Barclays lists three Canadian stocks among top picks for Americas

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When it comes to natural resources, the Canadian market is still home to some of the continent’s top stock picks, according to Barclays.

While the oil patch is still operating under mandatory production curtailments, and there is no resolution in sight to the pipeline dilemma, the Canadian energy sector is undoubtedly in a much better place than it was a few months ago.

The pipeline bottleneck has eased and the discount on Canadian crude has gone back to normal levels.

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Valuations, on the other hand, are stuck in the doldrums. Cenovus Energy Inc.’s stock, for example, trades at about a 40-per-cent discount to net asset value, Barclays analyst Paul Cheng said in a report.

“We think investors’ risk-reward view on Cenovus continues to be overly skewed to the downside,” Mr. Cheng wrote.

That’s one reason Mr. Cheng named Cenovus as the top pick among North American integrated oil companies.

It ranks among Barclays’s best investment ideas as chosen by the bank’s individual equity analysts. “The goal … is to curate the most compelling large-cap single stock ideas with superior alpha generation potential on a sector-by-sector basis,” the report said.

True to form, Canada also claimed the bank’s top mining pick, with Teck Resources Ltd. The only other Canadian name on the list is Manulife Financial Corp., as the top-ranked Canadian financial-services stock. Both Teck and Manulife are carried over from Barclays’s previous picks, while Cenovus is a new addition.

We look at each of Barclays’s Canadian picks, stock by stock.

Cenovus

Most of the past five years have been unkind to Cenovus shareholders. The company suffered alongside its sector peers from a global oil glut and downturn in energy prices, which was compounded domestically by the lack of pipeline capacity that sent Canadian crude prices down to as low as US$13.46 a barrel last November.

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There were also company-specific problems. The market was no fan of the debt the company incurred in a $17.7-billion deal to purchase assets from ConocoPhillips Co.

Cenovus management subsequently made an enormous bet on oil prices that backfired badly. A hedging program designed to protect against falling prices saw the company committed to selling most of its oil well below market value. A $469-million hedging loss was realized in early 2018.

Conditions have improved on all fronts.

“With the Canadian macro environment taking a complete 180-degree turn, and steep hedging losses in the rearview mirror, we think Cenovus’s cash flow outlook has improved significantly,” Mr. Cheng said.

“Even assuming Western Canadian Select crude oil differentials re-widen …, we still expect Cenovus to generate meaningful free cash flow in the years to come.”

Teck Resources

With base-metals prices in a downtrend for most of the past decade, the mining sector has been forced to cut costs and reduce debt.

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Teck is no exception, according to Barclays analyst Matthew Murphy. Despite a relatively clean balance sheet and better free cash generation, Teck shares trade at a discount to peers across several different valuation metrics, Mr. Murphy said.

The company’s free cash predominantly flows from its metallurgical coal business, which is currently benefiting from elevated prices. Meanwhile, a partnership deal to expand Teck’s Chilean copper mine is nearing completion.

“With a significantly de-levered and investment grade balance sheet, the company is well positioned to advance its key copper growth project while at the same time returning cash to shareholders,” Mr. Murphy said.

Manulife

Life insurers have been waiting a long time for higher interest rates.

With the return on invested premiums forming a key profit driver for insurance companies, the low-rate environment has seen their stocks underperform for years.

Elevated bond yields, at least compared with recent years, are lifting the group’s prospects.

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“Relative to its peers, Manulife’s earnings offer the most upside potential in a rising interest rate and equity market environment,” Barclays analyst John Aiken said, adding that the company’s stock trades well below its historical peaks in valuation.

“We expect the lift in bond yields, the return of investment gains, and new cost-saving initiatives to produce double-digit core earnings growth for 2019.”

