Mike Archibald, vice president and portfolio manager, AGF Investments

FOCUS: Canadian equities

MARKET OUTLOOK:

There is a lot of market uncertainty right now – central bank tightening, global turmoil, worldwide, inflation and supply chain disruptions. All of this affect nearly all sectors in both Canada and the U.S. Despite all this, North American economies remain strong and I believe we remain in a bull market. Earnings won’t be as strong as in the prior two years, but they should remain positive, and volatility will be a mainstay in most asset classes for 2022. As some of the things mentioned above start to abate and become clearer, uncertainty should diminish a bit, and earnings multiples should start to move higher again. I think investors will need to be nimble and act quickly in market pullbacks like we saw in Q1-2022.

There are some pretty aggressive forecasts for interest rate hikes in both Canada and the U.S., and this will certainly put some stress on the consumer, who is already feeling the pinch from higher prices, which are pretty much everywhere. Tighter financial conditions is what the U.S. Fed/Bank of Canada are looking for to tame inflation, which will result in a more volatile equity environment than we have seen in quite some time.

I suggest continuing to watch commodities, and specifically energy stocks to give us a read on when inflation has peaked. The ratio of energy companies to the TSX composite still remains in an uptrend, representing a good sector for capital, but also has done a good job at signalling the peak in inflation over many cycles. At the moment, inflation looks to be more persistent than many thought six months ago; sectors correlated to higher inflation and ones with pricing power in that backdrop continue to act well, including energy, materials and REITs.

I continue to believe there are great opportunities in most sectors in Canada, but 2022 is unlikely to be a rising-tide-lifts-all-boats kind of market. I also think dividends will be an important component of overall portfolio returns for the next few years, so look for companies that have strong balance sheets, good cash flows and a history of consistently raising dividends, preferably those with conservative payout ratios. There are lots of those businesses in Canada, tending to be slightly larger companies with solid management teams.

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TOP PICKS:

Colliers International (CIGI TSX)

Most recent purchase in March 2022 at $165

Offering a great way to play the global commercial real estate space, the company is involved in leasing, advisory and real estate transactions in 60+ countries around the world.

They service all major asset classes – office, retail, industrial and multi-family — so you get great exposure to all things real estate in a diversified company that has demonstrated a tremendous track record as a long-term compounding investment.

The company has consistently delivered double digit earnings growth over a long period of time, and I expect that to continue. Management is moving more towards a recurring revenue model, in the investment management and asset management divisions, which should result in better profitability over time.

Stock trades at 18x P/E, they generate a huge amount of free cash flow and have a very clean balance sheet to allow for M&A when the time and opportunity is right. The stock is off about 20 per cent in 2022, which represents a great opportunity to buy.

Toromont Industries (TIH TSX)

Most recent purchase March 2022 at $109

Here’s a large equipment deal in Canada. Toromont sells, rents and services Caterpillar construction equipment. The dealer market is on fire right now as it’s hard to get new equipment, so many are buying used equipment and doing more repairs on older machines.

Pricing power in this industry is very high right now with equipment in short supply, and TIH has record backlog for equipment, so visibility into future quarters remains quite high. As provincial and federal governments continue to focus on improving the infrastructure footprint across Canada, TIH will be a beneficiary of increased workloads.

Margins continue to improve, EPS growth should be around 15 per cent in 2022 and the company has a pristine balance sheet to use for future acquisitions when more CAT dealers come up for sale. They have an excellent management team with a long history of solid capital allocation and execution.

Tourmaline Oil (TOU TSX)

Most recent purchase March 2022 at $55

With clear leadership in the natural gas market, money continues to flow into this sector. TOU, which operates in B.C. Montney, as well as Alberta Deep Basin, is about 80 per cent natural gas, 20 per cent oil and produces around 450K/barrel of oil equivalent (BOE) currently, which should grow by about 10 per cent this year to 500K/BOE.

They just provided a solid update last quarter, with reserves increasing by about 12 per cent. Given the solid pricing environment for both oil and natural gas currently, I expect TOU should generate around $3 billion in free cash flow this year. This company has been aggressive in returning capital to shareholders, having paid two special dividends in the past six months. I consider this to be a best in class energy company, extremely well managed with solid capital discipline over time, and a staple for energy exposure in Canada.

The company has a strong balance sheet, and could be debt-free at any time. As mentioned, they will generate a huge amount of cash flow this year, and the stock trades around 4.5x P/CF. I really like this company, one of my largest energy holdings, and I am a long-term holder.

PAST PICKS: August 10, 2018

 Precision Drilling (PD/TSX, Aug 10/18 - $93.80)

• Then: $4..86
• Now: $97.01
• Return: - .19%
• Total Return: -.19%

StorageVault (SVI TSX, Aug 10/18 - $2.50)

• Then: $2.52
• Now: $6.92
• Return:  174.60%
• Total Return: 176.22%

Savaria Corp (SIS TSX, Aug 10/18 - $17.65)

• Then: $17.70
• Now: $16.94
• Return: -4.29%
• Total Return: +5.35%

Total Return Average: 60.46%