David Burrows, president and chief investment strategist, Barometer Capital Management

FOCUS: North American large caps

MARKET OUTLOOK:

The investment team at Barometer believes that North American equity markets hit an important low in June and that while it is possible that markets could consolidate over the next few weeks, we have completed a corrective period driven by inflation and the U.S. Federal Reserve’s ongoing tightening cycle. Many important breadth readings hit extreme oversold levels and have seen significant improvement, making it unlikely markets make fresh lows. In order for the market to have another leg lower, we would likely need to see some sort of credit crisis emerge and at this time there is no indication of that in either credit spreads or volatility readings.

While the negative news flow continues to trouble investors, markets have corrected both in time and in price such that exposures in portfolios are now as low as they have been in several years, leaving few investors with outsized portfolio risk. This should help mute additional selling on negative news and facilitate buying as we see more transparency in the economic outlook.

As market anticipation of a post slowdown economic business cycle emerges, Barometer sees both opportunities in more defensive dividend-paying equities in utilities, staples and health care barbelled with some recently discounted economically sensitive companies producing goods in structurally constrained industries such as agriculture, energy and materials.

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TOP PICKS:

Northland Power (NPI TSX)

 We see Northland Power as a top idea as it should continue to benefit from higher power prices in Europe. Power prices in the region have persistently been well above contract levels, and Northland has the ability to re-contract these agreements to capitalize on the higher spot, which will result in a stronger bottom line. Northland is expected to report its quarterly results Thursday afternoon, and we should expect some favourable market commentary from management that could set the name up well for the rest of the year.

Vertex Pharmaceuticals (VRTX NASD)

Vertex has the leading Cystic Fibrosis drug that continues to gain market share and de-risks the company. It has four compounds in clinical trials including drugs for beta-thalassemia, sickle cell disease, acute pain and kidney disease. The acute pain compound is non-addictive, has the largest potential addressable market and is entering phase three in the fourth quarter.

Nutrien (NTR TSX)

We like Nutrien based on our bullish view of the global agriculture market, which has allowed Nutrien to generate a robust amount of free cash flow. Boosts to excess cash have been used to fuel organic growth and return capital to shareholders through buybacks and dividends. To speak to its willingness to return capital to shareholders, Nutrien recently doubled the amount it plans to return to investors this year. Given realized pricing in all of its segments is expected to rise in the back half of this year, benefitting from surging gas prices in Europe, and restrictions on Chinese and Russian exports, we see Nutrien as a top idea as it will be able to capitalize on this strengthening space.