Analysts at Desjardins Securities released their sector-specific outlooks and top picks for 2018 in a series of research notes on Friday.
The firm's stock selections for the year consist of 34 stocks spread across nine different sectors.
"2017 was an interesting year for the markets, which saw the first year of Trump's presidency, the ups and downs related to potential tax reform, and major U.S. stock indices setting record highs late in the year despite three rate hikes south of the border and two rate hikes north," the analysts said. "We now enter 2018 facing a new host of challenges and opportunities. It is with this in mind that we are bringing into focus our expectations for 2018."
According to Desjardins, their 2017 top picks brought an equal-weighted average total return of 13.5 per cent, versus a 5.3-per-cent return for the firm's full coverage universe and 9.4 per cent for the S&P/TSX.
There selections for the current year are:
Staples - Alimentation Couche-Tard Inc. (ATD.B-T): "buy" rating, $78 target, 17.9-per-cent expected return. The analyst consensus target is $76.08, according to Bloomberg data.
Keith Howlett: "Alimentation Couche-Tard … is expected to be a direct beneficiary of increased consumer spending and economic activity spurred by U.S. tax reductions. Couche-Tard will also benefit from its integration of CST Brands and its recently closed acquisition of Holiday Stationstores in the Upper Midwest."
Discretionary - Canadian Tire Corp. Ltd. (CTC.A-T): "buy" rating, $184 target, 12.0-per-cent expected return. Consensus is $179.38.
Mr. Howlett: "Canadian Tire enters 2018 with good sales momentum and improving gross margins. We expect Canadian Tire to benefit from the exit of Sears Canada from the marketplace in January 2018. Canadian Tire performs relatively well in challenging economic conditions, and we expect it will do so should U.S. tax and trade initiatives trigger a slowdown in Canada."
Enercare Inc. (ECI-T): "buy" rating, $24 target, 26.6-per-cent expected return. Consensus is $24.36.
David Newman: "Enercare is poised to leverage its presence in 1.6m homes across North America to cross-sell more products and services (eg water heaters, HVAC equipment), and layer on an emerging connected home initiative (eg protection plans, plumbing and electrical services). The company has a stable, defensible core business model, with 75 per cent in recurring EBITDA and contract durations of 15+ years."
Rogers Sugar Inc. (RSI-T): "buy" rating, $7.25 target, 20.2-per-cent expected return. Consensus is $7.05.
Frederic Tremblay: "2018 will the first full year of the 'new' Rogers Sugar as its legacy refined sugar business is now complemented by meaningful exposure to the higher-growth maple syrup market. In our opinion, maple syrup is a welcome addition to RSI's product portfolio as it brings a compelling growth platform, both organically and via potential further consolidation of a relatively fragmented market, in addition to revenue and cost synergy opportunities."
Savaria Corp. (SIS-T): "buy" rating, $20 target, 11.1-per-cent expected return. Consensus is $19.04.
Mr. Tremblay: "Following Savaria's transformative acquisition of Span-America Medical Systems (Span) as well as its best-in-class share price appreciation (68 per cent) in 2017, we see ample reason to stick with this winner in 2018."
Sun Life Financial Inc. (SLF-T): "buy" rating, $58 target, 16.0-per-cent expected return. Consensus is $54.31.
Doug Young: "There are three drivers behind our positive views on SLF. First, we anticipate core EPS growth of 11 per cent in 2018, driven by U.S. group insurance, Canada (including its domestic mutual funds business), an earnings pickup from acquisitions made through 2016, benefits from a lower US corporate tax rate and further momentum in Asia. Second, we believe it has the most attractive wealth management franchise via MFS, its $491.6-billion (U.S.) US asset management platform. We acknowledge MFS net flows have been hurt by certain popular funds being capped (an internal decision) and a shift to passive (vs active) strategies, as well as a shift to fixed income (from equity) mandates. But MFS has still outperformed many US peers, and if we apply a 13.0-times multiple to our 2018 operating earnings estimate for MFS, the rest of SLF trades at 10.5 times our 2018 core EPS estimate. Third, SLF has the most attractive Canadian life insurance platform."
Bank of Nova Scotia (BNS-T): "buy" rating, $89 target, 11.2-per-cent expected return. Consensus is $88.71.
Mr. Young: "For FY18, we see a number of catalysts. First, on Dec. 5, 2017, BNS reached an agreement to acquire BBVA's 68.2-per-cent stake in BBVA Chile, which will be immediately EPS accretive, and it could purchase the remaining stake, making the economics even more attractive. Second, BNS's international operations (includes the Caribbean, along with Chile, Colombia, Mexico and Peru) are expected to benefit from further loan growth, NIM [net interest margin] stability, and a pickup in construction and investment activity in the Caribbean and Mexico following hurricanes, earthquakes and floods in 2H17. Finally, after achieving $500-million in expense savings in FY17 vs its $350-million target, management sees further room for improvement and has targeted savings of C$550m by FY18 and C$750m by FY19, which we believe are attainable. Put another way, management expects to drive 200bps of positive operating leverage in the next two years.
IGM Financial Inc. (IGM-T): "buy" rating, $50 target, 19.2-per-cent expected return. Consensus is $49.25.
Gary Ho: "Our investment thesis is predicated on the following: (1) continued momentum in net flows at IG and Mackenzie—we have seen a significant improvement in net inflows year-to-date; (2) expense growth has peaked and cost-containment efforts could provide upside; the company has guided to 5-per-cent non-commission expense growth in 2018 and 3 per cent in 2020, down from high-single-digit growth a few years back; (3) fee pressures are reflected in our forecasts; we are modelling a 2–4 basis points decline in average management fees; (4) we like its China AMC acquisition; and (5) the shares offer an attractive 5-per-cent dividend yield."
goeasy Ltd. (GSY-T): "buy" rating, $42 target, 11.4-per-cent expected return. Consensus is $44.
Mr. Ho: "Our investment thesis is predicated on the following: (1) management executing on future targets, given its solid track record on meeting or exceeding past targets; its new 2020 loan portfolio guidance points to a doubling of the loan book; (2) with the exit of two incumbents, the non-prime consumer lending market is underserved, in our view, which creates a unique opportunity to expand (particularly GSY's foray into the Québec market in 2017); (3) with scale, the business could generate a 20-per-cent-plus ROE [return on equity]; (4) we expect double-digit dividend growth over the next few years (we are expecting a 15-per-cent dividend increase with 4Q17 results); and (5) the IFRS 9 impact is less punitive than what investors had anticipated—management expects the allowance for loan losses to increase from the current 6.1 per cent of loans receivable to a range of 8.6–9.6 per cent."
Industrials/Transportation & Aerospace
CAE Inc. (CAE-T): "buy" rating, $27 target, 14.9-per-cent expected return. Consensus is $23.70.
Héroux-Devtek Inc. (HRX-T): "buy" rating, $19 target, 25.7-per-cent expected return. Consensus is $17.40.
Benoit Poirier: "Entering 2018, we favour the aerospace & defence and engineering & construction subsectors over transportation. In the aerospace and defence subsector, CAE and HRX remain among our top picks, as both stocks are trading at significant discounts to US peers while maintaining a strong balance sheet and facing robust industry fundamentals."
SNC-Lavalin Group Inc. (SNC-T): "buy" rating, $72 target, 26.3-per-cent expected return. Consensus is $70.05.
Mr. Poirier: "We also like SNC given its attractive valuation, significant catalysts ahead, possibility of margin improvement and potential upside to our target."
Stantec Inc.(STN-T): "buy" rating, $43 target, 20.8-per-cent expected return. Consensus is $39.25.
Mr. Poirier: "For more risk-averse investors, STN remains an attractive opportunity as its strong balance sheet provides flexibility in what is expected to be a busy year for M&A."
Transat A.T. Inc.(TRZ-T): "buy" rating, $20 target, 83.2-per-cent expected return. Consensus is $13.84.
Mr. Poirier: "TRZ is another stock which is underappreciated, in our view. While it was among the best performers in our coverage in 2017 (up 104 per cent), it continues to trade below the $12.13 value we derive for its surplus cash and we still see value for its tour operating business as management has been successful in generating value with past divestitures (Jonview, Transat France and TourGreece, and 35-per-cent interest in Ocean Hotels)."
Uni-Select Inc.(UNS-T): "top pick" rating, $37 target, 39.4-per-cent expected return. Consensus is $32.71.
Mr. Poirier: "Our preferred name in our coverage universe is UNS, for the following reasons: (1) valuation is attractive, (2) we expect a recovery in organic growth, (3) upside potential from the integration of Parts Alliance and other tuck-in acquisitions, and (4) its strong FCF."
