Equity analysts at Desjardins Securities revealed their top stock picks for Canadian investors in 2024, warning there is still a strong possibility for an economic recession followed by a pullback from recent market momentum.
“After a turbulent and complicated 2022, the rebound in 2023 was very welcomed by investors,” they said. “While many (all?) signs pointed to a recession in 2023, it has yet to happen; that said, it does seem a recession must occur at some point, doesn’t it? What did happen is that 2023 was a continuation of the wrestling match between inflation and rate hikes; surprisingly, the winner was the investor, who enjoyed a rebound in the NASDAQ (up 40 per cent), the S&P (up 23 per cent) and, to a lesser degree, the TSX (up 6 per cent) — which was welcomed following a challenging 2022 (down 33 per cent, 18 per cent and 8.5 per cemt, respectively).
“As we enter 2024, it looks like inflation is generally considered to be in check and that rates have plateaued, resulting in market moves which have almost erased their 2022 losses. With that momentum and now universal agreement (in the market) that rates will be marched down over the next two years, we can rightfully expect not only a continued buoyant outlook for equities, but also a deluge of capital markets activity as two years’ worth of pent-up demand starts to find receptive market conditions and open-minded investors. Time will tell—be sure to hold on tight.”
Royce Mendes, the firm’s managing director and head of macro strategy, said macroeconomic risks in Canada “remain skewed to the downside as the economy is expected to enter a recession next year.”
“Furthermore, mortgage renewals will weigh on household finances into 2025 and 2026, providing a medium-term headwind to consumption and economic growth,” he said. “The U.S. economy is expected to continue to outperform the Canadian economy. While a slowdown is likely, the U.S. is forecast to avoid a recession. Labour markets are slowly normalizing in both jurisdictions. Strong population growth in Canada has sped up the process relative to the US. Still, easing labour market tightness has helped inflation move closer to target in both countries.”
In a research report released before the bell, Desjardins analysts selected 26 equities “that should perform best given expected strong growth opportunities and catalysts.
They are:
Consumer Staples/Consumer Discretionary
* Alimentation Couche-Tard Inc. (ATD-T) with a “buy” rating and $85 target. The average target on the Street is $86.25.
Analyst Chris Li: “ATD remains our preferred idea given: (1) improving macro conditions and easing of cigarette headwinds next year should reaccelerate merchandise SSSG [same-store sales growth], which we believe is a key near-term catalyst; (2) continuing strong fuel margins and cost reductions are more than offsetting c-store sales softness; (3) funds flow to staples with torque to an economic recovery and less exposed to disinflationary/commodity risks; (4) a robust pipeline of growth initiatives supporting attractive organic EBITDA growth; (5) M&A environment is becoming more favourable; and (6) reasonable valuation at 16.5 times forward P/E (vs 17.5 times average).”
Diversified Industries
* Ag Growth International Inc. (AFN-T) with a “buy” rating and $82 target. Average: $76.44.
Analyst Gary Ho: “We favour AFN given (1) solid progress across its three strategic initiatives—operational excellence (driving 250 basis points margin improvement in 2023), product transfers (benefiting 2024), and aftermarket parts and services (benefiting 2025/26); (2) robust growth in International (Brazil, India); (3) deleveraging (2.5 times by mid-2024); and (4) attractive valuation.”
* Brookfield Business Partners LP (BBU.UN-T) with a “buy” rating and US$29 target. Average: US$26.79.
Mr. Ho: “BBU is our top pick in the diversified financials space due to (1) Clarios IPO/monetization catalyst (world’s largest vehicle battery manufacturer, should be well-positioned for an IPO after deleveraging). We estimate it could represent US$10–12 NAV/share (while accounting for approximately 25 per cent of BBU EBITDA), implying the rest of BBU trades at US$6 per share; (2) improved sentiment on interest rate cuts; (3) sale of Westinghouse reduces 40 per cent of its corporate debt; and (4) attractive valuation — trading at a 57-per-cent discount to NAV.”
* Lithium Ionic Corp. (LTH-X) with a “buy” rating and $4.50 target. Average: $5.25.
Analyst Frederic Tremblay: “Lithium prices declined sharply in 2023 due to a market surplus and slower-than-expected growth in EV sales. Lowering our near-term price forecasts had only a limited impact on our companies under coverage as only Sayona (SYA) is currently in production. Furthermore, we believe that the current price environment could prompt changes in global supply intentions, especially for higher-cost and/or more challenging projects. EV sales growth should remain positive and could get a boost from interest rate cuts. We like LTH given (1) the low capex and low costs of the Bandeira project; (2) fast-tracked permitting and quick path to production; (3) resource growth potential; and (4) attractive valuation.”
