Welcome to Soundbites, weekly insights on market trends and investment strategies, brought to you by Investment Executive and powered by Canada Life. For today’s Soundbites, we’re talking about Canadian equities with Lisa Conroy, fundamental equity product specialist with Connor, Clark & Lunn Investment Management. We talked about names she likes and where the risks are. And we started by asking about attractive opportunities in Canadian equities.

Lisa Conroy (LC): We continue to believe there’s long legs in monetary policy, and we’ve yet to see the full impact of higher interest rates. And as a result, growth in 2024 should be slower than what we saw in 2023. And what’s particularly relevant to corporates and their ability to earn revenue is the nominal GDP growth environment. This year could be a materially lower environment for nominal GDP. And that creates a more challenging backdrop for companies to earn revenue. We expect quality growth companies to outperform. Quality is companies that have the track record of consistent, less-volatile cash flow generation. On the growth side, we expect companies that can generate earnings growth faster than the market to outperform in this lower-growth environment.

Company names she likes

LC: In terms of a couple of examples that are resilient businesses, both [Toronto-based] Thomson Reuters, and [Saint-Laurent, Quebec-based] Stella-Jones are Canadian companies that fit that bill. Thomson Reuters, they’re most well known for their news business, but key drivers of their profitability these days are the services and software they offer to law and accounting firms. This is sticky business. It’s long-term contracts. It creates high levels of reoccurring revenue and the resilience to grow regardless of what the economy does. They also have a clean balance sheet, and are well positioned for M&A and for the generative AI theme as well.

Stella-Jones is another good example of a resilient business. They manufacture wood products. They create railway ties as well as those wooden utility poles. Their utility-pole business should generate 20% growth over the next few years, irrespective of what the economy does. It’s a well-run company, you know, generates high free cash flow, and it’s a company we like heading into this year.

Celestica [Toronto-based Celestica Inc.] is a Canadian company that’s a clear winner in regards to this generative artificial intelligence theme. They manufacture and design cutting-edge hardware solutions and have established competency in several high-demand product areas. A third of their revenue is directly exposed to hyper scalers in the U.S., including Amazon and Meta. And as these companies need to enhance their computing power to integrate generative AI, they’ll need Celestica’s hardware. And we believe Celestica can deliver upwards of double-digit earnings growth — well above the market — over the next two years.

Nuclear energy has been deemed a green energy source — through its lifecycle, it emits almost zero carbon emissions — and uranium is a key input for nuclear energy. Cameco [Saskatoon, Sask. -based Cameco Corporation] is one of the largest uranium producers globally and they’re a Canadian-listed company. And through their recent acquisition of Westinghouse [Cranberry Township, Pennsylvania-based Westinghouse Electric Company], which builds infrastructure needed for nuclear power plants, they have great exposure to this thematic. And we believe they will be able to drive superior earnings growth this year. And that’s another company that we like.

And finally, what’s the bottom line on Canadian equity investing in the current moment

LC: While there are some shorter-term cyclical challenges ahead for Canada, we believe Canada’s equity market is really well positioned. First off, we have a very attractive starting valuation point. Historically, if you look at equity markets, the starting valuation level is highly correlated to five-year and 10-year returns. Canada looks very cheap on an absolute basis, as well as on a relative basis, compared to the United States. We also carry some positive attributes in our economy and equity market that should do well in the next business cycle. While certainly over the short term, inflation should continue to ease, longer term, there are some structural pressures for inflation to move higher. In a higher-inflation environment, hard assets, including commodities, typically outperform. These tangible assets are a good store of intrinsic value that often provide a hedge against diminishing purchasing power. Canada’s economy and the market have a higher-than-average reliance on resources. In addition, many Canadian industries are oligopolies. You can think of the rails, telecommunications sector, grocer, banks, and even our smaller waste collection is an oligopoly. These types of market structures create pricing power and provide companies the ability to pass through inflation. And this is an attractive characteristic heading into a higher inflationary environment.

Well, those are today’s Soundbites, brought you by Investment Executive and powered by Canada Life. Our thanks again to Lisa Conroy of Connor, Clark & Lunn Investment Management. 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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