MARKET OUTLOOK:

After the fourth-best year in the last 25 for Canadian stocks in 2021, our outlook for the Canadian stock market remains favorable but tempered from recent returns.  

We expected ongoing above trend real growth in 2022 (consensus forecasts call for 4.1 per cent real GDP growth) and by extension, above trend growth in corporate profits (consensus forecasts call for 28 per cent growth in S&P/TSX index earnings), all while valuations remain undemanding, with the S&P/TSX index trading below 16x 2022 earnings forecasts and yielding 2.7 per cent.  

Nevertheless, with inflation expected to remain uncomfortably high for much of the year before fading back towards central bank targets, we favour price makers over price takers, we favour companies that can substitute capital and productivity-enhancing technology for labour and we favour companies whose products and services address the mass market over those that address mainly the affluent.

TOP PICKS:

TFI International (TFII TSX)
Last bought in January 2022 for $131.19 
TFI International is one of North America’s largest trucking companies, specializing in truckload, less-than-truckload, logistics & “last mile” and package and courier services across Canada, the U.S. and Mexico. 

While undoubtedly operating a cyclical business, TFI has migrated towards an “asset light” model, which has allowed them to earn higher returns on shareholders’ equity than their peers over a cycle.  

The company is a capable and active consolidator of the fragmented trucking industry, having completed 98 acquisitions since 2008, which has driven an 16 per cent compound growth rate in earnings per share over the last decade. Despite their rapid growth, TFI trades at a modest 17x 2022 forecasted earnings. 

Bank of Nova Scotia (BNS TSX)
Last bought in January 2022 for $91.36 
Scotiabank is Canada’s third-largest bank and is the nation’s most globally ambitious bank, with a long established footprint in Mexico, Latin America and the Caribbean. Scotiabank earns a 15 per cent return on shareholders’ equity and has grown earnings per share at a 6 per cent compound rate over the past decade, with commensurate increases in its dividend.  

The company has the largest exposure to fast growing and “underbanked” emerging markets among the big 6 banks. After a flurry of acquisitions in 2018-19, including BBVA’s Chilean bank, two other South American banking deals and two large asset management acquisitions here in Canada with the purchase of Jarislowsky Fraser and MD Management, Scotia has recently pruned non-core smaller assets and is poised to harvest synergies and growth opportunities in the acquired assets.  

Trading at 11x expected earnings and yielding 4.4 per cent, we see a logical and visible path to a double digit return over a cycle in the shares of Scotiabank.

Nutrien (NTR TSX)
Last bought in January 2022 for $88.54 
Nutrien is Canada’s largest mining company and is among the largest agri-businesses in the world, with wholesale potash, nitrogen and phosphates businesses integrated with a downstream retail farm supply network.  

A confluence of factors, including elevated prices for key cash crops like corn, wheat and soybeans coupled with trade sanctions on Belarussian potash exports, flooding at a large competitor’s potash mine and very high European natural gas feedstock costs for nitrogen, have created an extremely tight fertilizer market with very strong pricing.  

Nutrien’s long life, low cost, reliable mines are well positioned to meet demand and the company should enjoy windfall profits in 2022, with consensus forecasts calling for earnings up fourfold from 2019 levels.  

The company has also been expanding its retail network via a series of small acquisitions both within their traditional North American stronghold as well as in Australia and South America, which reduces both the commodity cyclicality of the business and the Northern hemisphere planting/harvest cycle seasonality.  

The two predecessor companies that merged to form Nutrien in 2018 traded on average at 2.9 and 2.4x book value through the cycle, whereas Nutrien currently commands a multiple of just 1.7x book value, illustrating the significant re-rating potential in the shares. The unexpected departure of the short tenured CEO last week triggered a 14 per cent pullback off recent highs, affording investors an excellent entry point.

PAST PICKS: January 7, 2021 

Curaleaf Holdings (CURA CSE) 

• Then: $17.37
• Now: $10.50
• Return: -40%
• Total Return: -40%

Canada Goose (GOOS TSX) 

• Then: $37.78
• Now: $42.44
• Return: 12%
• Total Return: 12%

Parex Resources (PXT TSX) 

• Then: $19.91
• Now: $23.73
• Return: 19%
• Total Return: 22%

Total Return Average: -2%