* Savaria Corp. (SIS-T) with a “buy” rating and $20.50 target. Average: $19.29.
Mr. Tremblay: “We like SIS because (1) 2024 should be a pivotal year which starts with a CEO transition and continues with the implementation of performance enhancement initiatives through the Savaria One program; (2) positive momentum in North America to continue while a recovery in Europe takes place; (3) significant potential upside to our and consensus adjusted EBITDA estimate for 2025, with upward revisions possibly triggered by a first-ever investor day in 1H24 and quarterly results; and (4) attractive valuation — trading at a significant discount to its 10.7 times EBITDA average, and would trade at an astonishing 6.6 times if management’s 2025 ambitions are reached!”
Financial Services
Lifecos
Sun Life Financial Inc. (SLF-T) with a “buy” rating and $75 target. Average: $73.50.
Analyst Doug Young: “There are four themes we like. First, its medium-term underlying ROE target of 18 per cent plus, which is peer-leading (compares favourably with the Canadian banks). Second, we see several earnings growth drivers over the coming year— DentaQuest (DQ) in the U.S., getting to scale and continued momentum in Asia, SLC Management hitting its stride, as well as potential capital deployment. Third, by our math, SLF has $6.0-billion in excess capital and debt capacity, and generates an attractive amount of excess capital annually, partially from MFS. Fourth, MFS has been performing well even in volatile equity markets.”
Banks - Large Cap
Bank of Montreal (BMO-T) with a “buy” rating and $135 target. Average: $130.11.
Mr. Young: “We designate BMO as our top bank pick for 2024. First, BMO has the most promising setup for FY24 in our opinion, primarily driven by the BOTW [Bank of the West] integration, which should result in US$800-million in expense synergies (vs its initial estimate of US$670-million). This factors in no revenue synergies, which could materialize over time. Second, BMO should reap cost savings of $400-million through FY24 from various actions taken in FY23. BMO’s track record in expense management is notable, achieving seven consecutive years of positive operating leverage from FY16–22, and reducing its adjusted efficiency ratio to 56 per cent from 65 per cent. Third, we like its position as a top four commercial bank in North America, as well as its lower relative exposure to Canadian mortgages vs the other Big 6 Canadian banks. We also view BMO’s current valuation as attractive — 1.3 times P/BV vs the Big 6 average of 1.4 times.”
Banks - Small Cap
Canadian Western Bank (CWB-T) with a “buy” rating and $37 target. Average: $34.
Mr. Young: “This year, we are introducing a small-cap bank into our nominations — CWB. We believe it stands apart from the Big 6 with its unique story. First, we expect NIM expansion in the 10 basis points range through FY24 vs relatively stable NIMs for the Big 6. Second, CWB has limited exposure to unsecured lending, a greater focus on commercial secured lending and much lower relative exposure to Canadian mortgages vs the Big 6. Third, CWB does not operate in the (volatile) capital markets business. Fourth, it finished FY23 with a healthy CET1 ratio, has curtailed its use of the ATM program, benefited from the capital adequacy requirements (CAR) changes in 2023 and is not subject to various buffers (eg the domestic stability buffer) to which the Big 6 banks must adhere. With its current 0.9 times P/BV multiple and a dividend yield of 4.3 per cent, we see a compelling case for further upside potential.”
Industrials/Transportation & Aerospace
* AtkinsRéalis (ATRL-T) with a “buy” rating and $53 target. Average: $50.67.
Analyst Benoit Poirier: “In engineering & construction, ATRL is our preferred name for numerous reasons: (1) 70-per-cent exposure to government clients; (2) resurgence of nuclear—unique expertise with proprietary technology; (3) conclusion of LSTK work in 2024; (4) potential monetization of non-core assets; and (5) re-rating opportunity as more investors see evidence of progress and join the turnaround story—ATRL is trading at 8.7 times EV/FY2 EBITDA (excluding the capital portfolio), a 35-per-cent discount to STN and WSP.”
* Bombardier Inc. (BBD-B-T) with a “buy” rating and Street-high $103 target. Average: $77.87.
Mr. Poirier: “BBD remains our favourite stock as we see many catalysts, with further opportunities to grow revenue (eg higher production, aftermarket ramp-up, defence and the certified pre-owned business) and improve margins. Additionally, with booking activity remaining strong and the absence of order cancellations, BBD is well-equipped to manage any short-term macro headwinds that may arise. Ending 3Q with a leverage ratio of 4.1 times off the back of strong FCF generation, we see leverage falling to 2.6 times at the end of 2024 and 1.6 times at the end of 2025, which should attract incremental investors. We expect BBD to be the biggest beneficiary in our coverage universe of a declining interest rate environment and see limited potential downside following our scenario analysis,”
* TFI International Inc. (TFII-T) with a “buy” rating and $172 target. Average: $182.
