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Morgan Stanley published a report entitled Key Investor Debates Likely to Drive Stocks in the Coming Year and I read all 75 pages so you don’t have to. By far the most stunning data point was provided by U.S. electric utilities analyst Stephen Byrd: “Clean tech stocks have surged in 2020, with our coverage up between 60% and >600%.” The worst performers in the pure play, clean power technology sector were higher by more than 50 per cent.

There is a good chance I lost a bunch of readers with that first paragraph. Renewable power and other ESG-sensitive (Environmental, Social and Governance) investments don’t generate huge page views for us at The Globe and Mail. Many readers perhaps prefer the comforts of the established dividend-paying giants of the stock market, or the technology and mining sectors.

But that resistance to delve into ESG investment opportunities could be coming at a cost to portfolios given their strong performance. And it comes as a bit of a surprise given the ease with which asset management firms are raising billions of new investment through ESG investment vehicles this year (ESG investment inflow chart posted on social media here).

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The global transition to renewable power is certainly not slowing. Mr. Byrd has short-term concerns about the clean energy sector, notably profit margins for solar panel manufacturers and excessive optimism regarding U.S. clean energy legislation. On the whole, however, he sees significantly more upside for renewable energy stocks in large part because of continued capital inflows from ESG investors.

Mr. Byrd’s top stock choices for 2021 are AES Corp. and American Electric Power Corp Ltd. In the first case, the analyst believes the company’s renewable power business is not yet fully reflected in the stock price despite a more than 90 per cent appreciation in the past year. He sees the possibility of a spin-off of the renewables operation that will unlock shareholder value.

American Electric Power has not enjoyed strong performance in 2020, but Morgan Stanley expects management to restructure operations to emphasize its growing wind power business. His 12-month price target implies 20 per cent upside from the current price.

Those resistant to joining the ESG bandwagon will be happy to hear that Morgan Stanley as a firm is bullish on oil stocks too. Energy analyst Martin Rats sees oil producers as a direct beneficiary of the post-pandemic economic recovery.

In a Monday research report, Mr. Rats noted that the free cash flow yield for U.S energy stocks will exceed the market average in 2021 for the first time in over ten years. Despite this, the sector trades at a 45 per cent discount to the market by EV/EBITDA (enterprise value to earnings before interest, taxation, depreciation and amortization charges).

Morgan Stanley also upgraded the Canadian oil sector recently thanks to capital discipline and attractive valuations. Mr. Rats’ top Canadian stock picks are Suncor Energy, Canadian Natural resources and MEG Energy.

I strongly suspect that most Canadians will own exposure to renewable power or other ESG investments eventually. Hopefully it happens before ESG stocks are fully valued and it’s too late. Just like the Morgan Stanley research department, ESG and oil investment bullishness can easily co-exist in investment portfolios.

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-- Scott Barlow, Globe and Mail market strategist

This is the Globe Investor newsletter, published three times each week. If someone has forwarded this e-mail newsletter to you or you’re reading this on the web, you can sign up for the newsletter and others on our newsletter signup page.

Stocks to ponder

Granite Real Estate Investment Trust (GRT-UN-T) Over the years, this REIT has provided investors with price appreciation combined with an attractive yield and distribution growth. Its unit price has rallied 20 per cent year-to-date, making it the top performing REIT in the S&P/TSX composite index. The unit price is less than one per cent away from its record closing high. The REIT also provides investors with reliable income. Management has announced distribution increases for the past nine consecutive years. Granite has a unanimous buy recommendation from 10 analysts. Our equities analyst, Jennifer Dowty, has this profile of the company. (for subscribers)

Enbridge Inc. (ENB-T) The pipeline operator’s high dividend yield has been flashing red throughout most of 2020, beckoning dividend investors but also signalling discomfort with the company’s connection to a depressed energy sector. The stock’s rebound over the past month suggests that investors are at last warming up to the stock, and there are several reasons why the rally could continue. David Berman looks at the investment case. (for subscribers)

MDF Commerce Inc. (MDF-T) This stock shot up more than 20 per cent on Monday after the e-commerce company disclosed a deal with a U.K. retailer Aldi to provide ‘click and collect’ grocery services amid the rise in contactless shopping during the pandemic. Analysts are calling the contract a “nice win” and are raising their price targets. Brenda Bouw reports. (for subscribers)

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The Rundown

TSX stocks are back to hiking dividend payouts after pandemic shock ignited a slew of cuts and cancelations

Canadian companies are spending the fourth quarter in confident, dividend-raising mode after a spring and summer of pandemic-related caution, cuts and cancellations. Giants like Enbridge Inc., Dollarama Inc., Mullen Group Ltd. and AltaGas Ltd. all joined the list of hikers in just the past week-plus. But they have plenty of company: A search of dividend-related announcements in the S&P Global Market Intelligence database shows 47 companies with their primary stock listing on the TSX announced dividend increases since Oct. 1 alongside reporting third-quarter results. David Milstead has the full list of Canadian stocks that have returned to raising payouts. (for subscribers)

The returns of this $335-million fund manager are almost twice that of the TSX this year. Here’s his top picks in the sectors he likes right now

