04.10.2014

Energy and Financials Strong in Canada

04.10.2014
Terry Flanagan

The energy and financial sectors in Canada represent good value for investors, according to Anish Chopra, managing director at TD Asset Management.

Chopra, who has overall supervisory responsibility for TDAM’s Canadian Value, Core Canadian Equity and Target Return teams, and is lead manager of the TD Canadian Value Fund, said that both sectors are trading at discounts relative to their peer groups or history.

“Within the Canadian energy sector, large cap companies are trading at a discount to their global peer group on a cash flow basis,” he said. “The Canadian names are in the five times cash flow range whereas the global peer group is at six times.”

Where the Canadian companies have an advantage is the fact that they are able to grow production, grow their dividends, and still be cash flow positive. “It is going to be very difficult for the global peer group to achieve those three things,” said Chopra.

Within Canadian financials, “what we are finding is the Canadian banking sector historically traded at around 12 times forward earnings,” Chopra said. “Today they are somewhere in the 11 times range, and I am talking about the Canadian bank group as opposed to any individual names, which could be a little higher or a little lower. Plus, we’ve got very strong franchises both in the Canadian marketplace and those that operate internationally.”

TDAM employs a screening process to look for stocks that meet its criteria on a quantitative basis. “We look at metrics like market caps, profitability and return on equity,” Chopra said. “Then, through the screening process, we whittle it down to a number of names that we do more in depth research on. When we did that, we found that are currently the most interesting are energy and financials.”

Chopra expects the overall growth rate in the Canadian economy to hover in the 2-3% range, “which would be lower than recent history, going back a decade or so, but despite about it this lower growth economy there are still opportunity sets in energy and financials.”

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