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

Focus: Infrastructure stocks

MARKET OUTLOOK:

Financial markets are off to a strong first half in 2021, driven by the vaccine roll-out and improving economic backdrop. While vaccination rates continue to climb across the world, the delta variant is surging globally. However, we note that deaths and hospitalizations continue to lag COVID-19 cases significantly, suggesting high vaccination rates are reducing the most severe cases of COVID-19. We believe fears around an economic slowdown due to a surge in the delta variant are overdone, as it is unlikely we will return to strict lockdowns and economic restrictions given the efficacy of vaccines and continued rollout globally. Infrastructure is poised extremely well to navigate the current market environment, given assets are benefitting from an uptick in economic activity and capacity utilization, while the essential nature of the services provided will limit the impact of reduced economic stimulus as government programs expire.

Progress continues to be made on President Biden's infrastructure bill, as the magnitude of the stimulus as well as the spending priorities continue to change as negotiations take place. While it is difficult to pinpoint exactly what or when the stimulus bill will be passed, we believe there is a path to successfully pushing through an infrastructure bill before the end of the year. Several areas of infrastructure are poised to benefit from the stimulus, including transportation, grid reliability, renewable energy, water and broadband. President Biden's most recent budget deal includes funding for an array of climate change programs, with an ambitious goal of achieving 80 per cent clean electricity and a 50 per cent economy-wide reduction in carbon emissions by 2030. Infrastructure companies will continue to play a pivotal role in the decarbonization of America and the rest of the world, and we believe Infrastructure equities will play a key role in investor portfolios going forward, particularly for those focused on ESG.

TOP PICKS:

Canadian National Railway (CNR TSX)

Canadian National Railway is Canada's largest railway company, providing freight and intermodal services over a network of more than 20,000 miles across Canada and the U.S. CN hauls freight such as coal, forest products, petroleum, grain and fertilizers as well as operating 20 intermodal terminals, which transfer freight between truck and train. CN shares have recently sold-off on concerns of its pending acquisition of Kansas City Southern (KSU) with investors concerned that CN overpaid for KSU and will face steep break fees if the deal falls through. While CN did pay a full price, we view the acquisition of KSU as transformational for CN, as it will result in the only Class 1 railway connecting Canada, the U.S., and Mexico and provide a significant network advantage over peers, particularly CP. The more than $9 billion decline in equity value for CN shares more than offsets the $1 billion break fee, should the deal not materialize. We believe CN shares are undervalued and the company is positioned well for the long term, with or without KSU.

RWE AG (RWE ETR)

RWE is a German utility with assets in Europe, Asia-Pacific and the United States. The company generates and trades electricity, with more than 10 gigawatts of renewable power generation. RWE's strategy revolves around the goal of becoming carbon neutral by 2040 through the development of their portfolio and phase out of legacy fossil fuel assets. RWE shares have underperformed this year after the company suffered losses due to adverse weather events in Texas as well as flooding in Germany. However, we believe both of these one-time items are more than reflected in the share price, while the renewables growth pipeline is not getting credit despite having high visibility on a number of projects. German elections in the fall could result in the Green Party winning a majority, which could accelerate the decommissioning of RWE's legacy coal assets. We believe RWE shares represent compelling value for investors, with significant upside from renewable development in offshore wind, solar and onshore wind.

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 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. Commentary from global freight companies continues to support our thesis that the e-commerce boom, which was accelerated due to COVID-19, is sustainable and growing, while the tight capacity in both ocean and air freight remains unchanged. Cargojet's shares have suffered as market sentiment has shifted towards value stocks and return-to-work sectors, but we believe the shift to e-commerce in Canada is in early innings and Cargojet is well positioned to benefit given its strong competitive position and growing fleet of planes. We view the recent pullback in the shares as a compelling buying opportunity.

Atlantica Sustainable Infrastructure (AY NASD)

• Then: $29.74
• Now: $38.42
• Return:  29%
• Total Return: 36%

Fortis Inc. (FTS TSX)

• Then: $52.46
• Now: $56.36
• Return:  7%
• Total Return: 12%

Fiserv Inc. (FISV NASD)

• Then: $98.25
• Now: $108.72
• Return: 11%
• Total Return: 11%

Total Return Average: 20%