss as a timing issue and to one-time charges. In November, EFX increased its dividend by 12 per cent to an annualized rate of 38 cents per share. These positive factors, along with EFX's strong balance sheet, make the company one of our top picks for 2018."

Energy – Infrastructure and Midstream

Mr. Foscolos's pick in this sector is Inter Pipeline Ltd. (IPL-T), which he has given a "strong buy" rating and $33 target. The average target is $30.17.

"Inter Pipeline is our top 2018 pick in the IM space for investors who are looking for stability, dividend growth, and potential capital appreciation," he said. "The Calgary-based company has extremely stable cash flows with 80 per cent of its revenue coming from cost-of-service or fee-based contracts. Not only does the Company lock in the majority of its cash flow, allowing for less volatility from energy price fluctuations, but it also pays 100 per cent out of this amount as its dividend."