Canadian flag as a barograph

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Canada’s energy and agriculture sectors are the kind of bright spots other developed nations may come to envy as inflation and supply-chain issues persist, says Joe Sirdevan, CEO of Toronto-based Galibier Capital Management.

Speaking on the Soundbites podcast, Sirdevan said Canada has a higher-than-average exposure to commodities like oil, base metals and grains — the very ones in extreme global demand.

“The Canadian economy is benefiting from high prices to some extent, as we export those commodities elsewhere in the world,” he said. “And our vaccination rate is among the highest in the world, which bodes well for us. So we’re probably pretty well positioned against other developed markets going forward.”

Sirdevan said investors have been trying to make sense of markets ever since Covid sparked labour constraints, supply chain challenges and inflation.

“Just look at the rise of things like the meme stocks or crypto; the massive price increases in housing; speculation in art; speculation in near-art like NFTs,” he said. “And now, with the war in Europe, the impact on the supply of oil and of agricultural products is being impacted further. It’s disorientating, and it’s a very difficult time to be an investor.”

He believes the rise of passive investing and index-linked investment products is worrisome because investors who are determined to replicate market indexes are price indifferent and volume dependent — a recipe for distorting the market.

“The rise of passive product is a concern because the larger the amount of capital in the hands of passive players who are concerned with replicating an index, the more potential for extreme volatility in equity prices,” he said. “Passive products are setting prices for stocks not due to the fundamentals of the company, but rather based on supply and demand of the stock in the marketplace.”

That said, the increased volatility is actually good for investors who have a long-term view of the market and disciplined investment processes.

He advises investors to look for steady and secular earnings and cash flow growth stories and use a very conservative valuation methodology to determine intrinsic value.

Among the Canadian equities he likes right now are Calgary-based Canadian Pacific Railways; Winnipeg-based Ag Growth International Inc.; Richmond, B.C.-based Premium Brands Holdings Corp.; and two Toronto-based companies, Manulife Financial Corp. and Spin Master Corp., a toy maker.

CP has caught his eye because its recent merger with Kansas City Southern Railway Co. makes it the only rail company with a pan-North American footprint.

“No one else has exposure simultaneously to Mexico, U.S., and Canada except for CP. So, we like that one quite a lot,” he said. “We think it’s got some very good upside from here and there’s lots of synergies on putting those two companies together.

Ag Growth is poised to benefit from very strong commodity prices in agriculture, especially after a couple of years of bad harvests and the ongoing conflict in Ukraine, which is having devastating effects on food exports from the region.

Premium Brands, a producer of specialty food products, has come through Covid in good shape and has a strong management team that is trying to capture new opportunities as employees return to office work.

Manulife currently enjoys a very attractive valuation with a big yield, and stands to capitalize on interest rate hikes and growth potential in Asia.

Finally, Spin Master is now the world’s third largest toy manufacturer, after Mattel Inc. and Hasbro Inc. Spin Master “is extremely well managed,” he said. “Fantastic balance sheet, and they continue to make very value-accreting acquisitions to add to their core franchise, which is the PAW Patrol franchise.”

In all of these cases, the companies meet his criteria of being strong market leaders at a good price. And he remains largely unconcerned about volatility.

“For the true investor, a volatile world is a good world,” he said. “Focus on stocks as pieces of businesses, and understand the drivers of those businesses. Think of businesses as assets that, over time, generate capital and generate cash flow. And try and buy things below intrinsic value. That really is my advice in good times and in bad.”


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

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