Equity analysts at Laurentian Bank Securities are taking a “more conservative approach” toward Canadian equities heading into 2023, citing “the backdrop of persistent inflation, talk of further interest rate hikes, and the ongoing debate around a potential recession.”
In a research report released Wednesday, the firm released their “Preferred Picks” for 2023, a group of six stocks deemed their best investment ideas for the year ahead based on “sound business opportunities, healthy balance sheets and cash flow generation, and positive organic growth/net asset value.”
Laurentian’s picks for 2022 have resulted in a loss of 41 per cent thus far on an equal-weighted basis, underperforming the TSX Composite Index by 34.2 per cent and the TSX Small Cap Index by 23.1 per cent. They attributed the underperformance to “persistent inflation-fighting interest rate hikes from the Federal Reserve that dampened the performance of Mining, Real Estate and Technology stocks, along with the lack of Energy sector exposure (18 per cent of TSX Composite) which had a strong performance of 48 per cent year-to-date.”
“Our top picks for 2022 were Héroux-Devtek Inc. (HRX-T), Sylogist Ltd. (SYZ-T), Pure Gold Mining Inc. (PGM-V), Major Drilling Group International Inc. (MDI-T), Galway Metals Inc. (GWM-V), WSP Global Inc. (WSP-T), Boardwalk REIT (BEI.UN-T), Northwest Healthcare Properties REIT (NWH.UN-T) and Pet Valu Holdings Ltd. (PET-T),” said Cameron Baker, Laurentian’s Head of Equities. “Among these, Major Drilling Group International Inc., one of the world’s largest drilling services companies, generated the highest return (YTD total return of 20.5 per cent), mainly due to continued strong demand and pricing for specialized drilling services.”
The firm’s picks for the next year by coverage are:
Exchange Income Corp. (EIF-T) with a “buy” rating and $58 target. The average is $61.18.
Analyst Jonathan Lamers: “Exchange is seeing positive momentum across both its Manufacturing and Aerospace & Aviation segments. In Manufacturing, recently acquired Northern Mat is exceeding expectations, benefitting from strong industry rental rates related to major pipeline and electrical infrastructure projects and tight industry supply. In addition, Exchange’s northern airlines and R1 aircraft parts supply businesses are set to continue to benefit from recovering passenger demand. The company has a strong track record with acquisitions, is actively evaluating opportunities, and has balance sheet capacity with net debt / EBITDA 1.8 times pro-forma completed acquisitions. The stock is inexpensive, trading at 6.4 times EV/EBITDA (2023), versus comparable operating businesses at an average 7.6 times.”
Calian Group Ltd. (CGY-T) with a “buy” rating and $80 target. The average is $80.75.
Analyst Nick Agostino: “With ongoing debate around a potential (earnings) recession in 2023, we elect to take a more conservative approach with our Preferred Pick for the new year by picking CGY. During this uncertain economic time, the company offers many positive investment traits including: 1) diverse topline exposure to Advanced Technologies (26 per cent of total F2022 sales), Health (29 per cent), Learning (16 per cent) and ITCS (30 per cent); 2) exposure to growing end markets with favourable secular trends such as healthcare and cybersecurity; 3) a steady annual healthy balance of organic and acquired growth; 4) a long-standing client base including sizeable exposure to the government vertical (a positive during challenging economic times); 5) steady corporate EBITDA margins, at 11.3 per cent in F2022; 6) a long history of profitability and positive FCF generation; 7) a strong backlog of $1.3-billion; 8) a healthy balance sheet; and 9) a nominal dividend yield.”
Wesdome Gold Mines Ltd. (WDO-T) with a “buy” rating and $13 target. The average is $12.38.
Analyst Barry Allan: “Wesdome have two high-grade gold mines to develop up to full capacity in 2023. In doing so, steadily improving quarterly performance is forecasted, allowing the company to pay down short-term debt and refocus on in-mine exploration. Both mines have drill intercepts that suggest additional high-grade areas of mineralization remain to be fully explored. 2023 should be a record year in terms of production and cash flow generation.”
Major Drilling Group International Inc. (MDI-T) with a “buy” rating and $17.50 target. The average is $16.30.
Analyst Ryan Hanley: “We believe that the company remains well positioned to take advantage of growing levels of demand for drilling services given its experienced team, strong balance sheet, and global fleet consisting of 603 drill rigs. Additionally, we believe that MDI offers investors exposure to the mining sector without having to take on single company, single asset, or exploration risk.”
Vox Royalty Corp. (VOX-X) with a “buy” rating and $6.25 target. The average is $6.
Analyst Jacques Wortman: “As we potentially head into a global recession in 2023, we believe that VOX offers investors looking for exposure to commodities a unique and diversified investment opportunity. In the last three years, VOX has acquired 62 royalties, including seven 7 royalties that we believe will generate US$13.6-million in revenue in 2023 (exposure primarily to iron ore and gold). VOX announced a new dividend policy in Q3/22 (1.5-per-cent yield currently).”
Atrium Mortgage Investment Corp. (AI-T) with a “buy” rating and $12.50 target. The average is $13.18.
Analyst Frederic Blondeau: “Atrium is a mortgage lender, essentially benefitting from the fragmentation of Canada’s lending environment. AI finances residential houses, small multifamily residential properties comprised of six or fewer units, residential apartment buildings, and mixed-use residential apartments; store-front properties, commercial properties; residential and commercial land and development sites; construction projects; and bridge financing for residential and commercial real estate. Given its high-quality portfolio and attractive dividend yield, we expect AI to outperform during the current volatile interest rate environment.
“H1/22 market conditions resulted in an unusually high number of new loans and repayments. Management expects the slowdown in repayments to continue over the next several quarters. The MIC has seen lending opportunities, essentially because of flight to quality, while major banks have tightened their credit standards. The MIC is well-positioned to be able to take advantage of such context and gain market share of markets where institutional lenders used to dominate.”
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