What Canadian stocks are poised for growth?

Canadian equities continue to outperform and are trading at a discount to U.S. peers, with the S&P/TSX up 15% year-to-date at the end of August, says Natalie Taylor, portfolio manager with CIBC Asset Management. To compare, the S&P 500 was up 8%, and the Nasdaq up 10% at that time.

However, if outperformance is to persist, there needs to be a resolution to trade uncertainty in the next 12 months, she said in a Sept. 2 interview. This ongoing uncertainty is the biggest risk to the Canadian economy and businesses.

“Many companies have told us they can mitigate and execute in just about any environment, but they need to know what the rules and regulations are,” she said.

Listen to the full conversation on the Advisor To Go podcast, powered by CIBC Asset Management.

The renegotiation of the Canada-U.S.-Mexico Agreement on trade is scheduled for 2026, and “a dissolution or complete rewriting of the agreement would unequivocally be a negative for the Canadian economy,” she said.

Despite ongoing trade uncertainty, there are still opportunities in Canadian equities, she said.

Taylor likes railway giant CPKC. “The recent merger with Kansas City Southern has enhanced CP’s rail network with connectivity to Mexico. While this has been viewed as a risk in today’s charged trade environment, we believe that ultimately, a truly North American rail network is an advantage.”

She added that rails should be among the first to benefit from any improvement in North American trade or economic conditions, especially after a prolonged freight downturn post-Covid.

Looking to the consumer sector, Taylor said there’s an emerging opportunity with Couche-Tard, which is a large global convenience store operator.

“Couche-Tard has just walked away from a bid for Seven & i Holdings, which owns 711 stores, after months of uncertainty as to whether this deal would go through or not,” she said. “By stepping away from the transaction, Couche-Tard has removed the uncertainty overhang of a large transaction, and committed to doing share buybacks with its excess capital.”

She added underlying fundamentals are improving. While traffic had declined due to lower miles driven, weaker cigarette sales, and a shift to value consumption away from convenience, sales are now improving with stronger food sales, loyalty programs and cigarette stabilization.

“Add to that that Couche-Tard trades currently at a very undemanding valuation of 17x, which is below its historical average, making what we think is a pretty good opportunity,” Taylor said.

In Canada’s energy sector, Taylor likes Keyera, a midstream company specializing in gas gathering, processing, fractionation and transportation. The company is in the process of acquiring Plains’ Canadian business, which will enhance Keyera’s positioning and value, she said. The company will also benefit from growing gas processing requirements as LNG Canada begins ramping up operations.

“Lastly, Keyera’s cash flows are highly contracted, and its leverage is among the lowest of the energy infrastructure companies, providing some downside protection,” she said.

Taylor said companies with exposure to U.S. and global economies would also outperform.

One example is Intact Financial, which rallied this year and was up 20% in June, she said. Though the stock has since pulled back 13%, she said, earnings have remained resilient.

“Intact continues to be incredibly well-positioned in Canadian property and casualty, given its scale and superior ability to segment its risks, as well as in U.S. specialty, where it’s demonstrated profitable growth.”

The Bank of Montreal also provides “an attractive opportunity.” BMO is focused on boosting return on equity across its businesses and is seeing stronger U.S. growth, Taylor said, particularly in commercial banking. It also has among the lowest exposures to Canadian consumers, where delinquencies are rising.

Overall, Taylor said that as long as there’s a trade resolution in the next year, the TSX would continue to perform well.

This article is part of the Advisor To Go program, sponsored by CIBC Asset Management. The article was written without input from the sponsor.