Barclay’s Americas top picks

Sector  Company Ticker Market Cap ($Mil) Share Price ($) (03/06/19) Price Target ($) 12M Fwd Div. Yield (%)
Basic Industries
North America Metals & Mining Teck Resources Ltd. TECK-B-T 17,140 30.03 42.00 0.7
U.S. Chemicals Chemours CC-N 6,271 37.54 48.00 0.3
U.S. Paper & Packaging Crown Holdings Inc. CCK-N 7,513 55.51 70.00 0.0
Consumer
Americas Agribusiness Tyson Foods Inc. TSN-N 23,209 63.54 73.00 3.0
Latin America Consumer Wal-Mart de Mexico WALMEX-MX 877,261 50.24 56.00 3.5
U.S. CHPC & Beverages Coca-Cola European Partners CCEP-N 22,739 47.88 51.00 2.3
Energy
Americas Integrated Oil Cenovus Energy Inc. CVE-T 13,811 11.24 16.00 1.8
North America Oilfield Svcs & Equip. Baker Hughes BHGE-N 27,268 26.31 31.00 2.7
U.S. Diversified Natural Gas Cheniere Energy LNG-N 16,876 65.56 78.00 0.0
U.S. Independent Refiners Marathon Petroleum Corp. MPC-N 40,370 59.93 124.00 2.3
U.S. MLPs Enterprise Products Partners EPD-N 60,871 27.86 33.00 6.3
Financial Services
Canadian Financial Services Manulife Financial MFC-T 44,016 22.48 27.00 4.4
Latin America Financial Services Banorte GFNORTEO-MX 298,063 103.37 145.00 5.4
U.S. Consumer Finance Essent Group ESNT-N 4,287 43.62 52.00 0.0
U.S. Insurance/Non-Life Progressive Corp. PGR-N 41,988 71.91 81.00 3.6
U.S. Large-Cap Banks JPMorgan Chase & Co. JPM-N 339,604 103.72 140.00 1.8
U.S. Mid-Cap Banks East West Bancorp EWBC-Q 7,732 53.27 72.00 1.7
U.S. REITs Digital Realty Trust Inc. DLR-N 23,393 112.56 137.00 3.9
Health care
U.S. Biopharmaceuticals Alexion Pharmaceuticals ALXN-Q 29,301 131.12 175.00 0.0
U.S. Health Care Services Humana HUM-N 36,888 272.1 351.00 0.5
U.S. Life Science Tools & Diagnostics Thermo Fisher Scientific Inc. TMO-N 100,246 251.24 295.00 0.2
North America Transportation FedEx Corp. FDX-N 46,513 178.18 235.00 1.5
U.S. Aerospace & Defense Allegheny Technologies Inc. ATI-N 3,518 27.99 39.00 0.0
U.S. Autos & Auto Parts Aptiv PLC APTV-N 21,442 82.46 90.00 1.4
U.S. Homebuilding & Building Products Owens Corning Inc. OC-N 5,253 47.94 57.00 1.7
U.S. Machinery & Construction CNH Industrial CNHI-N 14,846 10.81 13.00 6.0
U.S. Multi-Industry Honeywell International Inc. HON-N 112,090 153.74 170.00 1.9
Power & Utilities
Mexico Infrastructure Grupo Aeroportuario del Pacifico GAPB-MX 98,147 174.95 205.00 3.5
Retail
U.S. Leisure Norwegian Cruise Line Holdings NCLH-N 12,001 55.12 74.00 0.0
U.S. Restaurants McDonald’s Corp. MCD-N 139,311 182.03 208.00 2.5
U.S. Retail Broadlines/Hardlines Foot Locker FL-N 7,129 63.15 85.00 0.4
Technology
U.S. Payments, Processors & IT Services PayPal Inc. PYPL-Q 113,168 96.46 111.00 0.0
U.S. Semiconductors Marvell Technology Group Ltd. MRVL-Q 12,885 19.6 23.00 1.2
U.S. Software Salesforce.com Inc. CRM-N 119,944 156.79 180.00 0.0

Source: Refinitiv and Barclays Research; Market cap and share price are in the currency of the related exchange.

Source: The Globe and Mail

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