Jul 6, 2022
Mike Archibald's Top Picks: July 6, 2022
Mike Archibald's Top Picks
Mike Archibald, vice president and portfolio manager, AGF Investments
FOCUS: Canadian equities
It has been a very challenging first half for almost all asset classes – both stocks and bonds registered two consecutive quarters of negative returns, which has only happened four other times since 1976 (years 1980, 1981, 1994, 2008). Expected volatility should remain high as investors grapple with ongoing interest rate tightening globally and a further withdrawal of liquidity from the market. Day-to-day market volatility, both up and down, should be expected by investors.
We believe the first half correction in financial assets has been the market adjusting to higher interest rates and changing central bank policies. The tightening path in both Canada and the U.S. now seems well understood by the market and should be appropriately priced into stocks.
The challenges facing investors in the second half of the year are likely to be how earnings expectations adjust to tighter interest rates and weakening economic data. Earnings estimates have finally started to roll over in recent weeks, and I expect this trend to continue as we start to see second-quarter earnings roll out in the weeks ahead. How those expectations change will shape the path of the TSX and S&P 500 in the second half of 2022.
Despite the challenges highlighted, some market concerns are abating which should help bolster consumer confidence and investor sentiment, both of which are at multi-decade lows. One major concern for consumers and investors alike remains inflation – it looks like inflation is in the process of peaking and rolling over at this point. Market-based expectations for inflation are starting to come down, many commodity prices have peaked and rolled over (copper, lumber, soft commodities) and consumer demand for goods has also softened. The key to watch here is at what level does inflation roll down too and how fast does that occur. This will have a direct impact on how much more aggressive central bank policy needs to get as we near the end of 2022.
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Dollarama is a great long-term growth business with consistent earnings, a strong management team and a very predictable growth pattern regardless of the macro environment. Clearly, the inflation backdrop has helped DOL over the past year – consumers are trading down to cheaper price points – DOL is benefitting from increased foot traffic and higher basket sizes which is resulting in strong SSSG. The company consistently grows revenue by 7-9 per cent; I expect to see 15 per cent+ EPS growth for each of the next three years with stable margins and great free cash flow –it’s a very predictable business that should continue to attract investor interest. Last purchase at $75
Tricon Residential is a Canadian listed company that owns approximately 31,000 single-family rental units in the U.S., primarily in the sun-belt regions including Florida and Texas. It is an excellent way to get exposure to U.S. real estate asset classes in a Canadian-listed vehicle. This is a great environment for rental units – inflation allows TCN to re-price units that turnover at higher rates, and demand for single-family rental is very high in most of the markets they operate in. Currently seeing rent growth of about eight per cent with 98 per cent of their units currently occupied. Average rents are about $1,625/month and they have less than 20 per cent turnover in their portfolio. With a great long-term growth runway – the stock has come off on macro concerns around demand for their properties, but we just aren’t seeing that in the data. Should see ~15 per cent growth over the next three years. Last purchase at $13
CAE provides airline simulation training for pilots and airline crews. Revenue is equally split between civil aviation training and defence training. It is a great way to gain access to a return to more normal demand for both leisure and business and commercial air travel. There are very high barriers to entry in this industry. CAE is the leader in aviation training with a 30 per cent market share – global footprint, long-term customer relationships and a strong technology platform. Given the challenges of the pandemic, we should see significant, double-digit earnings growth over the next several years – high 20 per cent EPS growth over each of the next three years. Last purchase at $30
PAST PICKS: April 8, 2022
Tourmaline Oil (TOU TSX)
- Then: $61.28
- Now: $64.35
- Return: 5%
- Total Return: 8%
Colliers International (CIGI TSX)
- Then: $154.84
- Now: $148.35
- Return: -4%
- Total Return: -4%
Toromont Industries (TIH TSX)
- Then: $119.45
- Now: $103.66
- Return: -13%
- Total Return: -13%
Total Return Average: -3%