BMO’s equity research department recently released its top Canadian stock picks for 2019.
Making the list are 24 stocks across four categories: growth stocks, growth at a reasonable price (GARP) stocks, value stocks and stocks with potential catalysts.
Here are the investment rationales for each of the recommendations.
Three growth stock recommendations
Boyd Group Income Fund (BYD.UN-T)
Winnipeg-based Boyd Group operates a network of non-franchised collision repair centres across North America, mostly in the U.S., under banners such as Boyd Autobody & Glass, Gerber Collision & Glass and Assured Automotive. Boyd also operates auto glass shops across 34 U.S. states under banners such as Glass America, Auto Glass Service, and Auto Glass Authority. Over 90 per cent of its revenue is generated through insurance carriers such as State Farm Insurance, Allstate, and Geico.
Special situations analyst Jonathan Lamers has an “outperform” recommendation and target price of $135 based on a forward EV/EBITDA [enterprise value to earnings before interest, taxes, depreciation and amortization] multiple of 14 times.
Mr. Lamers notes, “We expect annual earnings growth in the mid-teens to 20 per cent range from self-financed, small acquisitions and modest same-store sales growth.” He anticipates the company will also benefit from a lower Canadian dollar relative to the greenback. The majority of Boyd’s revenue is from the U.S.
Fortuna Silver Mines Inc. (FVI-T)
Vancouver-based Fortuna is a silver producer with its Caylloma silver mine in southern Peru, its San Jose silver-gold mine in Mexico and the Lindero gold project in Argentina. The company is advancing its Lindero gold project with commercial production expected to begin later this year, at the end of the third-quarter.
Analyst Ryan Thompson has an “outperform” recommendation and target price of $7.75. The analyst suggests that the stock is trading, “At one of the most compelling valuation multiples in the group on 2020 cash flow estimates.”
Mr. Thompson remarks, “Construction should be completed without the need to issue equity given the company’s strong balance sheet and available room on the corporate revolver.”
Tricon Capital Group Inc. (TCN-T)
Toronto-based Tricon has a portfolio of assets invested in the North American residential real estate market.
Special situations analyst Stephen MacLeod has an “outperform” recommendation and target price of $13.50 based on a sum-of-the-parts [SOTP] calculation. He believes the company may experience further AUM [assets under administration] growth, NOI [net operating income] margin expansion, while the stock is trading at an attractive valuation.
Nine GARP stock recommendations
Badger Daylighting Ltd. (BAD-T)
Calgary-based Badger is the largest provider of non-destructive excavating services in North America. Its systems use water and vacuum technology to remove dirt and debris. The company services industries such as the oil and gas market and utilities.
Analyst Jonathan Lamers has an “outperform” recommendation and target price of $41 based on a forward EV/EBITDA multiple of 8 times his EBITDA estimate for the 12-month period ending in the third quarter of 2020. He sees the high short interest as unjustified and highlights that the company’s financial results have “exceeded expectations for the past six quarters.”
He maintains “there could be upside to the valuation if results continue to demonstrate margin stability or improvement.”
CGI Group Inc. (GIB.A-T)
Montreal-based CGI Group is a leading global provider of consulting services, technological systems and solutions, and technology servicing.
Technology analyst Thanos Moschopoulos has an “outperform” recommendation and $94 target price based on a price-to-earnings multiple of 20 times his 2019 estimate. Key drivers that may lift the stock price include, organic and acquisition growth as well as share repurchases.
Fiera Capital Corp. (FSZ-T)
Montreal-based Fiera Capital is Canada’s third largest independent publicly-traded asset management firm with over $143-billion in AUM [assets under management].
Analyst Nik Priebe has an “outperform” recommendation and target price of $14. The analyst notes that the stock has an attractive yield of over 6 per cent and conservative payout ratio.
He remarks, “Our constructive outlook on shares of Fiera Capital is underpinned by positive momentum in net flows, solid investment performance and stable management fees.”
