Andrew Pink's Top Picks: July 6, 2023
BNN Bloomberg
MARKET OUTLOOK:
We expect equity markets to remain volatile. There will be sector rotation and narrow markets until the U.S. Federal Reserve sees a path to its target inflation rate and stops increasing interest rates. When rates plateau and certainty is restored, there will be a basis for the yield curve to resume a more normal shape.
We believe equities will move higher once interest rate visibility is restored, and some of the $5 trillion parked on the sidelines will come out of GICs and short-term ETFs and back into equities.
Also helpful would be an improvement to global growth forecasts perhaps driven by stimulus in China. Until inflation is contained, there is a risk of a hard landing for markets if central banks raise rates so high that consumer spending is dramatically reduced. China has just begun cutting interest rates. Equity markets will react favourably if the rest of the world were to follow suit over the next 12-18 months.
TOP PICKS:
Exchange Income is a Winnipeg-based diversified industrial company focused on the acquisition and development of profitable and well-established companies in Aviation Services, Aerospace and Specialty Manufacturing. The company pays a healthy dividend and has a disciplined approach to acquisition valuation and financing. Establishing long-term partnerships with mature businesses has generated consistent free cash flow growth. This has fueled a five per cent annualized dividend CAGR for the past 19 years and has resulted in an average annual share price total return of more than 20 per cent.
Nexus Industrial REIT (NXR.UN TSX)
Nexus is a diversified REIT that owns industrial, office and retail properties across Canada. The company has recently increased its ownership in the growth-oriented industrials segment, which now makes up more than 90 per cent of net operating income. Its seasoned management team has secured a strategic relationship with RFA Capital which we expect to underpin its ambitious growth strategy over time. We believe Nexus is undervalued and should command a multiple consistent with its peers considering its high-quality assets, key geographic footprint, and opportunities for growth in its core markets.
The second largest Canadian bank by market capitalization, TD has done a commendable job establishing a significant U.S. retail banking franchise that we expect will generate out-sized returns compared to its domestic peers over time. Despite its best efforts, TD was unsuccessful in its most recent acquisition attempt for First Horizon North, a large U.S. regional banking peer. Although not the desired outcome, with $16 billion in excess capital, the highest reserve capital of the Canadian banks, TD is well positioned to pursue other U.S. acquisitions, invest for organic growth, buy back stock and/or increase the dividend. Typically trading at a mid-single-digit premium to domestic peers, uncertainty related to this acquisition has created a rare opportunity to invest in this high-quality bank at a meaningful discount.
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