Transcript: Beaten-down sectors offer upside as cycles turn

Sectors he likes

JB: Some interesting opportunities are those sectors that have been rolling recessions into rolling recovery. And some of those interesting opportunities are consumer or industrials, where they saw a massive pull forward in Covid. As a result, then, the last three years, they’ve seen inventory corrections, and now, with lower rates and an improving consumer, are going to see a recovery. They don’t need a perfect recovery to see upside, but just a change. And so those would be things like Magna Automotive, a parts provider. For the last few years, they focused in on cutting cost, improving their balance sheet. And now with the cycle turning, have significant upside to earnings. Or a company like BRP that makes side-by-side vehicles: snowmobiles, jet skis, four wheelers. It’s an industry that saw a pull forward during Covid. 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. So, to summarize, where we find interesting opportunities are some of those areas where they’ve been pressured for the last few years, but now with tailwinds, they’ve bottomed, and [are] now starting to see recovery.

On the energy sector

JB: Historically, the energy stocks have been linked to a commodity — oil price, in particular. Last year, they were actually negatively correlated. One of the largest negative correlations we’ve seen, where Canadian energy stocks were up double digit, and oil and WTI was down nearly 20%. The reasons for that, stepping back — there’s a couple reasons — one is 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. The second reason they performed strongly is we had M&A in Canadian energy, and that really shined a light for investors on the long resources of Canadian energy companies. So, the acquisition [by Cenovus Energy Inc.] of MEG Energy Corp. in the oilsands and [the acquisition by Tourmaline Oil Corp. of] several Montney producers [Crew Energy, Todd Energy, and Saguaro Resources]. And lastly, I would say there was a little bit of a re-rate as political risks started to dissipate. Comments federally were more supportive towards Canadian energy, and I think that made it more politically investable for global investors. So where do we go from here? As we look at the commodity for oil, we do see a surplus of oil over the next year. Nearly 2 million barrels. Now, that’s going to pressure pricing. That can change with risk premiums, so we always have to be monitoring that. But as we stand today, we do see a surplus of barrels, which probably puts pressure on the commodity and the energy stocks.

Names he likes

JB: Within financials, as I mentioned, we’ve seen a lot of multiple expansion in Canadian banks and we think for gains there, we’re going to need to see improvement in earnings. In the interim, the area we do like is some areas of diversified financials. One company in particular we like is Element Fleet, the global fleet provider, one of the largest in the world, where they provide fleet services for companies. So, think of a telecom company that has 10,000 or 20,000 trucks to service people’s home internet. They could run that in house, or they can let Element do that for 20-25% cheaper. It’s a very stable business that generates a lot of free cash flow and has a very attractive growth opportunity to gain market share. Another company we like within the commodity space is Osisko Royalties. With higher gold prices, we’re now seeing gold companies talk about growth. Historically, when we’ve seen gold companies reach for growth, one of the key beneficiaries are royalty companies. 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.

Headwinds for Canadian companies

JB: 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. And if growth starts to accelerate and bond yields start to rise, that could be a headwind for global equity markets. If we had a period of higher inflation, that means that bond equities could become correlated at the wrong time in a downside scenario. So, we’re watching the drivers of the bond market, which includes debt issuance, inflation and also the independence of the Federal Reserve. That is key for [the] monetary system, for the dollar. And so that’s a key risk for the equity market, is really the bond market. Higher yields would be a significant negative for equity markets globally.

And, finally, what is the bottom line for investors?

JB: As we look forward, where the areas of strength are in the equity markets, we think they’re going to be different areas than we saw in 2025. Some of those areas that are moving from rolling recession to rolling recovery. And areas with positive change we see in companies.

Well, those are today’s Soundbites, brought to you by Investment Executive and sponsored by Canada Life. Our thanks again to Jeff Bradacs of Picton Investments. Visit us at investmentexecutive.com, where you can sign up for our a.m. newsletter and never miss another Soundbite. Thanks for listening.

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