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Much-improved capital market conditions have brightened the outlook considerably for publicly traded brokers and dealers. But according to Scotia Capital Inc., the market is undervaluing two firms as conditions continue on the upswing: GMP Capital Inc. and Canaccord Financial Inc.

Price-to-book multiples for both firms remain at a significant discount to their pre-financial crisis three-year averages, said Scotia Capital analyst Phil Hardie.

Part of the reasoning for his bullish outlook is that both firms are highly levered to merger and acquisition activity. And he expects that to pick up next year amid the easing in credit conditions, a reduction in market volatility and the improved confidence of CEOs.

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"We believe that the extended drought in M&A activity has likely led investors to put too much focus on expected earnings from underwriting activity and underestimate the potential upside related to a strong rebound in advisory activity," Mr. Hardie said in a note.

Meanwhile, both firms are poised to broaden their horizons and pursue a focused international expansion strategy that will utilize their expertise in the energy and resource sectors. GMP has already added to its U.K. platform and Canaccord recently rolled out its Asian expansion strategy with the acquisition of Balloch Group, a leading China-based advisory and merchant bank.

Upside: Mr. Hardie hiked his one-year target price on GMP by $1.50 to $15.50 and raised his target on Canaccord Financial by $2 to $14.50.

Mainstreet Equity Corp. is "deeply undervalued" and should generate strong cash flow growth for the foreseeable future as it accelerates its acquisition pace, said Desjardins Securities Inc. analyst Jeff Roberts. The residential property firm's vacancy rate, now below 10 per cent, is expected to decline rapidly, and a new independent appraisal values its portfolio at what Mr. Roberts calls an "aggressive" $30.15 per share.

Upside: Mr. Roberts raised his target to $22.50 from $16.50 and rates the stock as a "top pick-average risk."

Athabasca Oil Sands Corp. has one of the most attractive land holdings and growth portfolios in Canada's oil sands sector, with potential to eventually produce as much as 800,000 barrels per day, said Mark Friesen, analyst with RBC Dominion Securities Inc. It's a well-financed company with a solid long-term asset portfolio as several of its projects move through the regulatory and development stages, he added.

Upside: Mr. Friesen initiated coverage with a "sector perform-above average risk" recommendation and a $16 price target.

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Macquarie Power & Infrastructure Income Fund has acquired a 33.3 per cent stake in a Swedish district heating business for $100-million. It's a stable and predictable business that Macquarie estimates will produce an equity return at the upper end of the fund's 10 per cent to 14 per cent target range, noted RBC Dominion Securities Inc. analyst Nelson Ng.

Upside: Mr. Ng hiked his price target by 50 cents to $7.50.

Shares in Churchill Corp., a provider of building construction services, are trading at an "unwarranted" significant discount to its peer group, said Scotia Capital Inc. analyst Mark Neville. This may be because the market is expecting a severe compression in margins, but Churchill should hold up relatively well, given its disciplined bidding approach, he said.

Upside: Mr. Neville is maintaining a one-year price target of $28.

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About the Author
Investment Editor

Darcy Keith is The Globe and Mail's Investment Editor. He has been a business journalist since 1992 and joined the Report on Business in 2010 from Yahoo! Canada, where he was the senior editor of finance. More

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