Market Call: Andrew Pink's outlook on Canadian Mid & Large Caps

Key Concepts

Earnings Season: The period when publicly traded companies release their financial results.
Canadian Mid and Large Caps: Medium to large-sized companies listed on Canadian stock exchanges.
Tariffs: Taxes imposed on imported goods.
Gold as a Safe Haven: Gold is often seen as a stable investment during economic uncertainty.
Integrated Energy Player: A company involved in multiple stages of the energy production process (e.g., exploration, refining, distribution).
Natural Gas Liquids (NGLs): Hydrocarbons that are separated from natural gas.
Midstream Companies: Companies involved in the transportation, storage, and processing of oil and gas.
Book Value: The net asset value of a company.
Momentum Investing: An investment strategy that involves buying assets that have been performing well.
Value Investing: An investment strategy that involves buying assets that are believed to be undervalued.
AI (Artificial Intelligence): Technology that enables machines to perform tasks that typically require human intelligence.
Generative AI: AI that can create new content, such as text, images, or code.
Supply Chain Management Software: Software used to manage and optimize the flow of goods and services.
Energy Transition: The shift from fossil fuels to renewable energy sources.
Independent Power Producer (IPP): A company that generates electricity and sells it to utilities or other customers.
Small Modular Reactors (SMRs): Smaller, more advanced nuclear reactors.
Real Estate Investment Trust (REIT): A company that owns, operates, or finances income-generating real estate.
Net Asset Value (NAV): The market value of a company's assets minus its liabilities.
Essential Services: Services that are critical for the functioning of society.
Contracted Revenue: Revenue that is secured by long-term contracts.

Market Overview and Earnings Season

Andrew Pink of LDI notes that earnings season is underway, with early Q3 results in Canada showing strong performance. He highlights that Q2 earnings growth was approximately 6%, with a little over 8.5% growth expected to continue into Q3. While some big tech companies have had mixed results (e.g., Google up, Meta down), the overall trend for Canadian earnings is positive.

Trade Tensions and Investor Sentiment

Regarding trade, Pink acknowledges that while tensions between Canada and the US are not ideal, the agreement between Chinese leadership and Donald Trump to reduce tariffs is a positive development. He suggests that investor fatigue with ongoing trade noise might be setting in. The deferral of tariffs is seen as a good sign, indicating a desire for resolution.

Gold Market Outlook

Gold has seen a slight pullback but remains above $4,000 per ounce. Pink attributes the recent surge to central banks buying gold as a place to park capital, selling treasuries. He notes that gold is a relatively small market compared to US treasuries, making it susceptible to demand-driven price increases. He believes there are still tailwinds for gold prices. For gold mining companies, he states that they perform extremely well when gold is priced between $3,000 and $4,000 per ounce, as their sustaining costs are around $1,500-$1,600, leading to wide margins. LDI holds a 6% weight in gold, including production companies, exploration, and royalty companies.

Company-Specific Analysis

Cenovus Energy (CVE)

Pink views Cenovus as a large, integrated energy player in Canada that LDI owns. He notes that the company has upgraded its refineries and managed its debt to a reasonable level. The potential acquisition of MEG Energy is a key development, though MEG shareholders have delayed their decision. Pink believes the acquisition would be a good deal for Cenovus in the long term, despite potential short-term pressure on the share price due to financing.

Sierra Corp (SIA)

For Sierra Corp, Pink sees potential in natural gas and natural gas liquids (NGLs), viewing natural gas as a transition energy source. He likes midstream companies and specifically Sierra, which LDI owns. Sierra offers a yield of over 5% and operates in transportation and storage. He notes that Sierra has improved its historical marketing practices and believes it's a stronger company, recommending buying on dips.

Manulife Financial (MFC)

Pink likes the insurance space and Manulife, though LDI owns Sun Life more significantly. He agrees that Manulife has strong fundamentals and a significant footprint in Asia. While Manulife trades at 1.8 times book value (slightly more expensive than its historical 1.2 times average), he believes it has a good chance of reporting a strong quarter due to its asset management business. He cautions that it's not a cheap stock but rather one with momentum.

Constellation Software (CSU)

Regarding Constellation Software, Pink notes a recent stock drop attributed to a leadership change and questions about its business model in the age of AI. He mentions that a colleague's deeper dive suggested the stock was overvalued and that AI could pose challenges. He advises waiting for the stock to find a stable level before buying, suggesting a sideways movement for a couple of quarters.

Intact Insurance (IFC)

Pink attributes Intact Insurance's pullback to stretched valuations, trading over three times book value. He also points to a market shift away from large-cap stable businesses towards growth and momentum stocks. Additionally, he hears about price competition in property and casualty (P&C) insurance, where companies may be resetting policy pricing to gain market share, which can hurt profitability.

Storage Vault Canada (SV)

Pink is closely watching Storage Vault Canada, a company he finds unique. He notes that while storage units are proliferating, the business is seasonal. Storage Vault experienced a slowdown post-COVID but is now back on track. He mentions that leasing rates are slightly lower, with occupancy in the high 80s to low 90s, compared to their usual mid-90s. He highlights that Canada has less storage density than the US and that a recent IPO in the space caused friction. He believes these issues are behind them and that the company is moving back into a better routine. He would buy it back, appreciating the short lease durations that allow for quick price discovery and resetting to market rents.