Kelt Exploration Ltd. (KEL-T)
Calgary-based Kelt Exploration is an oil and gas producer with operations principally in west central Alberta and northeastern British Columbia. Management and directors own 19 per cent of the shares outstanding, aligning their interests with shareholders.
Analyst Ray Kwan has an “outperform” recommendation and target price of $7, forecasting production per share growth of over 20 per cent next year.
He states, “The company’s strong balance sheet and diversified natural gas risk strategy offer protection in a period of wide differentials and weak oil pricing in western Canada.”
Manulife Financial Corp. (MFC-T)
Insurance analyst Tom MacKinnon has an “outperform” recommendation and target price of $31. He anticipates double-digit core earnings per share growth, potentially between 10 per cent and 12 per cent, with the company benefiting from growth from its operations in Asia.
His core earnings per share estimates are $2.78 for 2018, up from $2.22 in the prior year, rising to $2.90 in 2019.
Bank of Nova Scotia (BNS-T)
Bank analyst Sohrab Movahedi has an “outperform” recommendation and target price of $85. He argues, “The benefits of its roughly $7-billion of capital deployed last year are expected to start accruing in 2019, positioning it well to deliver peer-leading EPS [earnings per share] growth.”
The analyst is forecasting earnings per share of $7.41 in fiscal 2019, up from $7.11 reported in fiscal 2018, and $7.91 in fiscal 2020.
ShawCor Ltd. (SCL-T)
Toronto-based ShawCor is an energy services company.
Analyst Michael Mazar has an “outperform” recommendation and target price of $32. The analyst anticipates, “Additional backlog growth as 2019 progresses, particularly though larger contract award wins, which should act as catalysts.”
Suncor Energy Inc. (SU-T)
Analyst Randy Ollenberger has an “outperform” recommendation and target price of $58 on this large-cap energy stock.
He think investment in shares of Suncor allows investors “the opportunity to participate in low risk per share growth in production, cash flow and dividends.” He adds, “The company is uniquely positioned relative to its peers because of its very low sustaining capital ratio, which helps to insulate the company from commodity price volatility.”
Toromont Industries Ltd. (TIH-T)
Ontario-based Toromont has two core business segments: The Equipment Group with Caterpillar dealerships, and CIMCO, a provider of refrigeration systems.
Industrial Products analyst Devin Dodge has an “outperform” recommendation and target price of $66 based on a forward price-to-earnings multiple of 18 times.
He argues, “The outlook for construction spending in the company’s core markets remains favourable, while mining activities in its territories are primarily focused on gold, which is less sensitive to economic growth.”
Nine value stock recommendations
Air Canada (AC-T)
Transportation analyst Fadi Chamoun has an “outperform” recommendation and target price of $42. He highlights three potential near-term catalysts, “expected strong fourth quarter 2018 results, the company’s investor day on Feb. 28, and increased visibility into the impact of insourcing the Aeroplan loyalty program.”
Agnico Eagle Mines Ltd. (AEM-T)
Toronto-based Agnico Eagle is a senior gold producer with mining operations in Canada, Finland and Mexico. The company is also engaged in exploration and development activity in the U.S. and Sweden.
Gold analyst Andrew Kaip has an “outperform” recommendation and target price of $46, reflecting a price-to-cash flow multiple of 14 times his 2019 estimate.
The analyst’s strong conviction is based on the following expectations: “Agnico Eagle is expected to benefit from solid production growth and an improving free cash flow profile. We expect this to translate into an improving balance sheet, the potential for increased dividends and the company setting the stage for its next leg of growth.”
CCL Industries Inc. (CCL.B-T)
Toronto-based CCL Industries is the largest label company in the world with operations. CCL provides services to large multinational customers through its four core reporting business segments: CCL, Avery, Checkpoint, and Innovia.
Analyst Stephen MacLeod has an “outperform” recommendation and target price of $66.
Mr. MacLeod anticipated each of the four business segments will deliver solid performance noting, “In the ‘core’ CCL segment, fundamentals remain positive,” “We see the Avery segment as having the biggest opportunity for margin expansion,” “In Checkpoint, RFID presents upside,” and “In Innovia, we see long-term margin potential in the mid-teens”.
