1 utility, 2 resource stocks to buy

These three Canadian stocks all made cutbacks pre-COVID and have since been able to produce more than they did with the same amount of labour.

Average investors happy to simply pick up shares and wait for gains will take on greater risk than they can stomach if staying the course in 2022, warns portfolio manager Guy Lapierre.

Mr. Lapierre is a vice-president and branch manager at PI Financial based in Port Coquitlam, part of Greater Vancouver. Speaking to Investor’s Digest in a Jan. 5 telephone interview, he says that looking back on the rampant, speculation-led share price rallies of 2021, his plans this year are “really about downside protection and high-quality holdings” in businesses where they enjoy strong pricing power and will benefit from inflation.

“We were a little premature on our expectation of interest rates rising in the fall. That’s been pushed back,” he says. High share prices (and high prices generally) have left him reluctant to buy. “We expect to be very active in the second quarter but we’re holding cash right now.”

The portfolio manager notes: “With inflation concerns, we’re seeing a rationalization of commodity prices. There has to be adequate demand.” Citing iron and copper as examples, he recalls that the influence of speculators flocking to the base metals last year (a trend that Mr. Lapierre argues reflected individual decisions made while working from home) drove prices up wildly amid COVID scarcity.

Eventually, major suppliers and major buyers (which dictate the commodity markets’ true long-term trajectory, beyond the speculation) reached equilibrium: that is, the suppliers were unable to sell any more product at massively inflated prices, nor were buyers willing to pay them, and so those metals have corrected accordingly.

Inflation is here to stay

Nevertheless, he asserts that for consumers, substantial inflation is here to stay, given that wages have gone up, as have fuel prices and housing. “You cannot take wages back. . . . I don’t see those prices anytime soon.”

Mr. Lapierre says that in response, he is repositioning his clients’ portfolios to reflect up to five per cent inflation annually.

As for the ever-present pandemic, Mr. Lapierre remarks, “COVID is a large chaos factor, but our responses are known, and really, the question is, ‘How effective are we at implementing them?’”

Quoting the latest medical wisdom, he notes that Omicron has been much more contagious than past variants, but also much less lethal on a per-capita basis. The portfolio manager suggests that if that remains the case, then the situation here could be similar to South Africa, which is returning to normal life after a spike of roughly three months. “We’re optimistic in the second half of 2022, especially because with everybody vaxxed, they should be protected.” From a health perspective, the elderly remain at risk, but no more so than before, he adds.

1 utility stock and 2 resource stocks to buy

The portfolio manager’s three “best buy” picks are all giants in their respective fields who can pass on any cost increases they face to customers: utility stock Enbridge Inc. (TSX—ENB; NYSE—ENB), and resources stocks Suncor Energy Inc. (TSX—SU; NYSE—SU) and Nutrien Ltd. (TSX—NTR; NYSE—NTR). “In an inflationary period, if you don’t have pricing power . . . it’s going to be painful,” he says.

Mr. Lapierre adds, “All three companies understand their business. It’s known, the commodities and factors that affect the share price, providing some clarity, even taking into account the large unknowns associated with COVID and political developments in the United States.”

In the case of both Suncor and Nutrien, the portfolio manager anticipates they will double their dividends in 2022, from $1.68 per share (yielding 5.1 per cent) and $2.27 a share (yielding 2.5 per cent) annually, respectively, based on massive increases in revenue. Enbridge’s yearly dividend of $3.34 a share, meanwhile, yields an impressive 6.9 per cent.

Mr. Lapierre says that investors had some recent reason to avoid all three companies (Enbridge due to legal issues in Michigan, Suncor because of sustainability concerns, and Nutrien because of a CEO dismissal and executive shakeup following poor earnings growth), but in all instances the dust has settled in their favour.

As such, he underlines, “We see an opportunity in the first quarter to pick those three up.”

As a pipeline company, Enbridge is also in a prime position to profit from inflation rather than suffer from it. “Their business is simply taking natural gas from [one] end and selling it for a higher price at the other end.”

The portfolio manager praises his “best buys” for their strong operations as well, underlining that all made cutbacks pre-COVID and have since been able to produce more than they did with the same amount of labour.

This is an edited version of an article that was originally published for subscribers in the January 21, 2022, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.

Investor’s Digest of Canada, MPL Communications Inc.
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