Raymond James equity analysts revealed their “Canadian Analysts’ 2019 Best Picks” list in a research report released on Thursday.
The annual list is intended to be a “focused, static” selection of stocks with the objective of producing above-average price appreciation over the next year.
“The list’s long-term record is good; delivering an average holding period return of 17.7 per cent over the past 10 years, outpacing the 12.7-per-cent return for the S&P/TSX Small Cap Index,” said Daryl Swetlishoff, the firm’s head of research. “However, 2018 has been a more challenging year with the list returning negative 14.7 per cent, vs. the a negative 13.5-per-cent return of the Index. Only 8 of 16 stocks are outpacing the index since the list’s pricing on December 7, 2017 including InterRent REIT (51.8 per cent), Canadian Pacific Railway (13.0 per cent) and B2Gold Corp. (7.2 per cent).”
This year’s group is comprised of 19 stocks from 14 different industrial sectors.
Mr. Swetlishoff explained: “In keeping with historic list selections, company fundamentals, growth prospects, downside risks, and liquidity are taken into account, along with the analyst’s view of management’s ability to execute on investor expectations. This process has typically resulted in reasonably balanced lists; although, in keeping with our Canadian coverage footprint, energy and natural resource stocks tend to have a higher weighting.”
Their selections are:
“While shares of AQN have held up well year-to-date (up 3 per cent vs. the TSX down 9 per cent) we highlight that, at below 16.0 times, the stock continues to trade at a material discount to NA peers with comparable growth that trade in the 18-22 times price-to-earnings range,” said analyst David Quezada. “We believe interest in AQN south of the border is increasing and reiterate our view of this being key to AQN closing the valuation gap versus U.S. peers.”
Allied Properties REIT (AP-UN-T), “outperform” rating, $48 target (consensus: $47.75)
“Allied Properties REIT is benefiting from very strong job creation within its focus TAMI (tech/advertising/media/IT) sectors, as well as a strong general office environment in Toronto, Vancouver and Montreal,” said analyst Ken Avalos. “In 2017, Toronto led all of North America in TAMI job creation, with +30k jobs created, beating all of Silicon Valley. Meanwhile, Ottawa (13th), Montreal (14th) and Vancouver (25th) all enjoyed their strongest ever positions on the list. 2018 is expected to see similar job growth across all their markets. As a result, the REIT should benefit from steady, mid-to-high single-digit SPNOI [same property net operating income] growth and value creation via its development pipeline. The company also continues to create embedded value on the balance sheet via strategic acquisitions and repositioning existing properties to exploit or capture further density.”
Arc Resources Ltd. (ARX-T), “strong buy” rating, $18 target (consensus: $15.57)
“With a volatile energy market, we are of the view that balance sheet strength and return on capital are ultimately two of the largest drivers behind long-term share price performance," said analyst Jeremy McCrea. “Ideally, the company also has above average growth and a reasonable valuation but rarely does an investor have all four of these attributes work in their favor. Given the current sentiment with E&P names today, we think ARC comes very close. It’s track record of valuation creation with one of the strongest balance sheets in its peer group already should make it a core position. With liquids production now expected to grow 15 per cent over the next few years as well now (combined with its 7-per-cent dividend yield), on a risk/reward basis, we are making ARX our top pick for 2019.”
Boyd Group Income Fund (BYD-UN-T), “outperform” rating, $125 target (consensus: $132.19)
“Boyd is firmly positioned as North America’s second largest collision repair enterprise, boasting a network of 560 locations across 25 states and 5 Canadian provinces,” said analyst Steve Hansen. “Backed by one of the industry’s most reputable management teams, BYD has assembled a superb track record of growth and ultimately, shareholder value creation, with BYD units posting a 5 year total return of 308 per cent (vs. S&P TSX Composite total return: 30 per cent) ... We expect this track record of growth and above-average returns to continue.”
