Skip to main content

When it comes to natural resources, the Canadian market is still home to some of the continent’s top stock picks, according to Barclays.

While the oil patch is still operating under mandatory production curtailments, and there is no resolution in sight to the pipeline dilemma, the Canadian energy sector is undoubtedly in a much better place than it was a few months ago.

The pipeline bottleneck has eased and the discount on Canadian crude has gone back to normal levels.

Story continues below advertisement

Valuations, on the other hand, are stuck in the doldrums. Cenovus Energy Inc.’s stock, for example, trades at about a 40-per-cent discount to net asset value, Barclays analyst Paul Cheng said in a report.

“We think investors’ risk-reward view on Cenovus continues to be overly skewed to the downside,” Mr. Cheng wrote.

That’s one reason Mr. Cheng named Cenovus as the top pick among North American integrated oil companies.

It ranks among Barclays’s best investment ideas as chosen by the bank’s individual equity analysts. “The goal … is to curate the most compelling large-cap single stock ideas with superior alpha generation potential on a sector-by-sector basis," the report said.

True to form, Canada also claimed the bank’s top mining pick, with Teck Resources Ltd. The only other Canadian name on the list is Manulife Financial Corp., as the top-ranked Canadian financial-services stock. Both Teck and Manulife are carried over from Barclays’s previous picks, while Cenovus is a new addition.

We look at each of Barclays’s Canadian picks, stock by stock.

Cenovus

Most of the past five years have been unkind to Cenovus shareholders. The company suffered alongside its sector peers from a global oil glut and downturn in energy prices, which was compounded domestically by the lack of pipeline capacity that sent Canadian crude prices down to as low as US$13.46 a barrel last November.

Story continues below advertisement

There were also company-specific problems. The market was no fan of the debt the company incurred in a $17.7-billion deal to purchase assets from ConocoPhillips Co.

Cenovus management subsequently made an enormous bet on oil prices that backfired badly. A hedging program designed to protect against falling prices saw the company committed to selling most of its oil well below market value. A $469-million hedging loss was realized in early 2018.

Conditions have improved on all fronts.

“With the Canadian macro environment taking a complete 180-degree turn, and steep hedging losses in the rearview mirror, we think Cenovus’s cash flow outlook has improved significantly,” Mr. Cheng said.

“Even assuming Western Canadian Select crude oil differentials re-widen …, we still expect Cenovus to generate meaningful free cash flow in the years to come.”

Teck Resources

With base-metals prices in a downtrend for most of the past decade, the mining sector has been forced to cut costs and reduce debt.

Story continues below advertisement

Teck is no exception, according to Barclays analyst Matthew Murphy. Despite a relatively clean balance sheet and better free cash generation, Teck shares trade at a discount to peers across several different valuation metrics, Mr. Murphy said.

The company’s free cash predominantly flows from its metallurgical coal business, which is currently benefiting from elevated prices. Meanwhile, a partnership deal to expand Teck’s Chilean copper mine is nearing completion.

“With a significantly de-levered and investment grade balance sheet, the company is well positioned to advance its key copper growth project while at the same time returning cash to shareholders,” Mr. Murphy said.

Manulife

Life insurers have been waiting a long time for higher interest rates.

With the return on invested premiums forming a key profit driver for insurance companies, the low-rate environment has seen their stocks underperform for years.

Elevated bond yields, at least compared with recent years, are lifting the group’s prospects.

Story continues below advertisement

“Relative to its peers, Manulife’s earnings offer the most upside potential in a rising interest rate and equity market environment,” Barclays analyst John Aiken said, adding that the company’s stock trades well below its historical peaks in valuation.

“We expect the lift in bond yields, the return of investment gains, and new cost-saving initiatives to produce double-digit core earnings growth for 2019.”