Portfolio manager Stephen Takacsy says it was part design, part luck that his Canadian equity fund was relatively “COVID proof” when the markets plummeted this year after the pandemic forced the widespread closing of businesses. Some of his biggest positions were in sectors that surged amid the market uncertainty, including renewable energy and e-commerce. So what’s he buying now? Brenda Bouw looks at his picks across three of his preferred sectors. (for subscribers)

This $150-million fund manager expects ‘a very strong push’ for stocks in the next six weeks - and these are three of his favourites

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Jason Del Vicario sees another Santa Claus rally shaping up this holiday season, driven by continued low interest rates and market hopes the COVID-19 vaccine will help economies recover in the new year. “Whether it’s a Santa Claus rally before Christmas or after, I do think things are lining up for us to have a very strong push in equities in the next six weeks or so,” says Mr. Del Vicario, a portfolio manager and investment adviser at HollisWealth in Vancouver, a division of Industrial Alliance Securities Inc. He oversees about $150-million in assets. Brenda Bouw had a chat with the portfolio manager to find out more about his latest market views and top stock picks. (for subscribers)

Laurentian Bank Securities reveals its top TSX stock picks for 2021

Laurentian Bank Securities’ 2020 preferred stock picks returned 13.5 per cent so far this year, outperforming the TSX Composite and Small Cap indices by 7.1 per cent and 4.2 per cent, respectively. So what stocks are the bank’s analysts recommending for this year? David Leeder introduces us to the eight names they consider as their best investment ideas for 2021. (for subscribers)

CPPIB CEO says equities ‘fully valued’, sees five years of depressed returns for stocks and bonds

The head of the Canada Pension Plan Investment Board, Mark Machin, suggests Canadians need to plan for a slow economic recovery coming out of COVID-19, with global economic output not returning to prepandemic levels until the end of 2022. And given current valuations, he’s seeing very little upside for both stocks and bonds in the years to come. David Milstead reports. (for subscribers)

How my pandemic stock picks performed in a year unlike any other

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When the pandemic hit home in March, investors had to move quickly to navigate the rapidly evolving stock market environment. Gordon Pape at the time looked at stocks that he felt were positioned to do well in the face of new challenges arising from the devastating impact of the pandemic. Not all performed as expected but his track record was quite respectable. Here are some of the pandemic-related picks that were introduced. (for subscribers)

A mutual fund company where loyal clients pay lower fees

Steadyhand clients with five to 10 years at the company have their fees cut by 7 per cent; after 10 years, fees are cut by a total 14 per cent. Loyalty to long-term customers - what a concept. If they understand what Steadyhand is doing, maybe more people will be inspired to ask their banks and investment firms for a loyalty discount, says Rob Carrick. (for subscribers)

Market weakness in these top 20 five-year performers of the TSX may signal it’s time to buy

Norman Rothery crunches some numbers to highlight 20 candidates that sport the highest five-year total returns in the S&P/TSX Composite - and he provides some key valuation metrics for each. Bargain hunters will keep an eye out for the firms with low price-to-sales and low P/E ratios in the list. After all, profitable firms trading at bargain prices that are trending higher can be attractive investments. (for subscribers)

Others (for subscribers)

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Wednesday’s analyst upgrades and downgrades

Tuesday’s analyst upgrades and downgrades

Wednesday’s Insider Report: CEO is buying this beaten-down high-yielding REIT

Number Cruncher: Six Canadian stocks poised to do well during Santa Claus rally

Number Cruncher: Which of these top 10 Canadian biotech stocks are undervalued?

Others (for everyone)

Funds flock to base metals, but will they stay?

Globe Advisor

Inflation debate looms large over U.S. market outlook

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Ask Globe Investor

Question: To take advantage of lower stock prices that may occur because of the tax-loss selling season, I would like to purchase a stock in my tax-free savings account on Dec. 30 or Dec. 31. Then, on Jan. 1, I would make my annual TFSA contribution of $6,000 to pay for the trade in time for the settlement date, two business days after the purchase. Is this possible?

Answer: I doubt your broker will let you buy a stock before there is sufficient cash in your TFSA. But there’s an easy workaround: Purchase the stock in your non-registered account now. Then, after Jan. 1, call your broker and contribute the stock in-kind to your TFSA. The fair market value of the shares at the time of the transfer will be your TFSA contribution. Be aware, however, that if you buy $6,000 worth of shares they could appreciate and exceed your TFSA limit by the time you transfer them. So consider buying less than $6,000 of stock. Alternatively, you could create additional TFSA contribution room for 2021 by withdrawing some cash from your TFSA in December. The value of the withdrawal will be added to your contribution room as of Jan. 1. So, for example, if you withdraw $500 in cash now, you will be able to make an in-kind contribution of up to $6,500 in shares as of Jan. 1. (This assumes you have maxed out your TFSA contributions in previous years and have no additional TFSA room.)

--John Heinzl

What’s up in the days ahead

Jennifer Dowty checks in with Kurt Reiman, BlackRock’s senior strategist for North America, on his market outlook for 2021.

Click here to see the Globe Investor earnings and economic news calendar.

More Globe Investor coverage

For more Globe Investor stories, follow us on Twitter @globeinvestor

You may also be interested in our Market Update or Carrick on Money newsletters. Explore them on our newsletter signup page.

Compiled by Globe Investor Staff

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