Element Fleet Management Corp. (EFN-T), “strong buy” rating, $10.50 target (consensus: $9.15)
“The mid-point of management’s guidance range under its profitability improvement plan implies a two-year Adjusted EPS CAGR [compound annual growth rate] of 13 per cent,” said analyst Brenna Phelan. “Importantly,the majority of the profitability improvement is driven by operating cost reductions - i.e., top-line growth implied in guidance is very modest. Under an economic outlook where revenue growth appears that it may be more challenging to come by, a self-help, operating leverage driven, low-mid teens EPS growth story is a very compelling one, in our view.”
Endeavour Mining Corp. (EDV-T), “outperform” rating, $28 target (consensus: $28.88)
“With Endeavour set to meet its 2018 guidance and deliver growth and attractive free cash flow in 2019, we believe it is well positioned amongst global intermediate producers given its production profile enhancements, track record of execution, discounted valuation, and deep portfolio of development and exploration properties," said analyst Tara Hassan.
Enerplus Corp. (ERF-T), “strong buy” rating, $20 target (consensus: $20.16)
“Among commodity-based equities, comparisons can be made on the basis of comparative advantages (relative advantages or weaknesses) and competitive advantages (which only exist when return on capital plainly exceeds cost of capital)," said analyst Kurt Molnar. "Our selection of Enerplus is on the basis that we expect they will hold a true competitive advantage versus virtually all their peers in 2019 on the basis of cash on cash return on invested capital.”
Ero Copper Corp. (ERO-T), “outperform” rating, $15 target (consensus: $14.50)
“Ero Copper is a mid-tier copper producer that we believe is poised for significant production and reserve growth, a declining operation cost profile and robust free cash flow generation,” said analyst Farooq Hamed. “ERO operates the Mineracao Caraiba S/A (MCSA) mining complex in Brazil that consists of three mining districts (Pilar, Surubim and Vermelhos) and processing facilities. We believe all three of the mining districts within MCSA complex have potential for reserve growth via exploration while the processing facility at MCSA is currently underutilized representing an opportunity for production growth with minimal additional capital requirements. In addition to its operating assets, ERO owns the Boa Esperanca copper development project also in Brazil representing further copper production upside and diversification opportunity.”
“FNV is a precious metals-focused royalty/streaming company with a diversified, high-quality asset base in favorable jurisdictions," said analyst Brian MacArthur. "Free cash flow is expected to accelerate as Cobre Panama starts producing. In our view, the company also has a strong balance sheet to finance potential future deals and support its dividend, which has increased every year.”
“With the shares under pressure with Chinese pulp pricing, we see this as an excellent entry point for the stock,” said analyst Daryl Swetlishoff. “We expect Mercer to show strong earnings growth and FCF generation as the company realizes benefits from recent acquisitions, supported by tight pulp markets.”
“In F4Q18, OTEX started disclosing organic growth on an annual basis,” said analyst Steven Li. “It was up 2.5 per cent in F2018 at cc. This compares with other acquisition models organic growth rates such as CSU up 3 per cent and DSG up 6 per cent. We believe that the potential for a market re-rate if OTEX can sustain even modest organic growth is substantial.”
