Brian Madden's Top Picks
FOCUS: Canadian equities
Canadian stocks remain near all-time highs as third-quarter results roll in, showing strong growth against easy comparisons a year ago. Trading at 16.5x 12 month expected forward earnings, the S&P/TSX Composite is exactly in line with its twenty-year average P/E ratio.
Analysts foresee 7 per cent further earnings growth in 2022, a figure that seems readily achievable amidst ongoing broad-based economic growth, with 4 per cent GDP growth foreseen in 2022, which would make 2022 the third best year of this millennium.
Moreover, with the largest segment of the market - banks - showing subdued growth expectations (-1 per cent) and the second largest - energy (+18 per cent) - also constrained by consensus commodity price forecasts that are conservatively 6 per cent below futures strip pricing for oil and 7 per cent below for natural gas, we believe earnings could surprise to the upside in 2022.
Nevertheless, with persistently high inflation, 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.
Intact Financial (IFC TSX)
Last bought in Nov. 2021 at $165.75
With a 21 per cent market share, Intact Financial is the largest property and casualty insurer in Canada. Intact underwrites auto, home, commercial and specialty insurance policies and is best known for the efficiency of its operations and its consistent underwriting profitability which enables them to target a return on equity 5 per cent higher than its rivals and which currently stands at 19 per cent.
As a consolidator of the fragmented insurance market, Intact has grown earnings at a 20 per cent compound rate over the last five years and their recent $12B transformational acquisition of RSA Insurance extends their reach into the UK & Ireland.
Long term macroeconomic forces like climate change and rising property values advantage Intact through higher policy premiums on higher insured property values and over the medium term, a “hardening” (i.e. premiums are rising steadily) property and casualty insurance market is providing a significant tailwind to their financial results.
Methanex (MX TSX)
Last bought in Nov. 2021 at $57.72
With a 14 per cent share of the global market, Methanex is the world’s largest producer of methanol, a product used in fuel blending and in plastics and other chemical applications. The company operates facilities in Canada, the U.S., Chile, Egypt, New Zealand and Trinidad & Tobago.
Rare among commodity producers, Methanex generates prolific free cash flow through the cycle, thanks to its efficient plants situated near abundant sources of low cost natural gas feedstock. Methanol demand and pricing is roaring back from last year’s cyclical trough, and Methanex earnings, which grew 218 per cent year over year in Q3, are roaring back alongside the commodity and are poised to grow a further 75 per cent in the current quarter. Although the shares have also recovered sharply, they trade at a modest 2.2x book value vs. their ten-year average of 2.5x and well below prior cycle peaks above 4x.
Royal Bank of Canada (RY TSX)
Last bought in Nov. 2021 at $129.43
Royal Bank is one of the ten largest banks in the world. With a dominant domestic personal and commercial banking franchise, a top ten global capital markets business and the leading Canadian wealth management franchise rounded out with smaller insurance and investor services/treasury businesses, Royal has a very solid and well diversified earnings stream.
Royal is well diversified by geography with large scale businesses in Canada, the U.S. and Europe and in various other global financial centres. The bank is a leader in digital banking and in AI and is using its scale to invest heavily in these drivers of long term competitive advantage, with the goal of attracting, by itself and with its’ affinity partners, an additional 2.5M new Canadian banking clients by 2023.
With a dividend yield of 3.3 per cent and with dividends growing at a 7 per cent annual rate over the last decade, we see a highly visible path to sustainable double digit returns, particularly as the OSFI restrictions on dividend increases are lifted.
PAST PICKS: December 3, 2020
Bank of Nova Scotia (BNS TSX)
- Then: $66.40
- Now: $82.21
- Return: 24%
- Total Return: 29%
Manulife Financial (MFC TSX)
- Then: $22.64
- Now: $24.75
- Return: 9%
- Total Return: 13%
Alimentation Couche-Tard (ATD/B TSX)
- Then: $44.14
- Now: $47.86
- Return: 8%
- Total Return: 9%
Total Return Average: 17%