Mr. Poirier: “We continue to favour TFII for several reasons: (1) expectations that the freight environment will recover in 2H24; (2) operational improvements at TForce Freight; (3) its solid balance sheet (we calculate $18 per share of incremental value to our target price in the event of a sizeable acquisition); and (4) an attractive valuation with the stock trading at 8.1x EV/2024 EBITDA, a discount vs its peers’ average of 9.5 times.”
Metals & Mining
* OceanaGold Corp. (OGC-T) with a “buy” rating and $3.50 target. Average: $4.03.
Analyst Jonathan Egilo: “OGC is one of our top producer picks, specifically for its internally funded organic, near-term growth, in conjunction with its very attractive FCF yield. OGC production could reach 600koz by 2025 from 475koz in 2023. This is primarily driven by increased production from Haile, specifically driven by the high-grade underground deposit which recently had its first stopes mined. In 2024, we model production of 571koz Au at AISC of US$1,376/oz Au. This represents production growth of 23 per cent year-over-year, driving EBITDA growth of 23 per cent and FCF lifting from US$9m in 2023 to US$140m in 2024. OGC currently trades at 0.65 times P/NAV and 3.5 times 2023 EV/EBITDA vs intermediate peers at 0.85 times P/NAV and 5.3x EV/EBITDA. Over the last two years, OGC has traded at an average EV/EBITDA of 3.9 times while peers have averaged 4.8 times. On our 2024 and 2025 EBITDA, which both factor in the growth from Haile, it trades at 2.9 times and 2.6 times, respectively. We do not believe the stock would reach these multiples on an FY1 basis and believe instead that the market will factor in the growth from Haile as it ramps up”
* Skeena Resources Ltd. (SKE-T) with a “buy” rating and $18.25 target. Average: $15.28.
Analyst John Sclodnick: “SKE recently announced the results of the definitive feasibility study for its Eskay Creek project, which continued to demonstrate impressive economics and, importantly, is based on estimates and assumptions that appear achievable and conservative in our view. The project now has a 12-year minelife with average production of 455koz Aueq [gold equivalent] over the first five years, 370koz Aueq over the first 10 years and 324koz Aueq over the LOM [life of mine]. We estimate initial capex of $780-million and average AISC of US$447 per ounce, resulting in a $1.9-billion after-tax NPV5-per-cent and 46-per-cent IRR. The stock currently trades at 0.32 times NAV vs gold developer peers at 0.35x, but with the lowest AISC [all-in sustaining costs] in the group and average annual production of more than 300koz Aueq in a top-tier jurisdiction, we believe it should trade at a meaningful premium to the group. We also expect the project to be further enhanced via ongoing exploration at Eskay Creek and the inclusion of the nearby Snip project, which will likely be used to backfill years 6‒12 of the minelife when grade and production come down. Looking ahead, we expect the company to announce its project financing plans in 1H24; however, with the ability to potentially fund the entire development with the sale of a silver stream, and a 1.2-year payback which would be attractive to lenders, we do not expect a large equity component.”
* ATEX Resources Inc. (ATX-X) with a “buy” rating and $2.25 target. Average: $2.42.
Mr. Egilo: “In our view, ATX remains a standout among peers due to its prospectivity to substantial and near-term resource growth — driven by management’s aggressive approach to designing drill programs that are solely focused on determining the limits of the newly discovered and high-grade Valeriano porphyry system. At the time of writing, ATX had just commenced its Phase 4 drilling program at the Valeriano project, which is targeting 15,000‒20,000m and is fully funded. It seeks to further define extensions of the Central and Western high-grade trends — both open along strike. An early goal of the program is to test the Central and Western trends to the south, where the last holes of the last drill program suggested the two trends could possibly be coalescing. We expect initial visual results could be imminent and expect first assays in January.”
Oil & Gas
* ARC Resources Ltd. (ARX-T) with a “buy” rating and $31 target. Average: $27.58.
Analyst Chris MacCulloch: “We have previously highlighted that sanctioning of Attachie Phase I was a watershed moment for ARX following years of anticipation and delay, a perspective which was validated in early May when the project was sanctioned prior to the company’s outline of an updated five-year plan at its 2023 investor day in Toronto. During the presentation, ARX detailed, among other things, an ambitious organic growth profile with corporate production forecast to expand to 425 mboe/d in 2028 (from 350 mboe/d currently), although we should note that it remains contingent on the sanctioning of Attachie Phase II (35–40 mboe/d). Temporarily casting aside longer-term growth prospects, we continue to believe that the market is largely discarding the positive impact of Attachie Phase I on corporate FCF generation when the project starts up in late 2024/early 2025.”