Park Lawn Corp. (PLC-T), “strong buy” rating, $30 target (consensus:$29.44)
“Park Lawn is the only public Canadian death care company,” said analyst Johann Rodrigues. "Demand is ever-strengthening due to rapidly aging populations in both Canada and the U.S., yet death care has high barriers to entry and is extremely fragmented. However, for those companies already within the industry, scale is easier to achieve than in other real estate asset classes as deal multiples (5-8 times) have remained more or less the same for the past few years. Other population-driven real estate (apartments, retirement residences and selfstorage) has seen Asian/U.S. capital flow into the space and bid down cap rates (100-150 basis points in 24 months). Even more compelling is the fact that Park Lawn’s two largest competitors are either leveraged to the hilt (Arbor Memorial) or constrained in where they can grow due to trade commission regulations (Service Corp.), allowing Park Lawn to often be the only bidder in certain markets where they have focused on. As such, we expect two-thirds of the company’s growth to come from highly accretive external acquisitions
Pembina Pipeline Corp. (PPL-T), “outperform” rating, $51 target (consensus: $31.92)
“Pembina trades at 10.9 times 2020 EBITDA, matching the peer group average of the same,” said analyst Chris Cox. "Said differently, the market is not paying a premium for the company’s above-average growth and self-funding profile, and we believe that reflects a relative mispricing. Not only that, but the company continues to advance large scale growth opportunities to extend the value chain of its business, with more than $10-billion of potential capital to deploy into the Jordan Cove LNG and PDH/PP project. We believe 2019 could be a pivotal year for both projects, which could provide material upside. With the stock trading in-line with the peer group, we believe investors are paying little, if any, for the upside from these market diversification initiatives, presenting an attractive risk/reward opportunity
Secure Energy Services Inc. (SES-T), “strong buy” rating, $13.50 target (consensus: $11)
“We believe Secure shares at current levels are a rare opportunity for investors to either add to or start new positions in this high-quality specialty service company," said analyst Andrew Bradford. Despite meaningful growth and diversification of cash flow streams, the share price is only 22 per cent above its 2016 basement levels. Since then, SES' run rate EBITDA is up 135 per cent while its share count is up just 3 per cent. Our view is that Secure’s current share price is out of proportion with the potential impact of reduced oilfield activity on its profitability.”
Spin Master Corp. (TOY-T), “outperform” rating, $62 target (consensus: $58.22)
“At current levels, we believe Spin Master is simply too attractively valued given its positioning and growth trajectory,” said analyst Kenric Tyghe. “Spin Master is currently trading at roughly a two turn EV/EBITDA discount against its key peer Hasbro, against which it has historically traded at roughly a 1.7 turn premium. The peer group is trading at roughly a 2.5 turn discount to its 3-year average.”
“Looking ahead over the next few years, we see Suncor’s growth capex shifting increasingly toward low capital-intensity, margin-enhancing initiatives,” said analyst Crhis Cox. “In aggregate, these initiatives should drive $2-billion of incremental cash flow - meaningful growth, even on a business generating $10-billion of operating cash flow currently. However, two key characteristics greatly differentiate this growth vs. other opportunities in the space. First, this growth is largely independent of commodity prices, implying a structural $2-billion improvement across all parts of the commodity cycle - a significant contrast to typical production-driven growth that remains sensitive to the oscillations of commodities; this further strengthens the sustainability of the business. Second, this growth does not come with added capital requirements, implying that cash flow growth will translate to a similar improvement in run-rate free cash flow, extending Suncor’s peer-leading FCF profile.”
Trican Well Service Ltd. (TCW-T), “strong buy” rating, $3 target (consensus: $2.38)
“Despite what can only be described as a dismal outlook for Canadian fracturing over the first half of 2018, we think the market is grossly undervaluing Trican’s hard assets,” said analyst Andrew Bradford. “We don’t envision the immediate catalyst coming from new contracts or improved pricing. Rather, we are concerned the market is pricing Trican below where strategic buyers of pumping assets should find them attractive. For instance, we estimate Trican’s horsepower is priced at just 19 per cent of the implied market values for U.S. fracturing horsepower. We consider this disparity too wide for reasonableness or sustainability. We are mindful that the bulk of Trican’s assets are on wheels, and can consequently move to where they might realize a higher prescribed value.”
WSP Global Inc. (WSP-T), “outperform” rating, $80 target (consensus: $76.09)
“With its dominant position in the global transportation market, geographically diverse operations and dynamic management team, we see WSP Global continuing its steady organic growth streak in 2019,” said analyst Frederic Bastien. “What’s more, the firm can count on a healthy balance sheet and the support of two anchor investors—CDPQ and CPPIB—to further consolidate the pure-play engineering sector for years to come.”
“With multiple clinical readouts from both ZW25 and ZW49 slated for 2019, we believe the company is positioned for a significant market re-rating throughout the year,” said analyst David Nowak.