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In 2020, many short-term investors and traders made very attractive gains in the stock market by following the crowd and investing in popular themes.

In certain areas of the market, we saw just about all boats rise with the tide. For example, numerous stay-at-home stocks rallied with buyers taking little notice of valuations.

In the near-term, this herd mentality is likely to continue. Buyers will chase short-term trends.

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However, for longer-term investors, this is a stock pickers market where companies with strong fundamentals are likely to outperform in the long-run.

For long-term investors, a recommended first step in managing one’s portfolio is sector allocation. Honing in on a sector is the first step because you can select an exceptional company run by a strong management team, but it could be a poor stock in a sector facing challenges, and, without buyers, the stock isn’t going up. After sector allocation comes research, or company due diligence, which may involve fundamental analysis, quantitative analysis and technical analysis.

Based on this investment strategy of sector then stock selection, over the next few weeks, I will be providing readers with a list of companies in the S&P/TSX composite index grouped by sector and ranked according to their expected price returns (excluding dividend or distribution income).

Kicking off this series are stocks in the financials sector, the largest sector, making up approximately one-third of the S&P/TSX composite index.

Interestingly, three of the ‘Big 5’ bank stocks have muted price returns, less than 3 per cent. The outliers are CIBC and Royal Bank, both with 8 per cent price returns (not including dividends) forecast.

The stocks with the highest expected price return are Element Fleet Management Corp. (EFN-T) and Brookfield Asset Management Inc. (BAM-A-T) both with anticipated price gains of 26 per cent.

Expected top performers

Toronto-based Element is a leading fleet management company with operations in North America, Mexico, Australia and New Zealand. Its fleet of vehicles includes cars and trucks, as well as equipment such has forklifts and scissor lifts. The company has a diversified client base serving blue-chip customers across different industries and geographies, including Amazon.

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The company has nine buy recommendations and one sell call (from Jeff Fenwick at Cormark Securities). According to Refinitiv, analysts anticipate earnings will come in at 83 cents per share in fiscal 2020 and rise 11 per cent to 92 cents in fiscal 2021.

Toronto-based Brookfield is an asset management firm operating in more than 30 countries with approximately US$575-billion in assets under management. The company has a diversified portfolio of assets focused in real estate, renewable power, infrastructure, private equity and credit.

The company has 11 buy recommendations and two neutral calls. According to Refinitiv, the consensus FFO (funds from operations) per share estimates are US$2.65 in fiscal 2020, US$2.66 in 2021, jumping to US$3.07 in 2022.

The remaining 24 stocks in the S&P/TSX financials sector are ranked by expected price return in the table below.

Keep in mind that once companies report their quarterly earnings results in the weeks ahead, target prices could be adjusted meaningfully depending on the reported earnings, earnings outlook. In addition, some analysts may introduce their 2022 earnings forecasts and adjusting their target prices and multiples used to calculate their target prices to reflect their 2022 expectations.

Company Jan. 25 close Consensus target Potential return
EFN-TElement Fleet Management Corp. $12.56 $15.88 26%
BAM-A-TBrookfield Asset Management Inc $49.15 $61.76 26%
ONEX-TOnex Corp $70.09 $87.10 24%
CIX-TCI Financial Corp $16.50 $20.28 23%
IFC-TIntact Financial Corp $145.06 $176.00 21%
SII-T Sprott Inc. $37.44 $43.75 17%
X-TTMX Group Ltd $124.01 $143.86 16%
IAG-TiA Financial Corporation Inc. $58.48 $67.38 15%
FFH-TFairfax Financial Holdings Ltd $473.01 $538.88 14%
ECN-TECN Capital Corp. $7.04 $7.90 12%
HCG-THome Capital Group Inc $30.54 $33.57 10%
MFC-TManulife Financial Corp $23.96 $26.26 10%
GWO-TGreat-West Lifeco Inc $30.19 $33.00 9%
CWB-TCanadian Western Bank $29.85 $32.35 8%
CM-TCIBC $110.97 $120.16 8%
SLF-TSun Life Financial Inc $60.47 $65.38 8%
RY-TRoyal Bank of Canada $106.29 $114.41 8%
NA-TNational Bank of Canada $73.51 $77.88 6%
EQB-TEquitable Group Inc. $109.00 $114.00 5%
IGM-TIGM Financial Inc $34.87 $36.39 4%
POW-TPower Corp of Canada $30.92 $32.25 4%
BMO-TBank of Montreal $98.14 $101.30 3%
LB-TLaurentian Bank of Canada $31.48 $32.30 3%
TD-TToronto-Dominion Bank $73.51 $75.22 2%
BNS-TBank of Nova Scotia $69.94 $69.80 0%
MIC-TGenworth MI Canada Inc $43.66 $43.50 0%

Source: Bloomberg

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