Employees and shareholders look on at Agrium’s annual meeting in Calgary in 2012.Jeff McIntosh/The Canadian Press
Bargain-seeking investors may still find deals on Canadian stocks.
Unlike a nearly 12-per-cent rally this year in the U.S. equity market, domestic stocks are marginally in positive territory after a pullback that began in February. Energy, resource and financial stocks, which make up about two-thirds of the S&P/TSX Composite Index, dragged the Canadian market lower despite a strong economy.
It's difficult to say how sustainable a rebound might be, but there is still a buying opportunity for long-term investors. To help wade through firms trading off their 52-week highs, we asked two portfolio managers to recommend stocks to buy on the dip.
Norman Levine, managing director at Portfolio Management Corp., Toronto
The pick: ARC Resources Ltd.
52-week range: $15.61 to $24.94 a share
Annual dividend: 60 cents a share for a yield of 3.34 per cent
Shares of the Calgary-based oil and natural gas producer have been hurt by slumping commodity prices and concern about hostility toward major energy projects by British Columbia's NDP-Green Party alliance, says Mr. Levine. ARC's assets, which are mostly in B.C.'s Montney region, get 70 per cent of their production from gas and 30 per cent from oil. ARC's stock is being penalized but its shares remain attractive because the company is a low-cost producer with good production growth, a strong balance sheet and a solid management team, he says.
"Its shares also trade at a reasonable multiple to its peers." Governments aren't around forever, and stocks can get overly punished and bounce back, he says. "As one of the best players in the industry, ARC will benefit."
The pick: Enbridge Inc.
52-week range: $48.98 to $59.18 a share
Annual dividend: $2.44 a share for a yield of 4.77 per cent
Shares of the Calgary-based pipeline giant have fallen amid concerns ranging from opposition to the U.S. section of its Line 3 oil pipeline between Alberta and Wisconsin, to rising interest rates, says Mr. Levine. Rising rates can increase debt and cause investors to flock to higher-yielding bonds.
Gas demand for heating and air conditioning at Enbridge's Ontario distributor was also hurt by a warmer winter and a cooler summer, he said.
And some U.S. investors have been selling off Enbridge shares acquired when it bought U.S.-listed Spectra Energy Corp. in a stock deal, he adds. The transaction, however, diversified Enbridge away from being an oil-focused company because it gained access to Spectra's natural gas pipelines. Enbridge still shows excellent growth, and its dividend should grow by 10 to 12 per cent a year, he says.
The pick: SNC-Lavalin Group Inc.
52-week range: $50.27 to $59.63 a share
Annual dividend: $1.09 a share for a yield of 1.94 per cent
Shares of the Montreal-based engineering and construction firm have been stuck in a range over the past year, but are poised to benefit from a proposed increase in infrastructure spending across North America, says Mr. Levine. The recent acquisition of British-based engineering firm WS Atkins PLC also provides more diversification globally, and away from the hard-hit energy sector, which made up 45 per cent of revenue last year, he says.
SNC also has a 17-per-cent stake in Ontario's highly profitable Highway 407, heads a consortium to build Montreal's Champlain Bridge, and has an order backlog totalling $9.6-billion, he adds. While SNC faces a potential fine of about $200-million related to a 2012 bribery scandal, that negative news is largely built into the stock price, he suggests.
Greg Newman, director and portfolio manager at The Newman Group, Toronto
The pick: Manulife Investment Corp.
52-week range: $17.76 to $26.11 a share
Annual dividend: 82 cents a share for a yield of 3.33 per cent
A growing wealth management division and rising interest rates should help drives shares of the Toronto-based insurer and financial services provider, says Mr. Newman. Higher rates enable insurers to generate better yields from their bond investments. Manulife operates in Canada, Asia and the United States.
Its stock popped in July on rumours that it was spinning off its U.S.-based John Hancock Financial Services unit, which has had years of disappointing returns, but trended lower as Manulife downplayed the speculation.
Manulife shares are trading at roughly 10 times forecast 2018 earnings versus 10.5 times for its peers, he says. The insurer is doing well operationally versus write-downs of the past, and there are expectations for 9-per-cent annual dividend growth, he adds.
The pick: Agrium Corp.
52-week range: $115.16 to $146.99 a share
Annual dividend: $3.50 (U.S.) a share for a yield of 3.26 per cent
Agrium's stock has tumbled amid soft fertilizer prices and concerns about its proposed merger with Potash Corp. of Saskatchewan Inc., says Mr. Newman. The market has been cool to the planned marriage because Calgary-based Agrium is mainly a retailer of agricultural products with fat margins, while Potash, a fertilizer producer, is a commodity player, which can't control prices, he notes. The deal is expected to close before year-end and the merged entity is to be called Nutrien.
The upside potential comes from the expected cost synergies and a recovery in commodity prices, he says. A risk comes from whether management can successfully execute in merging the two entities. Agrium is a "safer play" than Potash in case the merger fails to get all the regulatory approvals, he adds.
The pick: Royal Bank of Canada
52-week range: $80.35 to $99.90 a share
Annual dividend: $3.64 a share for a yield of 3.86 per cent
Shares of Royal Bank have pulled back this year amid worries about a housing slowdown and near-collapse of mortgage lender Home Capital Group Inc., says Mr. Newman. Assuming a "soft landing" for the housing market, Royal Bank shares are still compelling, even though they trade at premium valuation – roughly 11.6 times forecast 2018 earnings versus 11 times for its peers, he says.
"Royal has the best earnings power right now. We see them growing earnings at 5 per cent compounded annually over the next couple of years." Its credit quality is pristine, while its wealth management earnings – helped by the acquisition of U.S.-based City National Bank – are strong, he said. Royal will also benefit from rising interest rates because that will help boost profit margins, he adds.