Andrew Pink, portfolio manager at LDIC

FOCUS: Canadian large caps, preferred shares, fixed income

MARKET OUTLOOK:

Over the past five months, global equity markets are up materially, in part due to an anticipated coordinated central bank shift to quantitative easing as inflation cools.

Interest rates peaked in October 2023, coordinated with the TSX Index and S&P 500 Index market lows. After the Bank of Canada and U.S. Federal Reserve language pivot on Nov. 1, bond yields fell, which fuelled a rally in valuations and advanced stock prices.

Year-to-date, bond yields have lifted again as core inflation remains above target due to persistent consumer demand for services and higher energy prices. As a result, expectations for interest rate cuts have been pushed out. For stocks, the persistent higher interest rate environment has not had the typical reaction of reducing valuations and dampening investment returns. This suggests that markets are comfortable with the shifting interest rate timeline and are squarely focused on the momentum of corporate earnings growth and the economy.

We agree that it is more important that the economy remains strong to power earnings and less important to know when central banks will start an easing cycle.

LDIC expects the market to continue broadening out from expensive technology-related growth stocks. We are well-diversified with companies that have strong cash flows and reasonable valuations.

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TOP PICKS:

Cenovus Energy (CVE TSX)

An opportunity to buy Cenovus Energy at a relative discount to the senior integrated peers emerged when the company experienced some processing difficulties within its refining assets. Management swiftly addressed the issues and reported the one-time associated costs. With the business operating more efficiently, and a tailwind from higher crude prices, particularly for Canadian producers as the Trans Mountain pipeline fuels higher domestic prices, we expect the company will meet an important debt reduction target midway through this year, earlier than expected. Management will fully shift its free cash flow priorities from debt repayment to the shareholder in the form of dividend increases, special dividends, or earnings-accretive share repurchases, which should contribute to share price momentum.  

Chartwell Retirement Residences (CSH.U TSX)

Accommodative Canadian immigration policy is likely to tighten up in the coming years, as Canada refocuses on key public infrastructure investment and relieves pressure on key services before it’s able to accommodate further population growth. However, there is no changing the dynamic of Canada’s aging baby boomer population, and the need to provide care and housing for the elderly. Chartwell Retirement Residences offers a compelling organic growth profile with healthy mid-teen vacancy levels, an active development pipeline to accommodate future demand and unregulated rental growth.     

Granite REIT (GRT.UN TSX)

Granite is a high-quality, industrial REIT with assets throughout Canada, the United States and Europe. The company is a primary beneficiary of the proliferation of global e-commerce. Granite has the strongest balance sheet amongst its peer group, with more than $1.1 billion in available liquidity, which shelters it from the threat of a higher-for-longer interest rate environment. Consistent net operating income from its high-quality and diversified global tenant base. 

PAST PICKS: January 8, 2024

Storage Vault (SVI TSX)

• Then: $5.47
• Now: $5.06
• Return: -7 per cent
• Total Return: -7 per cent

Waste Connections (WCN TSX)

• Then: $196.26
• Now: $228.22
• Return: 16 per cent
• Total Return: 16 per cent

WSP Global (WSP TSX)

• Then: $183.30
• Now: $208.69
• Return: 14 per cent
• Total Return: 14 per cent

Total Return Average: 8 per cent