Believing the world economy is starting 2019 with “waning momentum,” equity analysts at Canaccord Genuity feel a slowdown in growth is likely to continue through the first half of the year, expecting to see leading economic indicators to remain “depressed.”
“We believe re-acceleration in [the second half of the year] is contingent upon a break in the standoff in the US-China trade war, the Federal Reserve/EM central banks stepping to the sidelines, and U.S. dollar depreciation,” the firm said in a research report released Monday. “In all, we believe risks to the outlook for global GDP growth remain tilted to the downside.”
The firm expects investors to continue to take a defensive equity posture through the first quarter and possibly into the second quarter as global growth deceleration hits the United States.
Under that climate, they feel utilities, staples, energy and health care will outperform, while, at the same time, consumer discretionary and technology will struggle.
“In other words, value outperforms growth,” they said.
“Also, investors will likely wait to see a softening in the Federal Reserve tightening rhetoric before returning to more cyclical stocks. Last, despite strong relative performance lately, defensive sectors trade in line with the market. History has shown that a premium as high as 20 per cent can build if a U.S. recession unfolds sooner than expected. Should U.S. monetary policy become less restrictive in H2, we think the odds are that cyclical stocks will rebound very strongly, given their much-depressed valuation. As such, the right sector strategy in 2019 could be a barbell portfolio with defensives on one side and value on the other side. We believe growth will continue to underperform.”
With that view, the firm released its top Canadian equity picks for 2019, which includes 32 stocks spreading across 10 groups.
Their picks were:
Consumer & Retail
Parkland Fuel Corp. (PKI-T) with a “buy” rating and $57 target. The average on the Street is $49.14, according to Bloomberg data.
Analyst Derek Dley: “2018 was a strong year for Parkland, as the company generated impressive shareholder returns of 36 per cent” (vs. the Consumer Staples index, flat for the year). We expect the momentum to continue into 2019, as Parkland captures further synergies related to the recently acquired Chevron and CST assets, while producing positive results within Parkland’s network of convenience stores. We see many potential near-term catalysts that should benefit Parkland’s share price, including initial results from the acquisition of SOL as well as further accretive tuck-in acquisitions within the Parkland USA business.”
Energy
Canadian Natural Resources Ltd. (CNQ-T) with a “buy” rating and $50 target. Average: $47.28.
Suncor Energy Inc. (SU-T) with a “buy” rating and $65 target. Average: $55.12.
Analyst Dennis Fong said: “For 2019, Suncor remains our top integrated pick due to its integration, focus on shareholder return and clean balance sheet (in a volatile commodity price environment). We are adding Canadian Natural Resources as another compelling way to gain Canadian exposure to oil and gas and a potentially closing differential to Western Canadian crudes through 2019. We have a BUY rating on both stocks and estimate these companies will show a combination of the highest free cash flow yields in our coverage universe in 2019 coupled with relative balance sheet strength.”
Parex Resources Inc. (PXT-T) with a “buy” rating and $32 target. Average: $28.78.
TORC Oil & Gas Ltd. (TOG-T) with a “buy” rating and $10.50 target. Average: $8.25.
Total Energy Services Inc. (TOT-T) with a “buy” rating and $14 target. Average $14.25.
Financials
Bank of Montreal (BMO-T) with a “buy” rating and $112 target. Average: $109.35.
Analyst Scott Chan: “BMO is our top pick among the Canadian Banks. BMO declined 11 per cent in 2018 (excluding dividends), versus the TSX and Canadian financials, down 12/13 per cent respectively in 2018. However, we see an emerging disparity between management targets and consensus expectations, which we believe offers an attractive entry point for the long-term investor.”
Manulife Financial Corp. (MFC-T) with a “buy” rating and $29 target. Average: $29.05.
Cannabis
Curaleaf Holdings Inc. (CURA-CN) with a “speculative buy” rating and $13 target. Average: $16.67.
Analyst Matt Bottomley: “After a rather tumultuous end to 2018 for the cannabis sector, Curaleaf has seen its valuation come down 40 per cent since its October listing, with many of its U.S. peers experiencing share price declines of similar magnitudes over this period. However, we do not believe the recent sector wide pullback has been rooted in fundamentals. In fact, the end of 2018 saw a number of positive headlines in the space, including encouraging midterm election results (with Michigan approving recreational cannabis); the passing of the Farm Bill; indications that the STATES Act will have a majority support in the Senate; New York’s Mayor calling for a legalized adult use market; and additional strategic investors entering the space, including Altria and AB InBev. With sentiment in the U.S. continuing to track in the right direction, we are introducing Curaleaf as our Top Pick for 2019.”
Khiron Life Sciences Corp. (KHRN-X) with a “speculative buy” rating and $3.40 target. Average: $3.40.
Analyst Kimberly Hedlin: “In our view, Khiron is positioned to secure a sizable market share in the growing LATAM cannabis market owing to its early entry, robust patient acquisition platform and strong management. Following its RTO in May 2018, the stock outperformed the sector in Q4 but has recently declined 20% from its post-RTO closing high of $1.86. We believe an early entry into Mexico, along with the start of commercial cultivation, clinic operations and medical sales could provide strong share-price growth in 2019.”
Industrials
Air Canada (AC-T) with a “buy” rating and $33 target. Average: $35.64.