Barclay's Americas top picks

Sector CompanyTickerMarket Cap ($Mil)Share Price ($) (03/06/19)Price Target ($)12M Fwd Div. Yield (%)
Basic Industries
North America Metals & MiningTeck Resources Ltd.TECK-B-T17,14030.0342.000.7
U.S. ChemicalsChemoursCC-N6,27137.5448.000.3
U.S. Paper & PackagingCrown Holdings Inc.CCK-N7,51355.5170.000.0
Consumer
Americas AgribusinessTyson Foods Inc.TSN-N23,20963.5473.003.0
Latin America ConsumerWal-Mart de MexicoWALMEX-MX877,26150.2456.003.5
U.S. CHPC & BeveragesCoca-Cola European PartnersCCEP-N22,73947.8851.002.3
Energy
Americas Integrated OilCenovus Energy Inc.CVE-T13,81111.2416.001.8
North America Oilfield Svcs & Equip.Baker HughesBHGE-N27,26826.3131.002.7
U.S. Diversified Natural GasCheniere EnergyLNG-N16,87665.5678.000.0
U.S. Independent RefinersMarathon Petroleum Corp.MPC-N40,37059.93124.002.3
U.S. MLPsEnterprise Products PartnersEPD-N60,87127.8633.006.3
Financial Services
Canadian Financial ServicesManulife FinancialMFC-T44,01622.4827.004.4
Latin America Financial ServicesBanorteGFNORTEO-MX298,063103.37145.005.4
U.S. Consumer FinanceEssent GroupESNT-N4,28743.6252.000.0
U.S. Insurance/Non-LifeProgressive Corp.PGR-N41,98871.9181.003.6
U.S. Large-Cap BanksJPMorgan Chase & Co.JPM-N339,604103.72140.001.8
U.S. Mid-Cap BanksEast West BancorpEWBC-Q7,73253.2772.001.7
U.S. REITsDigital Realty Trust Inc.DLR-N23,393112.56137.003.9
Health care
U.S. BiopharmaceuticalsAlexion PharmaceuticalsALXN-Q29,301131.12175.000.0
U.S. Health Care ServicesHumanaHUM-N36,888272.1351.000.5
U.S. Life Science Tools & DiagnosticsThermo Fisher Scientific Inc.TMO-N100,246251.24295.000.2
North America TransportationFedEx Corp.FDX-N46,513178.18235.001.5
U.S. Aerospace & DefenseAllegheny Technologies Inc.ATI-N3,51827.9939.000.0
U.S. Autos & Auto PartsAptiv PLCAPTV-N21,44282.4690.001.4
U.S. Homebuilding & Building ProductsOwens Corning Inc.OC-N5,25347.9457.001.7
U.S. Machinery & ConstructionCNH IndustrialCNHI-N14,84610.8113.006.0
U.S. Multi-IndustryHoneywell International Inc.HON-N112,090153.74170.001.9
Power & Utilities
Mexico InfrastructureGrupo Aeroportuario del PacificoGAPB-MX98,147174.95205.003.5
Retail
U.S. LeisureNorwegian Cruise Line HoldingsNCLH-N12,00155.1274.000.0
U.S. RestaurantsMcDonald's Corp.MCD-N139,311182.03208.002.5
U.S. Retail Broadlines/HardlinesFoot LockerFL-N7,12963.1585.000.4
Technology
U.S. Payments, Processors & IT ServicesPayPal Inc.PYPL-Q113,16896.46111.000.0
U.S. SemiconductorsMarvell Technology Group Ltd.MRVL-Q12,88519.623.001.2
U.S. SoftwareSalesforce.com Inc.CRM-N119,944156.79180.000.0

Source: Refinitiv and Barclays Research; Market cap and share price are in the currency of the related exchange.

Report an error Editorial code of conduct
Tickers mentioned in this story
Unchecking box will stop auto data updates
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed.

Read our community guidelines here

Discussion loading ...

Cannabis pro newsletter
To view this site properly, enable cookies in your browser. Read our privacy policy to learn more.
How to enable cookies