* Cenovus Energy Inc. (CVE-T) with a “buy” rating an $34 target. Average: $32.50.
Mr. MacCulloch: “We believe that headwinds can (and will) turn into tailwinds given that the past misfortunes were not structural in nature. In fact, with a slew of upstream growth projects currently in the pipeline, including the Sunrise optimization project and the return of the Terra Nova FPSO (10 mboe/d), we expect production to begin hitting full stride in 2024, with operational momentum moving into the late 2020s. Furthermore, reconciliation of past events provides greater understanding of a discounted stock valuation which is now far too lucrative to ignore, in our view. For reference, the stock is currently trading at an estimated 2025 EV/DACF multiple of 4.7 times at strip prices, a significant discount vs its oil-weighted large-cap peers (6.4 times) while offering a 10.6-per-cent FCF yield (vs peers at 9.3 per cent). Obviously, the full restoration of downstream segment contributions will provide a meaningful uplift to corporate cash flow to the extent that crack spreads remain elevated from a historical perspective, even following the recent pullback in gasoline prices. However, we also believe that the market is discounting the company’s upstream business, specifically the potential benefit of narrowing WTI‒WCS differentials. Based on our sensitivity analysis, CVE retains the second-highest torque to WCS prices within the Desjardins E&P coverage universe (trailing only ATH), which suggests considerable upside to our expectations for supportive long-term heavy oil fundamentals as western Canadian pipeline takeaway constraints abate next year when TMX comes online.”
Power & Utilities
* Boralex Inc. (BLX-T) with a “top pick” rating and $43 target. Average: $39.30.
Analyst Brent Stadler: “With a relatively large amount of retained FCF, we expect BLX to take advantage of current attractively priced PPAs and to continue sourcing new projects in an impressive fashion in all core growth regions”
* Capital Power Corp. (CPX-T) with a “buy” rating and $51 target. Average: $45.11.
Mr. Stadler: “CPX is a value play with assets that are increasing in importance to grid reliability, with re-rate potential, and is a preferred name. We also see good value in INE’s operating assets and an improving payout ratio upon project completion.”
Real Estate
* InterRent REIT (IIP.UN-T) with a “buy” rating and $16 target. Average: $14.34.
Analyst Kyle Stanley: “With its concentration in key urban markets that have benefited from healthy market rent growth, IIP is poised to deliver sector-leading FFOPU [funds from operations per unit] growth in 2024.”
* Killam Apartment REIT (KMP.UN-T) with a “buy” rating and $22 target. Average: $21.29.
Mr. Stanley: “Top-line growth should accelerate in 2024 which, in light of its deeply discounted relative valuation and healthy FFOPU outlook, offers an attractive entry point.”
* Primaris REIT (PMZ.UN-T) with a “buy” rating and $16.50 target. Average: $16.34.
Analyst Lorne Kalmar: “As our top pick in the retail space, we believe PMZ should continue to outperform in 2024 with its sector-leading balance sheet and the ongoing recovery of Canadian malls.”
* RioCan REIT (REI.UN-T) with a “buy” rating and $22 target. Average: $21.43.
Mr. Kalmar: “Following relative underperformance in 2023, we believe REI is poised for a bounce-back year, particularly given our expectation for an increase in funds flows to the retail REITs.”
Telecom, Media & Tech
Telecoms
* Rogers Communications Inc. (RCI.B-T) with a “buy” rating and $76 target. Average: $75.25.
Analyst Jerome Dubreuil: “We are moving our telecom valuations to 2025, which is when RCI/SJR synergies should be almost fully reflected in the company’s results—this makes RCI attractive on an FCF basis. As the company is on track to deliver on its synergy targets and the veil has been lifted on several regulatory and competition-based unknowns, it is now easier to live with its leverage. We see a reasonably clear path toward deleveraging.”
IT Services
* Quisitive Technology Solutions Inc. (QUIS-X) with a “buy” rating and 70-cent target. Average: 72 cents.
Mr. Dubreuil: “We believe near-term macro headwinds and the ongoing uncertainty in relation to the best medium-term use cases for AI should continue to affect demand in early 2024. That said, we expect the demand for digitization to materially reaccelerate around spring/summer, which should make IT services look better when it laps easier year-over-year comps in the summer. QUIS is a high-risk/high-reward option with potential catalysts—its decent FCF generation reduces balance sheet risk and should reward shareholders buying at the current valuation.”
Technology
* Stingray Group Inc. (RAY.A-T) with a “buy” rating and $9 target. Average: $7.92.
Mr. Dubreuil: “RAY trades like a legacy media stock, but this portrayal increasingly diverges from the company’s reality; we believe 2024 could be the year when retail media adoption accelerates.”
David Leeder