Analyst Doug Taylor: “Air Canada shares closed the year flat (0 per cent), outperforming the TSX by 12 per cent and other airlines by a significant margin (WestJet by 32 per cent and the NYSE Arca Airline index by 23 per cent). We attribute the relative strength in AC shares to the company’s strong operational performance and firm-specific catalysts largely related to the internalization of the loyalty program. In 2019, we expect improving margins, partly driven by the move to bring Aeroplan in-house, to help drive increased profitability and for investors to continue to train their eyes on the significant FCF ramp in the coming years. Air Canada remains our top pick for 2019.”
Aecon Group Inc. (ARE-T) with a “buy” rating and $24 target. Average: $22.25.
Metals & Mining
Atlantic Gold Corp. (AGB-X) with a “buy” rating and $3 target. Average: $2.72.
B2Gold Corp. (BTO-T) with a “buy” rating and $6 target. Average: $5.09.
Ero Copper Corp. (ERO-T) with a “buy” rating and $17.50 target. Average: $14.50.
Goldcorp Inc. (G-T) with a “buy” rating and $19.50 target. Average: $17.87.
Cobalt 27 Capital Group Corp. (KBLT-T) with a “speculative buy” rating and $15.50 target. Average: $13.05.
Osisko Mining Inc. (OSK-T) with a “speculative buy” rating and $5 target. Average: $4.25.
Premier Gold Mines Ltd. (PG-T) with a “buy” rating and $4.50 target. Average: $4.07.
Probe Metals Inc. (PRB-X) with a “speculative buy” rating and $2 target. Average: $2.18.
Trevali Mining Corp. (TV-T) with a “buy” rating and $1.25 target. Average: $1.14.
Wheaton Precious Metals Corp. (WPM-T) with a “buy” rating and $41 target. Average: $36.25.
Analyst Carey MacRury: “Wheaton Precious Metals is our top pick among the precious metal royalty/streaming companies. We believe Wheaton is well positioned to outperform its royalty peers in 2019 on the back of a solid growth profile, an improving balance sheet, and a compelling valuation gap with its closest peer, Franco-Nevada (FNV-T, $96 target, “buy”). Despite resolving two of the most significant overhangs on the company’s shares in 2018 (the San Dimas stream and CRA settlement), WPM’s shares were down 4 per cent in 2018, in line with the TSX Global Gold Index (down 4 per cent), outpacing the S&P/TSX index (down 12 per cent), but under performing the gold price (down 2 per cent). WPM now trades at 1.25 times NAV and 16.4 times 2019 estimated EBITDA, a 20-per-cent discount to FNV. We note that historically the companies have traded in-line and we expect this valuation gap to narrow over 2019.”
Pipelines
Pembina Pipelines Corp. (PPL-T) with a “buy” rating and $58 target. Average: $54.06.
Analyst David Galison: “Pembina is our top pick for 2019. The shares outperformed the Canadian midstream group in 2018, declining 11 per cent, compared to the group which declined 18.6 per cent and the S&P/TSX declining 11.6 per cent. We believe the share price in the new year should continue to benefit from earnings growth from new assets that entered service as well new assets entering service throughout the year.”
Real Estate
Brookfield Asset Management Inc. (BAM-N, BAM.A-T) with a “buy” rating and US$53.50 target. Average: US$50.56.
Analyst Mark Rothschild: “Brookfield Asset Management (BAM) generated a total return of negative 10.7 per cent in 2018, outperforming the TSX (down 11.6 per cent). Much of this decline took place in the final quarter of 2018 when the share price declined 14 per cent. BAM now trades at a 22.2-per-cent discount to our NAV per share estimate of US$48.67. Considering that over the past three years, the shares have traded, on average, at a 2.1-per-cent discount to NAV, we view this discount as extremely attractive. While it is difficult to point to a near-term catalyst, we expect steady cash flow growth from BAM’s key operating platforms as fundamentals are generally healthy, and management fees should rise.”
Canadian Apartment Properties REIT (CAR.UN-T) with a “buy” rating and $51 target. Average: $50.38.
Chartwell Retirement Residences (CSH.UN-T) with a “buy” rating and $17.50 target. Average: $16.80.
Special Situations
Diversified Royalty Corp. (DIV-T) with a “buy” rating and $4 target. Average: $4.15.
Park Lawn Corp. (PLC-T) with a “buy” rating and $29.50 target. Average: $29.44.
Superior Plus Corp. (SPB-T) with a “buy” rating and $13.75 target. Average: $14.80.
Telecom, Media and Technology
Cogeco Communications Inc. (CCA-T) with a “buy” rating and $76 target. Average: $80.
Cineplex Inc. (CGX-T) with a “buy” rating and $34 target. Average: $34.30.
Kinaxis Inc. (KXS-T) with a “buy" rating and $97.50 target. Average: $96.96.
Analyst Robert Young: “Kinaxis is our top pick in the Canadian technology sector for 2019. A premium valuation name with exceptional fundamentals, Kinaxis had gained 30.2 per cent in 2018 through its peak on August 15, closing at $100.68. Since then, Kinaxis has declined more than 30 per cent, on broad market weakness and a weaker-than-expected Q3 print. Considering the full year, 2018 performance of negative 14.2 per cent compares to broader TSX performance of negative 11.6 per cent and NASDAQ losses of 3.9 per cent. We see the hiccup as an opportunity for investors. We believe Kinaxis can sustain predictable 20-25-per-cent top-line growth for several years, with EBITDA margins of 25 per cent-plus and positive free cash flow, which supports a premium valuation. Importantly, we see recent investments in sales, channel and global data center infrastructure as supporting strong 2019 growth, particularly in Europe and Asia. Key company insiders have accumulated meaningful positions following the Q3 slip, demonstrating their conviction.”
David Leeder