Some stocks worth watching in 2018

With a market correction overdue, consider investments in CIBC, Rogers and Linamar in 2018

Today’s North American stock-market rally is getting long in the tooth. The current U.S. bull market, for instance, is entering its eighth year — the secondlongest bull on record.

A correction is long overdue, and even blue-chips will be trimmed in value with a market downturn. But the firms described below are built to last, long-term investing prospects that will reward the patient 2018 investor.

Canadian Imperial Bank of Commerce, Toronto (TSX: CM; $123.11)

CIBC is the most undervalued of the Big Five bank stocks, owing to its aboveaverage exposure to the market in uninsured mortgages, and recent U.S. acquisitions for which it is thought to have overpaid.

Those two risks are likely overstated, and meanwhile they obscure CIBC’s strengths. The bank’s profit growth has outpaced that of its Big Five peers for the past four years.

One reason is its impressive attention to costs. Revenues have increased 17 per cent since fiscal 2014, but noninterest expense is up just 2 per cent in that period.

As it happens, PrivateBank and wealth management firm Geneva Advisors, the two recent U.S. acquisitions, are performing better than CIBC’s own high expectations.

They give CIBC valuable exposure to a robust U.S. market to match that of rivals TD and Bank of Montreal. They also reduce CIBC’s vulnerability to added pressure on mortgage holders due to anticipated Bank of Canada rate hikes next year.

CIBC maintains its share buyback plan, which keeps the stock price strong, while offering the highest dividend yield of the Big Five. Indeed, at a current yield of 4.25 per cent and impressive revenue growth, CIBC is unusual as an income stock with the characteristics of a growth stock.

Linamar Corp., Guelph, Ont. (TSX: LNR; $74.45)

The current drag on shares of the engine and transmission components maker, the second-largest Canadian auto-parts maker behind Magna International Inc., is due to overwrought concerns about the status of the North American Free Trade Agreement. But the demonstrated economic benefit to the three NAFTA partners of the current, thoroughly integrated continental auto industry argues against significant change in the status quo.

CEO Linda Hasenfratz’s goal of reaching sales of $9.5 billion by 2021, up from the current $6 billion, appears realistic. The looming transition to electric vehicles (EVs) and hybrids will create new revenue opportunities.

With recent strategic tech-oriented acquisitions and an existing global network of 59 plants in 17 countries, Linamar will be able to exploit new opportunities in the market, both geographic and tech- nological. For instance, Linamar’s exposure in the Asia-Pacific region, the fastest-growing auto market, is a prime candidate for growth, now accounting for fewer than 6 per cent of total sales.

Linamar is already more profitable than its better-known rival, Magna, with a 2016 operating margin of 11.6 per cent to Magna’s 7.6 per cent. Even assuming the future growth rates in Linamar revenue are more modest than expected, Linamar stock currently trading at 13 per cent below its peak price of $85.82 seems undervalued.

Rogers Communications Inc., Toronto (TSX: RCI.B; $64.15)

Incoming CEO Joe Natale is focused on transforming Rogers into an even more formidable wireless provider than it now is. That doubling down on wireless will be a costly endeavour, as Rogers bulks up its already considerable broadband capacity. Fortunately, Rogers has a trove of assets unrelated to wireless that are prime candidates for divestiture, in order to finance the technological improvements required.

Rogers can raise about $1.2 billion by selling its one-third interest in Montreal cable provider Cogeco Communications Inc. Rogers can raise an estimated $1.7 billion by selling the Toronto Blue Jays. And there are additional funds Rogers can be free up by selling its stake in Maple Leaf Sports & Entertainment, which owns the GTA’s four other major-league franchises.

In the main, Rogers’ many media operations are not the firm’s best use of capital. For instance, Rogers’ media operations accounted for 15 per cent of total revenues last year, but just 3 per cent of operating profits.

Rogers shares are poised to grow as the company becomes a more focused “pure play” in content distribution rather than ownership. Capturing its share of soaring internet data is a lucrative proposition, while keeping up with wage inflation among athletes is not.

Loblaw Cos. Ltd., Brampton (TSX: L; $68.16)

The Loblaw investment story is about upside potential. Loblaw stock is in the doghouse — down 3.3 per cent in the past year — for reasons that each represent room for improvement.

The cost to Loblaw of lax manage- rial supervision in its packagedbread price-fixing scheme revealed in December will be at least $75 million in customer reimbursements. Loblaw’s sales growth has slowed, to just 2.2 per cent in its latest fiscal year. And Loblaw’s operating margin, at 4.5 per cent, lags that of Metro Inc., its largest rival (5.9 per cent).

Closing the gap with Metro could be as straightforward as trimming the firm’s bloated store count. Loblaw has about 2,500 stores, including Shoppers Drug Mart. The stores operate under no fewer than 23 “banners,” including Loblaws, No Frills, Fortinos, Zehrs, Pharmaprix and TNT.

Loblaw can serve its 17 million customers with fewer stores and fewer banners, with their duplicative overhead.

Given its proximity to the greatest number of Canadian shoppers, Loblaw stands to be rewarded by its new home-delivery services, the most aggressive initiative in the industry. For the same reason, Loblaw is a safe investment in the marijuana boom. With its 1,300 drug stores plus hundreds of in-store pharmacies, Loblaw will be a major player in the medicinal marijuana business.

CSX Corp., Jacksonville, Fla. (Nasdaq: CSX; $55 U.S.)

CSX is a bet on a turnaround at one of America’s Big Four railways. The stock has dropped with the unexpected death of CEO Hunter Harrison in December. Admittedly, the rebound at CSX, which serves the U.S. Eastern Seaboard and the central Plains states, is a work in progress.

Then again, the Harrison blueprint by which Canadian National Railways Co. and Canadian Pacific Railway Co. were turned into North America’s two most profitable major railroads is showing early promising results at CSX, which are likely to continue under interim CSX CEO Jim Foote.

The upside potential here is considerable. CSX stock is trading almost 30 per cent below its 2011 peak. Annual revenues are down close to 13 per cent from their 2014 high, and profits are down 20 per cent from 2014. Restructuring a rail network, some parts of which are a century or so old, is akin to moving a cemetery. Sure enough, CSX inconvenienced its shipping clients with massive tie-ups last summer as it closed unprofitable routes and redundant switching yards.

But CSX has put much of that pain behind it, which will enable it to improve its operating margins from 29.6 per cent, the worst performance among North America’s Big Six railroads in 2016.