Power & Utilities
Algonquin Power and Utilities Corp. (AQN-T): "buy" rating, $16 target, 23.7-per-cent expected return. Consensus is $15.89.
Bill Cabel: "AQN has a proven track record of growth and strong total return performance. We have high conviction that AQN will deliver on growth through continued power development project commissionings, investments in the utilities segment and likely additional acquisitions on either the power (ie AY) or utilities side of the business."
Boralex Inc. (BLX-T): "buy" rating, $26 target, 13.6-per-cent expected return. Consensus is $25.50.
Mr. Cabel: "We believe BLX is one of the best long-term investment opportunities in our IPP coverage, offering solid near-term growth from its identified pipeline and exposure to the hot renewables market in France (offering mid-teens project IRRs)—which should enable it to achieve its goal of 2,000MW of installed capacity by 2020 (~12% CAGR from the current 1,420MW)."
Northland Power Inc.(NPI-T): "buy" rating, $28 target, 26.0-per-cent expected return. Consensus is $26.31.
Mr. Cabel: "NPI has an exceptional development team which is considered a leader in the offshore wind space."
Oil & Gas:
Canadian Natural Resources Ltd. (CNQ-T): "buy" rating, $55 target, 21.8-per-cent expected return. Consensus is $52.34.
Justin Bouchard: "CNRL is a large, liquid name and a good way to add leverage to oil prices. One of the things we like about the company is the mix of short-cycle and long-cycle investment opportunities; if oil prices improve, there is an opportunity to grow on the conventional side of the business (eg conventional heavy oil), as CNRL is able to deploy capital quickly."
Enerplus Corp. (ERF-T): "buy" rating, $16 target, 24.5-per-cent expected return. Consensus is $16.75.
Kristopher Zack: "We continue to highlight Enerplus as one of our favorite names to own in the mid-cap space, even following the stock's relative outperformance in 2017. The stock continues to trade at a discount vs peers despite providing meaningful price diversification away from Canadian commodity benchmarks (particularly weak AECO gas), with 80 per cent of total production coming from US basins where price differentials are improving."
Tamarack Valley Energy Ltd. (TVE-T): "buy" rating, $4.50 target, 56.8-per-cent expected return. Consensus is $3.97.
Chris MacCulloch: "We highlight Tamarack as our favourite name in the small-cap space in 2018, despite the stock's relative outperformance last year; specifically, we note that it represents one of the cheapest ways to add oil leverage within our coverage universe based on the current valuation. We see an opportunity for multiple expansion as the company gains greater market recognition of its recent operational success."
Pembina Pipeline Corp. (PPL-T): "buy" rating, $53 target, 22.9-per-cent expected return. Consensus is $51.
Mr. Bouchard: "We continue to believe that Pembina is the best-positioned midstream company to capitalize on the continued development of liquids-rich plays in the WCSB. By leveraging its Peace Pipeline system (which bisects the Duvernay, the Alberta Montney and reaches into the BC Montney), Pembina should be able to continue adding new gas plants and/or new volumes onto its system."
Agnico Eagle Mines Ltd. (AEM-T): "buy" rating, $62 target. 6.4-per-cent expected return. Consensus is $67.98.
Josh Wolfson: "Agnico Eagle is a well-established operator within the large-producer group that is well-positioned for the year ahead. We forecast that Agnico Eagle will exceed its conservatively outlined 2017 guidance, 2018/19 issued guidance for 1.50moz/1.60moz will be improved and reserve/resource growth will be outlined."
Detour Gold Corp. (DGC-T): "buy" rating, $15.50 target, 12.4-per-cent expected return. Consensus is $20.04.
Mr. Wolfson: "Detour operates a world-class asset featuring an extensive minelife and long-term projected healthy margins, and that is located in a premier mining jurisdiction. Despite these attractive properties and a healthy financial positioning, DGC shares trade at a P/NAV [price to net asset value] at spot gold of 0.75 times, well below peers at 1.05 times and large producers at 1.69 times."
Golden Star Resources Ltd.(GSC-T): "buy" rating, $1.75 target, 66.6-per-cent expected return. Consensus is $1.53.
