Canadian stock picks by sector

Despite a backdrop of recession fears and ongoing geopolitical tensions, market prices have reached lofty levels.

“We find ourselves in and around all-time record highs despite the headwinds,” said Craig Jerusalim, senior portfolio manager with CIBC Asset Management, in a recent interview. He put recent performance in context.

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Materials and energy have led TSX sectors, with returns of about 18% and 15% year-to-date, respectively.

While crude oil prices are off their highs for the year, West Texas Intermediate is still up about 10%, which is attributable in part to strong supply-demand fundamentals driven by emerging markets, Jerusalim said. Companies such as Canadian Natural Resources Ltd. have also reached significant milestones in debt reduction targets, which Jerusalim said allows them to return substantial cash flows to shareholders.

He remains bullish on the energy sector due to its current undervaluation. “While the group is no longer trading at trough valuations, they are still well below long-term averages,” he said.

Materials have been boosted by a rally in gold and copper prices, and Jerusalim highlighted the potential for companies such as Teck Resources Ltd. to benefit from an increase in ongoing global demand, specifically for copper.

Financials have presented a mixed bag of performance. “It’s been a tale of two subsectors,” Jerusalim said.

Insurance companies have outperformed, with names like Fairfax Financial Holdings Ltd. and Trisura Guarantee Insurance Co. driving the sector’s growth, while Canadian banks have lagged the overall market. Banks face near-term headwinds, Jerusalim noted, including greater regulatory scutiny and slower loan growth.

“We definitely prefer the insurers to the banks, as they have growth and higher return on equity, which allows them to deploy excess capital at better rates of return,” he said.

Industrials have closely trailed financials in terms of year-to-date performance, with companies such as Thomson Reuters Corp. and Element Fleet Management Corp. standing out from the crowd. Potential upside in the second half of the year lies with the sector’s current laggards, such as Cargojet Inc., Brookfield Business Partners LP and GFL Environmental Inc., Jerusalim said. For example, “GFL, which has been steadily reducing their leverage, is very well positioned to double their free cash flow over the next four years, all while trading at amongst the widest discount to their peers since their [intial public offering],” he said.

Some of the weaker performers this year are in interest-rate-sensitive sectors such as utilities, REITs and communication services, with Jerusalim citing strained balance sheets, lack of growth attributes and challenging valuations.

“While many of the companies in these sectors will benefit from falling interest rates, we are not pinning our hopes on rate movements given how difficult they are to forecast,” he said. “Instead, we seek out companies that are able to differentiate themselves by growing regardless of the macro backdrop.”

Brookfield Renewable Partners LP and Brookfield Infrastructure Partners LP, for example, are well-positioned to capitalize on global power demand trends and the growth of artificial intelligence (AI) and data centres, he said.

Regarding the poorly performing telecom sector, Jerusalim recently revised his outlook. “The group now trades well below long-term averages and provides a great source of dividend yields — around 7% in some cases —that we believe is sustainable and likely to grow for select companies,” he said.

Also at the bottom in terms of year-to-date performance is the technology sector, dragged down by the recent price drop of Shopify Inc., Jerusalim noted. However, despite recent challenges, he was optimistic about Shopify’s future in the U.S. e-commerce market, and he identified Docebo Inc. as another strong contender, with its innovative AI-enabled learning management system.

“We remain overweight the sector, given technology is the best source of growth on the TSX,” he said.

Jerusalim also noted that the path of monetary policy is uncertain.

“No one really knows where rate cuts will start, yet alone how deep they will go,” he said. “Therefore, our best opportunity is to seek out high-quality growing businesses with defensible competitive advantages that can relatively outperform regardless of the rate or macro backdrop.”

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