FOCUS: Canadian large caps

MARKET OUTLOOK:

Right now is a great time to buy Canadian equities. The Toronto Stock Exchange (TSX) is offering some very attractive opportunities at the moment, and buying high quality Canadian companies that are attractively valued has historically done very well in an inflationary environment like we are experiencing today.

It’s interesting, if you look back over much of the past decade, growth stocks have done well. Remember that growth stocks are long-duration assets. This means, much of their value is based on the expectation of their future growth.

So, while growth stocks are expected to reach new heights; we use a discount rate to value these growth companies. When interest rates increase, valuation drops.

Shopify is an excellent example, as it peaked on Nov. 18, 2021 and is down 70 per cent since then. Despite the pullback in Shopify, the Canadian market has been performing relatively well.

In 2022, Canada had a strong return for a developed nation. This year, the TSX is up over five per cent year-to-date.

Looking forward, we believe that the Canadian market is setting itself up for more success and a big reason for that is the very attractive valuation multiple.

In summary then, the Canadian market is trading at the best discount to the U.S. market in decades. Now is a great time to load-up on Canadian companies.

• Sign up for the Market Call Top Picks newsletter at bnnbloomberg.ca/subscribe
• Listen to the Market Call podcast on iHeart, or wherever you get your podcasts

TOP PICKS:

Bank of Nova Scotia (BNS TSX)

One of Canada’s big banks. It is unique in that ~40 per cent of their revenue is sourced from Central and South America. Shares have traded down due to softness in these markets, presenting a buying opportunity. New CEO Scott Thomson joined the firm recently with a mandate to restore growth. This is a reversion to the mean investment opportunity – we are looking for shares to reflate to their prior trading levels. In the meantime, there is a six per cent yield.

CN Rail (CNR TSX)

CN Rail is a Class 1 transcontinental railway that transports lumber, grain, energy, and intermodal across North America. This is a high-quality company, with impressive profitability and a solid balance sheet. Shares traded down after their last earnings report presenting a good buying opportunity.

TD Bank (TD TSX)

TD is a very well run high-quality, blue-chip company. It has a strong brand, good business model and a solid balance sheet. TD is second largest bank in Canada by market cap; top-10 in North America and one of the largest banks in world.  Presently TD has a pending acquisition of Tennessee-based First Horizon Corp for US$13.4 billion. With the failure of some U.S. regional banks, shares in TD have traded off in sympathy. This presents a good buying opportunity for a high-quality Canadian bank.