Five stocks to watch next year
Tired of overhyped buys that quickly fizzle? Maybe consider these trouble-free keepers
Canadian stocks are widely expected to outperform their counterparts in most of the world’s major equities markets in 2020. That’s despite an already impressive 18 per cent gain in the S&P/TSX Composite Index in 2019 that has added about half a trillion dollars in shareholder value to Canadian stocks.
This year’s annual list of stocks to watch exclusively features Canadian equities, because the S&P/TSX is expected to post a further gain of about seven per cent in 2020, compared with a forecast four to five per cent 2020 gain in the S&P 500 Index.
After several years of chasing highgrowth stocks — in tech, most conspicuously, and in overhyped sectors like marijuana — global investors are expected to return to “underappreciated” value stocks like those listed below.
As always, this space does not make stock recommendations.
It identifies stocks worth considering for your portfolio.
And the stocks highlighted here are trouble-free keepers, favoured not for dynamic and possibly short-lived growth, but for gradual, steady, longterm growth in both value and dividend income.
CAE Inc. CAE stock is an investment in civil and military aviation growth, and in more demanding safety practices in global aviation. Shares in Montreal-based CAE, the world’s biggest provider of flight-training systems, are not bargainpriced. At $34.50 currently, CAE is trading at a steep price/earnings multiple of 28.
That number falls to 22 as a multiple of projected 2021 profits, however, and the stock pays a handsome dividend yield of 1.3 per cent.
CAE is the quintessential buy-and-hold stock. Civilian air travel is expected to double, to 8.2 billion passengers per year, over the next two decades. And government spending on military and emergency response aviation is forecast to continue growing as well. CAE, with operations in 35 countries, is alone in providing entire training systems — flight simulators and classroom materials and instruction — for both pilots and other crew members.
The U.S. industry alone will need about 635,000 new pilots by 2040, and is already coping with pilot shortages.
Lack of pilot simulator training on the new Boeing 737 Max was a factor in the two tragic crashes of that aircraft, which Canadian, U.S. and European regulators refuse to recertify unless every Max pilot undergoes simulator training.
That’s why CAE has a massive $9-billion backlog of orders, equal to three times’ annual revenue. Again, the stock is pricey in the short term, but its reliability as an income and growth stock is as close to a guarantee as one finds in the investing world.
Empire Co. Ltd. Empire is a classic “defensive” stock relied upon to hold its value in good times and bad. As Canada’s No. 2 grocery retailer, Empire has an entrenched position in a sector that provides a recession-resistant service.
Investors have been wary of the stock since Empire’s botched 2013 acquisition of Safeway’s Western Canada operations, which led to a $2.1-billion loss in 2014. But Empire, which operates the Sobeys, IGA, FreshCo, Safeway and Farm Boy banners, has been restored to good health. Empire’s profits more than doubled in its latest fiscal year, to $387 million — not far off Empire’s peak profit of $419 million in 2015.
Empire is also expected to exceed its targeted $500 million in cost-cutting this year, a goal it set after the Safeway debacle. Yet the stock has barely budged in response to Empire’s considerably improved performance. And Empire has significant upside potential, having achieved a gross profit margin of just 22.5 per cent in 2018, compared with rival Loblaw Cos. Ltd.’s 30.3 per cent.
The Stellarton, N.S.-based
Empire retail network of 1,415 stores is poised for continued strong revenue growth from its 2018 acquisition of Farm Boy, an upscale grocery chain with above-average profit margins and growth opportunities outside its Ontario home market; and from a best-in-class home-delivery service, dubbed “Voilà by Sobeys,” that launches in Ontario next year and in Quebec in 2021.
Empire is also competitive with grocers Loblaw and Metro Inc. as an income stock, with a dividend yield of 1.6 per cent.
