Look North to Canada for 3 High-Conviction, Long-Term Buys in 2023

Every January, RBC Dominion Securities, the brokerage arm of Canada’s largest bank, Royal Bank of Canada (RY), announces its list of the “Top 30 Global Ideas” for 2023. 

On this year’s list, eight of the 30 names are Canadian-based companies. Seven of them are back from 2022. The lone addition is Constellation Software (CNSWF), a company that’s grown primarily through small software acquisitions. 

If you’re looking to make money in the markets in 2023, Constellation and the other seven Canadian stocks on RBC Dominion Securities’ list should be on your radar. 

Three of them stand out for me as the best of the bunch.

A Globally Dominant Convenience Store Operator

Alimentation Couche-Tard (ANCTF) owns gas stations and convenience stores across Canada, in 47 of 50 U.S. states, Europe, and Asia. It generates 66% of its revenue from the U.S., 13% from its home country, and 21% elsewhere. 

Its goal is to become the world’s preferred destination for convenience and mobility. However, despite having more than 7,000 locations in the U.S., it still only has a 5% market share. Moreover, according to the company’s data, of the 148,026 convenience stores in America, approximately 60% are single-store businesses, leaving plenty of consolidation.

As the company points out, convenience store sales grew by 5% during the dot-com bubble in the early 2000s and 8% during the Great Recession of 2007 to 2009. It is a business that will do fine should a recession happen in 2023.

Over the last few years, Couche-Tard has moved to operate under a single banner. Its Circle K stores account for 91% of its locations in the U.S., 97% in Canada, and 100% in Europe. This gives consumers a familiar name wherever they go while generating cost savings through greater purchasing power. 

While 2022 was an exceptional year, the company’s done an excellent job over the past decade controlling costs. In the decade between 2013 and 2022, its expenses have grown by just 2.0% annually. This has led to an EBITDA compound annual growth rate of 20% since 2012. 

The company’s become known for its ability to efficiently and effectively integrate acquisitions. Since 2004, it’s done 68 deals, adding nearly 11,000 stores. Acquisitions remain a crucial driver of growth. 

RBC Dominion Securities has an Outperform rating and an CAD$80 ($58.48) target price. 

Canadian Natural Resources Has the Energy to Move Higher

Canadian Natural Resources (CNQ) is one of Canada’s largest independent oil and gas producers. Over the past year, its stock gained more than 22%. Over the past 10 years, it has had an annualized total return of 8.90%, almost double its peers in oil and gas exploration and production.

At the end of November, the company said that once it gets its net debt down to CAD$8 billion sometime late in 2023, it will increase the free cash flow it returns to shareholders. While it currently pays out 50% of its free cash flow, it plans to increase that to between 80% and 100% upon hitting its debt repayment target. 

“‘There was a higher debt-load going through COVID, and now (producers) have got options,’ said Ryan Bushell, President of Newhaven Asset Management, which holds shares in Canadian Natural and ARC Resources Ltd.,” Reuters reported on Dec. 9.

RBC Dominion Securities analyst Greg Pardy believes that the company’s free cash flow will continue to grow, providing shareholders with above-average returns in 2023 and beyond. 

“‘Canadian Natural Resources’ management committee structure and shareholder alignment are unique factors which distinguish the company globally. CNQ’s long-life, low-decline portfolio—anchored by moderate sustaining capital— affords the company superior free cash flow generative power,’ The Globe and Mail reported the analyst’s comments from Tuesday’s released report. 

RBC Dominion Securities has an Outperform rating and a CAD$89 ($65.13) target price, 25% higher than where it’s currently trading. 

A Defensive Tech Play

Until the Federal Reserve pauses interest rate hikes or pivots lower, tech stocks will continue to face significant headwinds in 2023. That said, a company like Constellation Software could be a way for tech investors to have their cake and eat it in the year ahead. 

In 2022, it lost approximately 9% of its value. That’s less than half the S&P 500’s decline. So I’d take this result and run with it.  

As I said in the intro, Constellation is a company that knows how to make and integrate small acquisitions. Raymond James portfolio manager Chris Blumas is a big fan of the company. 

“Constellation is a software consolidator, and they have two big unique advantages that other companies don’t have. They have this infrastructure that allows them to do small acquisitions — and these acquisitions they do are typically $5 and $10 million software companies and they’ve done hundreds of acquisitions over the years,” The Cantech Letter reported his comments in October. 

The beauty of Constellation is that it’s a holding company for six independently run tech businesses. These businesses hold their debt at the operating level, so none of the six verticals are put at risk should one of the businesses have some financial distress. 

Constellation’s free cash flow per share in the trailing 12 months ended Sept. 30, 2022, is $55.31. That gives it a free cash flow yield of nearly 4%. That’s not exceptionally cheap, but given the lower level of risk, it’s more than fair. 

RBC Dominion Securities analyst Paul Treiber said this about Constellation in the brokerage firm’s report adding the company:

“We add Constellation Software, with our outlook for high shareholder returns reflecting Constellation’s ability to rapidly compound capital through acquisitions, potential to benefit from an uncertain macro environment (high mix of recurring revenue and greater likelihood of M&A), and attractive valuation, in our view,” The Globe and Mail reported. 

The analyst has an Outperform rating and a CAD$2,600 ($1,902.61) target price, 23% higher than where it’s currently trading.

Oh, Canada, indeed. 

 

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On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes.