Varun Anand, vice president and senior portfolio manager at Starlight Capital

Focus: Infrastructure stocks

MARKET OUTLOOK:

With economic growth set to accelerate through the remainder of the year, the focus has turned to monetary and fiscal stimulus. We do not anticipate the U.S. or Europe will follow Canada's lead in tapering bond purchases already, but we would not be surprised to see tapering and rate hikes ahead of schedule. With upward pressure on interest rates, market returns will shift from being driven by multiple expansion to being driven by earnings growth. This is precisely where infrastructure equities shine, given their ability to deliver positive returns through a combination of earnings and dividend growth, without depending on further multiple expansion. Infrastructure equities provide defensive characteristics given their essential nature and contracted cash flows, while still having leverage to an improving economic backdrop via higher capacity utilization and demand growth.

With respect to fiscal stimulus, President Biden's US$2.3 trillion 'American Jobs Plan' will disproportionately benefit infrastructure through investment in transportation, renewable energy, clean water, broadband and grid modernization.  We believe this bill will be scaled down modestly, but will likely be passed using the budget reconciliation process later this summer. The bill includes additional investment in highway infrastructure as well as airports, and we anticipate state's will continue to pursue public-private-partnerships to help build out transport infrastructure. The American Jobs Plan is heavily focused on reducing America's carbon footprint and we believe renewable energy companies are positioned extremely well to benefit from additional investment in research and development as well as the extension of tax incentives. The energy transition is well underway and several components of this bill will accelerate the move towards clean sources of power generation and a modernized electric grid. Infrastructure companies will continue to play a pivotal role in the decarbonization of America and the rest of the world.

TOP PICKS:

Cargojet (CJT TSX)

Cargojet is Canada's leading provider of time sensitive overnight air cargo services and carries over 1,300,000 pounds of cargo each business night. Cargojet also provides dedicated aircraft to customers on an aircraft, crew, maintenance and insurance (ACMI) basis, operating between points in Canada and the U.S. Cargojet has continued to increase its market share in the Canadian cargo market and the favourable secular tailwinds behind e-commerce will continue to benefit the company’s competitive position. Cargojet recently announced it entered into a new Air Transportation Services Agreement with Amazon, further cementing their position as Amazon's partner of choice as they experience robust volume growth in Canada. We view the recent pullback in the shares as a compelling buying opportunity as several of Cargojet's growth initiatives are not being reflected in the shares at the current level.

Polaris Infrastructure (PIF TSX)

Polaris Infrastructure is a pure-play renewable energy company with assets in Central and South America. The company has consistently delivered strong results from its flagship asset, the San Jacinto geothermal facility in Nicaragua, while expanding into hydroelectric energy in Peru. Polaris recently extended its contract with the Nicaraguan government for the output from its geothermal plant until 2039 and continues to explore M&A opportunities in other countries. The company trades at a significant discount to peers and we believe the valuation gap will narrow as the company continues to diversify its portfolio and grow cash flow.

Eiffage (FGR EPA)

Eiffage is a French-based infrastructure company focused on contracting and concessions, operating through four business lines: infrastructure, energy, construction and concessions. Eiffage is active in 50 countries with France accounting for the vast majority of revenues. Unlike airports, toll roads have seen a much faster recovery in traffic from pre-COVID levels, and we anticipate Eiffage's flagship asset, the APRR, will benefit from the roll-out of vaccines in France and the continued re-opening of the economy. Eiffage is also poised to benefit from improving momentum in its construction business, with a record backlog and further upside from projects linked to France's €100bn 2021-2022 stimulus plan. Eiffage trades at a discount to peers and the broader market, despite having leverage to a re-opening of the economy and resilient traffic on its toll road concessions.

PAST PICKS: July 3, 2020

Atlantica Sustainable Infrastructure (AY NASD)

• Then: $29.74
• Now: $39.73
• Return: 34%
• Total Return: 39%

Fortis Inc. (FTS TSX)

• Then: $52.46
• Now: $54.86
• Return: 5%
• Total Return: 8%

Fiserv Inc. (FISV NASD)

• Then: $98.25
• Now: $122.89
• Return: 25%
• Total Return: 25%

Total Return Average: 24%

Personal Twitter Handle: https://www.linkedin.com/in/varun-anand-cfa-6b0a4217/

Company Website: https://starlightcapital.com/en/

Blog: https://starlightcapital.com/en/insights/market-and-fund-commentaries