Raj Ray: "Given the outlook for steady low-cost production starting in 2018, a stabilized balance sheet, major capex spend completed and potential further upside to be uncovered through additional exploration, we believe GSC shares are well-positioned for a re-rating."
Kirkland Lake Gold Ltd. (KL-T): "buy" rating, $25 target, 26.5-per-cent expected return. Consensus is $22.58.
Mr. Ray: "KL Gold was one of the best-performing gold stocks on the TSX in 2017 (175 per cent versus 11 per cent for the GDX). We believe there is additional upside to the share price as the company could continue to surprise market expectations with some strong catalysts expected in the near term."
SEMAFO Inc. (SMF-T): "buy" rating, $5.50 target 55.8-per-cent expected return. Consensus is $5.27.
Mr. Ray: "The pullback in the share price following a weaker 1H17 has, in our opinion, provided a nice entry point for investors who are willing to accept some near-term volatility for strong potential FCF generation starting in 2H18, assuming timely completion and smooth ramp of the Boungou mine."
Torex Gold Resources Inc.(TXG-T): "buy" rating, $14.50 target, 25.9-per-cent expected return. Consensus is $19.38.
Mr. Wolfson: "While Torex's interim outlook is uncertain, in our view the share price does not appropriately reflect the company's long-term outlook and we view the risk/reward as asymmetric. A resolution of current uncertainties and the ramp-up to projected steady-state targets are expected to close the company's relative valuation gap."
InterRent REIT (IIP.UN-T): "buy" rating, $ 10.75 target, 15.5-per-cent expected return. Consensus is $10.05.
Michael Markidis: "IIP has one of the best earnings growth profiles in our coverage universe; we are calling for funds from operations per unit growth of 12 per cent in 2018 and 7 per cent in 2019. This outlook primarily reflects (1) IIP's favourable geographic positioning (more than 75 per cent of net operating income is derived from properties located in Toronto, Hamilton, Ottawa and Montreal), and (2) the large proportion of NOI that is generated from properties that are not yet stabilized."
Northview Apartment REIT (NVU.UN-T): "buy" rating, $ 26.50 target, 15.8-per-cent expected return. Consensus is $25.83.
Mr. Markidis: "NVU is an attractive option for investors who (1) are looking for exposure to the multifamily segment, and (2) prioritize current income. The 6.7-per-cent annualized distribution yield exceeds the simple average of our multifamily universe by almost 300 basis points. This is not a function of an aggressive FFO payout ratio or abnormal capex grind. Rather, we believe it reflects investor perception of the underlying value of NVU's assets, the majority of which are located in secondary/tertiary markets."
WPT Industrial REIT(WIR.U-T): "buy" rating, $ 14.50 target, 15.5-per-cent expected return. Consensus is $14.19.
Mr. Markidis: "WIR has the highest-quality asset base of the TSX-listed industrial pure plays, in our view. The desirability of the properties is illustrated by (1) WIR's top 10 tenant list (accounts for 40 per cent of revenue and includes household names such as General Mills, Unilever, Continental Tire, CEVA, Amazon and Honeywell), and (2) operating performance (98-per-cent-plus occupancy for 14 consecutive quarters, 95-per-cent tenant retention in 2017). Going forward, these attributes should support a low- to mid-single-digit organic growth rate that requires relatively minimal capex spend."
Québecor Inc. (QBR.B-T): "buy" rating, $29 target, 24.4-per-cent expected return. Consensus is $27.42.
Maher Yaghi: "We believe management is responding well to the strong competitive threat from BCE by focusing on product differentiation and customer service rather than on maintaining market share at all costs. Our view is that the shares are attractive at these levels as they trade at a discount to peers even though the company delivers above-average EBITDA growth."
Rogers Communications Inc. (RCI.B-T): "buy" rating, $ 71 target, 15.7-per-cent expected return. Consensus is $70.11.
Mr. Yaghi: "Our view is that the shares are attractive at these levels, as they trade at a discount to peers despite the company's current and expected above-average EBITDA growth vs large-cap Canadian telcos."
TELUS Corp. (T-T): "buy" rating, $52 target, 16.0-per-cent expected return. Consensus is $50.90.
Mr. Yaghi: "We also note that T is one of the few companies in Canada that is actually growing wireline revenue. It enjoys strong wireless performance, which should support future profitability. We continue to believe that T should trade higher given the company's strong underlying fundamentals."