Magna International Inc. Magna is a proxy for the global auto industry, supplying parts to most of the West’s major automakers. Magna also has a significant presence in China, thanks to a recent partnership to supply electric vehicles (EVs) in the world’s biggest and fastest-growing EV market. (Magna already had three parts plants in China.)
But the biggest emerging story at Magna is its increasingly dominant role in the advanced driver-assisted systems (ADAS) essential to EVs and autonomous, or driverless, vehicles. Magna is the global leader in camera-based ADAS products.
It already supplies world automakers with about 12 million cameras a year, along with sensors and other related ADAS gear.
Cameras are the key component in ADAS products, giving Magna a head start in the most rapidly growing segment of 21st-century automaking. Automaker spending on ADAS gear is expected to quadruple by 2025, to $81 billion (U.S.). At this early stage, it’s difficult to know who will best meet the challenge of revolutionary automaking. But since Magna supplies all of them, that makes Magna a safer entrée to this dynamic aspect of the industry than stock in any one or several automakers.
The hit Magna took this year from a 40-day strike at major client General Motors Co. reminded skittish investors that Magna is tied to the auto industry’s notorious volatility. It’s worth noting, though, that while Magna shares briefly lost about two-thirds of their value during the Great Recession, they have since roared back, posting a more than sevenfold increase in price.
National Bank of Canada Canada’s big banks have been in the doghouse this year, notably in the fourth quarter, when most of them reported higher loan-loss provisions, large restructuring charges and mediocre results from their international operations. Montreal-based National Bank, smallest of Canada’s Big Six banks, was the exception, posting double-digit increases in earnings per share and return on equity, and rewarding shareholders with a four per cent dividend hike.
With a dividend yield in the latest fiscal year of 3.9 per cent, National Bank already is one of the richest income stocks in Canada. Shares in National Bank are chiefly an investment in Quebec, where the bank does most of its business.
Quebec’s above-average economic performance is expected to continue for several years, based on strong growth in business spending and labour-force growth. “We see little that would throw Quebec’s economy off its faster track in the near term,” Robert Hogue, senior economist at the Royal Bank of Canada, said earlier this year. And because Quebecers on average carry less mortgage debt than their counterparts in red-hot housing markets like Toronto and Vancouver, National Bank boasts a lower-risk loan portfolio than its Big Six peers. The bank has also been spared restructuring charges with its astute cost-control management. National Bank’s interest income has soared by 50 per cent over the past five years, but its noninterest expenses have not grown in tandem, instead rising just 23 per cent.
The bank’s shares are undervalued, trading at a price/ earnings multiple of just 11.4.
Toromont Industries Ltd. Toromont is an infrastructure play. The venerable Concord, Ont.-based firm operates one of the world’s biggest networks of Caterpillar dealerships, with a near-monopoly in supplying Caterpillar Inc. heavy equipment from Manitoba to Newfoundland and Labrador, extending north to Nunavut.
Caterpillar is the world leader in mission-critical machines for the construction, mining and forestry sectors. Though Toromont’s principal business is in Canada, it also has some international exposure, notably in the U.S. Canada, like the U.S., suffers an immense “infrastructure deficit,” which for Canadian municipalities alone amounts to an estimated $120billion-plus in needed replacement or upgrading to transportation, water, power, health-care and educational systems. Quebec is expected to spend more than $90 billion on projects over the next decade. And, eventually, the billions of dollars Ottawa has set aside for infrastructure will be deployed once the feds, provinces and territories can agree on cost-shared projects to which they’ve committed.
Even without that boost, Toromont’s revenues have more than doubled in the past five years, and profit is up 89 per cent in that period. Toromont stock has shown steady growth, more than doubling over the past five years, and that trend should continue with the firm’s expectation of revenue growth in the low double digits in 2020.
Toromont also qualifies as an income stock, with a 1.6 per cent dividend yield.
Less important than the size of the dividend is its durability. Toromont has a 29-year record of dividend payments, a sign of the firm’s consistent mastery of its markets and its operating expenses.