Beaten-down sectors offer upside as cycles turn

Jeff Bradacs, co-head of equity strategies at Picton Investments, says there are deals to be found in sectors of the economy still recuperating from the global pandemic five years ago.

“We see some interesting opportunities in those sectors that have been rolling recessions into rolling recovery,” he said on the latest episode of the Soundbites podcast.

In particular, he sees upside in some areas of the automotive, industrials and consumer discretion sectors, which saw “a massive pull forward in Covid.”

Bradacs said massive inventory corrections have set the companies up nicely.

“And now, with lower rates and an improving consumer, [they] are going to see a recovery,” he said. “They don’t need a perfect recovery to see upside, but just a change.”

He likes Aurora, Ont.-based Magna Automotive, a parts provider that since the pandemic has focused on cutting costs and improving their balance sheet.

“Now with the cycle turning, [they] have significant upside to earnings,” he said.

Another company that is benefiting from the new economic phase is Valcourt, Que.-based Bombardier Recreational Products (BRP), manufacturer of so-called side-by-side vehicles like snowmobiles, jet skis, and four wheelers.

“It’s an industry that saw a pull forward during Covid,” he said. “For the last three years, [they] have been working down inventories through their channel. And that means they have significant margin upside as the cycle turns.”

Companies like these that have been under pressure for years, are now seeing tailwinds and conditions for recovery.

In industrials, he likes Element Fleet, a global fleet provider, that “has a very stable business, generates a lot of free cash flow and has a very attractive growth opportunity to gain market share.”

A company in the commodity space that will benefit from the current growth in gold mining operations is Montreal-based Osisko Royalties.

“Osisko Royalties is going to see one of its largest mines — the Malartic mine — grow as Agnico Eagle Mines adds capex to the project. And we’ll see that benefit to its free cash flow over time,” he said.

Looking forward, he expects areas of equity market strength will be different in 2026 than in 2025 when financial, energy and materials drove the TSX from strength to strength.

“We saw strength across all three areas that led to stronger performance of the TSX,” he said. “In the case of financials, banks held up very well in a slowing Canadian housing market, managed credit extremely well, and their diversified franchises and capital markets and wealth did well.”

Canadian energy stocks were up — despite the commodity itself being down — due to improved egress and M&A activity.

“There was a structural improvement in egress, meaning ability to get our molecules outside of Canada. We had TMX [the Trans Mountain Expansion Project pipeline], which allowed us to take more oil barrels outside of Canada. And we also had Canada LNG, that allowed our gas molecules finally to reach the west coast and Asian markets,” he said.

On the M&A front, markets liked the acquisition of MEG Energy Corp by Cenovus Energy Inc., and Tourmaline Oil Corp’s purchase of several Montney producers, including Crew Energy, Todd Energy, and Saguaro Resources.

“I would say there was [also] a little bit of a re-rate as political risks started to dissipate,” he said. “Comments federally were more supportive towards Canadian energy, and I think that made it more politically investable for global investors.”

In the case of materials, the real the driver was gold, which saw improving sentiment in the face of geopolitical uncertainty.

Bradacs said he’ll be keeping a close eye on the drivers of bond markets – including debt issuance, inflation, and threats to Fed independence.

“Right now, we have the Fed cutting rates with inflation still not back to 2%. It’s at 3% in the U.S. We also have fiscal stimulus. If growth starts to accelerate and bond yields start to rise, that could be a headwind for global equity markets,” he said.

“Higher yields would be a significant negative for equity markets globally,” he said.

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This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.