Varun Anand, portfolio manager at Starlight Capital

Focus: Infrastructure stocks

MARKET OUTLOOK:

2021 will be heavily impacted by the rollout of the COVID-19 vaccines and the agenda of the Biden administration. The global distribution of vaccines has generally fallen behind schedule while the virus continues to mutate/spread, putting the timeline for re-opening the global economy in jeopardy. The pandemic has resulted in massive fiscal stimulus programs from federal governments to preserve household income and corporate revenues. We expect the Biden administration to aggressively pursue further stimulus, however, the narrow Democratic majority in the Senate means passing any legislation will have to be bipartisan in nature or move through a lengthy reconciliation process.

Equities continue to trade at historically high multiples with many companies’ valuations already reflecting a robust economic rebound despite the fact that we are in the early stages of the recovery, which remains fragile. In this uncertain environment, we believe infrastructure assets are poised to outperform, given these companies provide essential daily services to a majority of the population in a supply constrained manner - and exhibit superior cash flow visibility and dividend growth. Not only does infrastructure encompass the traditional sectors of energy, industrials and utilities - but it also includes technology-driven sectors such as data centres, cellular towers and payment processing. As a result, investors can benefit from the more defensive characteristics of sectors like renewables and waste management, while also having exposure to sectors benefitting from technology tailwinds like cloud computing and 5G.

With interest rates having limited room to fall further, 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 - making infrastructure one of the most compelling investment opportunities today.

TOP PICKS:

Polaris Infrastructure (PIF TSX) 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.

Cellnex Telecom (CLNX SM) is a Spanish-based company which operates wireless telecommunications infrastructure and broadcast infrastructure across Europe. Cellnex rents tower space and equipment to wireless carriers and broadcasters for the distribution and transmission of frequencies. Cellnex's business model is underpinned by contracts with wireless carriers and will continue to benefit from increased investment in networks, including the eventual roll-out of 5G. Cellnex has announced a number of attractive acquisitions over the past few months and we do not believe the growth pipeline is currently reflected in the valuation, representing significant upside from current levels.

Waste Connections (WCN TSX) is a waste management company that provides non-hazardous solid waste collection services for commercial, industrial and residential customers, serving six million customers in 40 U.S. states and six Canadian provinces. WCN has industry leading EBITDA margins (30 per cent) and FCF margins (12 per cent) with a strong track record of both organic growth and acquisitions; the U.S. waste market is still highly fragmented, and WCN is well positioned to participate in the consolidation of smaller players. WCN’s business model is defensive, as waste disposal is an essential daily service, anchored by multi-year contracts with industrial customers with inflation-linked pricing, generating a stable cash flow profile.

PAST PICKS: February 10, 2020

QTS Realty Trust (QTS NYSE)

• Then: $58.34
• Now: $65.48
• Return: +12%
• Total Return: +16%

Ferrovial ADR (FRRVY OTC)

• Then: $31.88
• Now: $24.85
• Return: -20%
• Total Return: -20%

Tidewater Midstream (TWM TSX)

• Then: $1.02
• Now: $0.90
• Return: -12%
• Total Return: -6%

Total Return Average: -5%

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