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Raymond James upgrades Suncor, predicts 25% rally

Suncor's head office in Calgary

TODD KOROL/REUTERS

While wary of inflationary pressures in the oil sands, Raymond James Ltd. today upgraded Suncor Inc. to "outperform," citing its poor share price performance of the past year that has left the stock trading at attractive valuations.

The Raymond James analysts, who previously rated the company as "market perform," also raised their six- to 12-month target on Suncor by $4 to $39, a price that would represent a 25 per cent return to investors from current levels.

The analysts also see greater upside for Canadian Oil Sands Ltd. , raising their price target to $23.50 from $20. But they left that stock's rating unchanged at "market perform."

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"Our long-term outlook for Suncor and Canadian Oil Sands remains effectively unchanged," the analysts, led by Justin Bouchard, said in a note today. "We continue to see meaningful risk to both stocks over the coming years as inflationary pressures set in the oil sands. Both companies are highly exposed to the mining side of the oil sands business, an area that we believe will experience the most significant cost pressures when activity levels in the sector begin to tick up meaningfully in the latter half of 2012 and into 2013.

"That being said, we believe the current valuation for Suncor is attractive."

Neither Suncor nor Canadian Oil Sands are among Raymond James' top picks among senior producers with a heavy focus on oil. It prefers Cenovus Energy Inc. (with a revised price target of $45, up $5) and Canadian Natural Resources Ltd. (with a new target of $50, up from $43).

"Among the seniors, we continue to favor Cenovus as a compelling opportunity due to its consistent operating performance, attractive growth profile and low-cost asset base," the analysts wrote. "Furthermore, the continued ramp-up of Christina Lake Phase C and the expected announcement of a joint venture at Telephone Lake should be potential catalysts for the stock in the first half of 2012."

As part of its fresh review of the energy sector, Raymond James also raised its forecast for Brent crude for this year to $105 (U.S.), up $5. It trimmed its assumption for the Canadian dollar to 98 cents (U.S.) from $1.00, which it noted should be a slight positive for Canadian producers.

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A strong free cash flow yield, a potential dividend hike and a low probability of major acquisitions in 2012 make Domtar Corp. a top pick for Raymond James analyst Daryl Swetlishoff.

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Mr. Swetlishoff notes that Domtar's free cash flow yield is relatively insensitive to macroeconomic conditions due to its dominant market position, and that a doubling in the current dividend, which would theoretically bring the payout ratio to just 49 per cent, remains possible.

Upside: Mr. Swetlishoff reiterated his "strong buy" rating and $125 target price.

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Teck Resources Ltd.'s $435-million (Canadian) acquisition of oil sands partner SilverBirch Energy Corp. will have a negative short-term impact on the stock, warns Desjardins Securities Inc. analyst John Hughes. But he's not changing his recommendation.

The sticking point for Mr. Hughes is the increased capital expenditures Teck will face. "We believe that the major capex required for development of the projects may initially scare the market .... following the announcement of Teck's increased ownership," says Mr. Hughes.

Upside: He reiterated his "buy" recommendation and $68.50 (Canadian) target price.

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Related: Teck needs big partners after oil sands deal

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RBC Dominion Securities Inc. analyst Drew McReynolds downgraded Corus Entertainment Inc. to "outperform" from "top pick" due to share price appreciation.

Corus shares climbed more than $2 in December. Going forward, Mr. McReynolds cited advertising and merchandising strength through the holiday season and Western Canadian radio performance as key areas of focus for the first quarter of 2012.

Downside: Mr. McReynolds maintained his $25 price target.

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Their shares may not have huge upside, but drug stores should be a safe haven among Canadian retail stocks in coming months, argues CIBC World Markets Inc. analyst Perry Caicco. Most of the negative impact from Ontario's drug reform should dissipate over the next six quarters, and even if other provinces pass similar legislation, Jean Coutu Group (PJC) Inc. PJC.A-T looks safe, with plenty of cash to be made over the next couple of years, he said.

Upside: Mr. Caicco raised his price target on Jean Coutu by $2 to $15.

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About the Authors
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

Streetwise editor

Jody White is the web editor for Streetwise. He previously worked as a senior editor at Canadian Business Online and has written for MoneySense Magazine, Maclean's, the National Post and other national publications. More

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