Shopify (SHOP)

Pink likes Shopify's story and its massive total addressable market, calling it a great Canadian success. He acknowledges its volatility, with trading ranges from $200 down to $50-$60 in 2022. He advises that it's not suitable for a significant portion of a portfolio due to this volatility. The high valuation (100 times earnings) is justified by future cash flows, making it sensitive to any fluctuations in future estimates.

Descartes Systems Group (DSG)

Pink had a similar thesis to the caller regarding Descartes Systems Group, expecting it to benefit from tariff turmoil due to its role in expediting cross-border transportation paperwork. However, he sold his position after a conversation with the CFO revealed that AI could automate many of their services. He sees generative AI as a threat, as competing products are becoming free, impacting their ability to sell their software. He notes that other software companies are facing similar challenges.

Past Picks Performance

Pink reviews his past picks from April 30th:

Atkins (formerly SNC-Lavalin): Up 48% since April. He likes the engineering firm, especially its nuclear component and global reach. He emphasizes that it's a new company with a new executive team, distinct from its past. The nuclear space, particularly with new US government deals, is a significant growth driver.
Sienna Senior Living (SIA): Up 12% (14% total return) since April. This is a buy-and-hold stock driven by the aging population theme. It offers exposure to long-term care and senior residences. He notes it trades cheaper than its main competitor, Chartwell.
Capital Power (CPX): Up 37% (40% total return) since April. This stock is in the energy transition theme, with renewable energy plays in the US and a significant role in Alberta's power supply. The growth of data centers in Alberta and potential partnerships with hyperscalers are key drivers.

Other Company Discussions

Baytex Energy (BTE): Pink used to own Baytex but has been out of the producer space for a while, sensing that energy prices might go sideways to down. He notes that Baytex has performed well over the last five years and has great assets, but he doesn't typically buy based solely on takeover potential. He prefers midstream companies for their better free cash flow profiles.
CNQ (Canadian Natural Resources Limited): LDI owns CNQ in its growth mandates. Pink prefers integrated companies like Cenovus. He believes oil prices are likely to go sideways to down due to supply and the energy transition, making him less enthusiastic about this type of stock.
TFI International (TFII): Pink eliminated companies exposed to tariffs, and TFI was one of them. He notes that the market disliked the idea of moving headquarters to the US. Freight rates and volumes have decreased, and uncertainty around the trade war makes him hesitant to buy.
Couche-Tard (ATD): Pink doesn't own Couche-Tard, finding the convenience store space difficult. He likes the business and its global player status but notes that the market prefers momentum stocks. He would wait to see how things play out, especially regarding potential acquisitions.
Vermilion Energy (VET): Pink steers clear of Vermilion due to its significant European gas production. Gas prices in Europe are highly susceptible to geopolitical issues, leading to more volatility than in North America. He prefers Tourmaline, a larger Canadian player with access to multiple North American markets.
Brookfield Asset Management (BAM): Pink considers Brookfield a great, well-run company with significant fundraising capabilities. He likes its involvement in large infrastructure projects, including the $80 billion nuclear reactor deal with Westinghouse and the US government. He acknowledges its complexity but sees it as a unique investment opportunity.
TD Bank (TD): Pink has always liked TD and considers it undervalued, trading at a discount to other banks despite being a premium bank. He believes it can regain its premium valuation. He notes that TD has addressed its anti-money laundering challenges effectively and has a strong team in place.
Loblaw Companies (L): LDI is not currently invested in staples like Loblaw. Pink believes that recent price increases may have reflected some inflation and tariffs, and that dynamic might be unwinding. He notes that blue-chip companies are less favored due to the strong performance of momentum stocks.
Algonquin Power & Utilities (AQN): Algonquin used to be a large holding for LDI. Pink mentions a past issue with a Spanish investment that didn't work out. He likes the investment theme but prefers Northland Power and Capital Power over Algonquin.

New Top Picks

Pink shares his new top picks:

Exchange Income Corporation (EIC): This company acquires businesses in aviation/aerospace and manufacturing, focusing on essential services. Examples include Arctic flight routes for essential supplies and maritime surveillance. He highlights its strong 20-year track record of annual returns north of 20% and increasing institutional ownership.
Granite Real Estate Investment Trust (GRT.UN): An industrial real estate company that originated from Magna International. Pink believes the industrial real estate market is at an inflection point, with vacancies capping out. Magna's increasing commitment to long-term leases reduces the overhang on Granite. It trades at a 20% discount to NAV.
WSP Global (WSP): A large global engineering firm with expertise in water, environmental services, transportation, and power. It operates in stable OECD countries and has delivered strong earnings growth. Pink believes its strategic plan to 2027 is achievable.

Conclusion

Andrew Pink's outlook on the Canadian market is cautiously optimistic, with strong earnings season performance and positive developments in trade relations. He favors companies with resilient business models, essential services, and strong growth trajectories, particularly in sectors like engineering, energy transition, and industrial real estate. He advises investors to be mindful of valuation and market sentiment, especially concerning momentum stocks versus value plays.