Encana Corp. (ECA-T)
Alberta-based Encana is an oil and gas producer with operating in four attractive basins in North America: Montney, Duvernay, Permian and Eagle Ford.
Analyst Randy Ollenberger has an “outperform” recommendation and target price of $11.
His investment thesis is: “Encana holds a strong portfolio of assets that are located in the top resource plays in North American. We believe that that company is well positioned to exceed investor expectations regarding the operating and cash generation upside associated with the pending acquisition of Newfield Exploration.”
BSR Real Estate Investment Trust (HOM.UN-T)
This small-cap REIT with a market capitalization of just over $300-million has an “outperform” recommendation by analyst Troy MacLean. He has a target price of $11.25. The REIT owns a portfolio of 50 multi-family residential properties, or over 10,000 apartment suites, in the U.S. Sunbelt region.
The analyst remarks, “Given the strong property fundamentals in most of the REIT’s markets and its significant and ongoing renovation program, we expect its strong organic growth will continue, which should be a catalyst for the unit price.”
IAMGOLD Corp. (IMG-T)
Toronto-based IAMGOLD is a mid-tier gold producer with four operating mines located in North and South America as well as Africa.
Analyst Andrew Kaip has an “outperform” recommendation and target price of $6. The analyst views the stock’s valuation as attractive with the share price trading at a discount relative to its peers. In addition, Mr. Kaip notes that the stock is highly levered to the price of gold. He suggests, “IAMGOLD has further potential to re-rate, in our view, driven by execution at Westwood and the integration of Saramacca at Rosebel.”
Loblaw Companies Ltd. (L-T)
Consumer analyst Peter Sklar has an “outperform” recommendation and $70 target price. He notes three key drivers: inflation, favourable year-over-year comparisons (previously reported a drag on earnings from the increase in minimum wage and generic drug reforms), as well as shareholder value created from the sale of its 61.6 per cent interest in Choice Properties REIT that was completed several months ago.
Pason Systems (PSI-T)
Calgary-based Pason provides data management systems for oil drilling rigs. The company offers investors a yield of over 3 per cent with a dividend that could be hiked according to the analyst.
Oil and Gas analyst Michael Mazar has an “outperform” recommendation and target price of $27. He notes the company has a strong balance sheet, rising market share and has “industry leading margins.”
Teck Resources Ltd. (TECK.B-T)
Vancouver-based Teck is a diversified mining company producing resources including copper, coal and zinc.
Metals and mining analyst Jackie Przybylowski has an “outperform” recommendation and target price of $48. The analyst anticipates seeing "investment funds flow in to Teck as sentiment toward copper and commodity markets improve in 2019.”
Three stocks with potential catalysts
B2Gold Corp. (BTO-T)
Vancouver-based B2Gold is a gold producer with five operating mines located in Mali, Namibia, the Philippines and two in Nicaragua.
Precious metals analyst Brian Quast has an ‘outperform’ recommendation and target price of $5.
The company has a potential near-term catalyst, according to Mr. Quast.
“We expect positive movement on the stock following the release of a new life-of-mine plan for Fekola at the end of the first quarter 2019," he said.
Enbridge Inc. (ENB-T)
Alberta-based Enbridge is an energy infrastructure company.
Analyst Ben Pham has an “outperform” recommendation and $59 target price. Mr. Pham highlights the company’s “industry-leading growth rate,” compelling valuation, attractive dividend yield of nearly 6 per cent and pristine balance sheet.
Catalysts include “start of construction of line three replacement project,” a “10 per cent dividend increase late in year” and guidance for the full year.
Wesdome Gold Mines Ltd. (WDO-T)
Wesdome is a gold producer with three projects, two in Ontario and one in Quebec.
Analyst Andrew Mikitchook has an “outperform” recommendation and target price of $4.75.
The analyst sees upside as “exploration successes at Wesdome’s two main assets leave it in a position to significantly increase production by providing visibility on a restart of its Kiena mine currently on care and maintenance.” He adds, “With the company expected to deliver visibility on this potential to the market in 2019.”