Andrew Pyle's Top Picks
Andrew Pyle, senior investment advisor and portfolio manager, CIBC Wood Gundy
FOCUS: North American equities
In my opinion, U.S. and European stocks are looking overbought with little incremental positive news on the horizon, now that the U.S. banking sector appears to have stabilized and a debt ceiling deal has been signed. In fact, the negative view of stocks is symmetrical. To get the environment necessary for interest rates to be reduced by year-end, we will need to see a contraction in economic output in the coming months. The damage that would do to demand and revenues is not priced in. On the other hand, if we don’t get that pullback in activity then, by default, demand would be buoyant, which would keep inflation higher than the currently predicted trajectory. That means a likely further tightening by the Bank of Canada and U.S. Federal Reserve, which again would work against stocks.
The S&P 500 is less than 40 points from testing its intraday high from last August (4,325) and that level not only capped the summer advance but saw the massive reversal that ultimately placed us at the low for the year. I don’t anticipate another 20 per cent setback this time around but see 3,800 as being highly likely. I am favouring Canadian equities going into the summer and expect a recovery in banks and energy to offset sympathetic weakness in the broader market. The large gap in performance between the S&P/TSX Composite Index against almost every major developed index should close.
I see challenges in U.S. stocks in the coming weeks for other reasons. The rebound in Treasury issuance is not only going to subtract liquidity in general but if there is a large take-up in foreign buying of this new wave, that could send the U.S. dollar higher. This typically acts as a headwind. Any upward pressure on bond yields from this issuance and/or adjustment to central bank rate expectations should be viewed as a buying opportunity.
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Rental demand is going to remain strong in Canada as population growth exceeds previous estimates. The positive net migration into Florida is also going to support demand. We have been picking away at TCN over the last several weeks and think the street is underestimating the upside, which I would put up in the $13 area.
We have held NTR for a while, but had cut exposure last year. With the bounce off $70, we are looking to add back. Fundamentals are still challenging, with fertilizer demand still impacted by the surge in prices back in 2022, but we should see that stabilize. Urea and potash prices also appear to be bottoming out.
The stock has been disproportionately hit by the U.S. banking mini-crisis, with a loss of 11 per cent since the start of the year, versus a 4.3 per cent drop for the group as a whole. Even though TD missed on second-quarter estimates, it stands out in terms of having one of the better performances on credit losses than the peer group. The P/E of 9.11 and estimate P/E of 9.5 are below long-term averages. The bank will be holding its investor day this Thursday.
PAST PICKS: August 8, 2022
Canadian Apartment REIT (CAR.UN TSX)
- Then: $47.77
- Now: $50.36
- Return: 5%
- Total Return: 8%
Teck Resources (TECK.B TSX)
- Then: $39.73
- Now: $56.51
- Return: 42%
- Total Return: 45%
Methanex (MX TSX)
- Then: $47.14
- Now: $59.82
- Return: 27%
- Total Return: 29%
Total Return Average: 27%