It's February. Many people, the author included, think this is the worst month of the year. In the northern hemisphere it’s cold, dreary, windy, and miserable, and spring seems so far away. There’s one bright spark in the month though. February 14th, St. Valentine’s Day – a celebration of love and romance.
In the spirit of the season of love, we spoke to various Morningstar Research Analysts, and asked them to highlight some stocks they love. “Well, ‘Love’ is a bit of a strong word,” all of them said, but gamely offered up their favourites. All in all, we collected 13 stocks (if that isn’t a sign of true love, we don’t know what is) of which six are Canadian, and seven are in the U.S.
Six Canadian Stock Picks We Love
Let’s start with the six Canadian socks we love:
All but one of these stocks are undervalued, and one, Lithium Americas (LAC), makes our ‘Best Ideas’ list.
According to Morningstar analyst Seth Goldstein as electric vehicle adoption increases, he expects maintained double-digit annual growth for lithium demand, and Lithium Americas should benefit as there should be more than enough demand for the company’s three resources to enter production and expand capacity over time. “Management announced a new feasibility study for Thacker Pass, raising both operational cost and capital cost required for the project. After updating our model, we are reducing our fair value estimate to $74 per share. We maintain our no-moat rating,” Goldstein added. At current prices, he views the stock as materially undervalued, with the stock still trading at less than half of our updated fair value estimate and in 5-star territory. “As such, the company remains our top pick for investors who want to invest in lithium,” he says.
Morningstar analyst Jon Mill thinks that no-moat Newcrest Mining (NCM) remains the better-value pick among the Australian listed miners. “We think this reflects market concerns about the outlook for gold as the world recovers from the COVID-19-induced downturn. Inflation and rising bond yields have the potential to increase the opportunity cost to hold gold. However, recessionary concerns potentially increase gold’s appeal as a safe-haven asset.”
The Canadian energy stock pick that makes the list is TC Energy (TRP), covered by Morningstar analyst Stephen Ellis who has reduced his fair value estimate for TC Energy stock to $63 per share after incorporating higher cost estimates for the challenged Coastal GasLink project. “While the cost increase is a setback, we do think this will help reset investors’ focus on the attractive nature of the core business and its utility-like nature, which is 95%-plus of the business. There remain strong growth opportunities that support billions of dollars of capital investment across U.S. and Canadian LNG as well as Mexican gas,” he adds.
CIBC (CM) is the only Canadian bank on the list, however, Morningstar analyst Eric Compton thinks that, “With 2022 in the books, it now appears that CIBC may struggle a bit more than peers in 2023. We think the bank will be on the edge of improving operating efficiency in 2023, and we also wonder if the bank will be able to hit its medium-term profitability and growth goals. For now, we view CIBC as in the "prove it" category, and if it can hit some of the targets it set out, there should be upside to the bank's valuation.”
For investors seeking renewables, Brookfield Renewable (BEPC) made the list. As Morningstar analyst Brett Castelli points out, Brookfield Renewable primarily invests in assets alongside Brookfield Asset Management’s private equity funds. “This approach brings the benefit of increased scale, allowing the company to pursue larger opportunities, but results in frequent acquisitions and disposals. Management seeks to add additional value through aggressive cost and revenue optimization. The company targets 12%-15% returns via a combination of organic growth and mergers and acquisitions. Brookfield utilizes a primarily contrarian approach to M&A.”
Finally, the most expensive stock on the list is Manulife Financial Corp (MFC). Morningstar analyst Suryansh Sharma relaunching Manulife Financial with a fair value estimate of $27.50 per share after taking a fresh look at it. “Our fair value estimate implies that Manulife is slightly undervalued at the current prices. Manulife provides a variety of financial services products, including life insurance, annuities, and investment management products mainly in the U.S., Canada, and Asia. The investment management business of the company has achieved adequate scale and is a source of stable earnings and sustained cash flows. We assign a no-moat rating, a stable moat trend, and a standard capital allocation rating to the company,” he says.
For investors who want exposure to non-Canadian stocks, the analysts also pick U.S stocks that they ‘love’ – or maybe ‘like’.
7 US Stock Picks We Love
The two cheapest stocks on the list are international commercial banking group Citigroup (C) and real estate investment trust (REIT) Kilroy Realty (KRC).
“Citigroup (C) is currently in the middle of a major turnaround and remains a complex story. The bank is working through consent orders from regulators, selling off its international consumer operations, and refocusing on its wealth unit. This should make the bank easier to understand and structurally more focused, however, we think Citi will still structurally trail its peers from a profitability standpoint and struggle to outearn its cost of capital. The wealth space remains as competitive as ever, as does the card space, and we don't see the bank building up a retail presence to rival its peers. While Citi's issues are real, we still see room for an improved valuation. The bank will need to prove it can bring core costs down after 2023. Working through their consent orders and a lower discount rate demanded by investors from simplified operations would also help,” Compton says.
Sharma covers Kilroy Realty (KRC). “The company has positioned itself to benefit from the burgeoning life sciences sector with material exposure in its current portfolio and future development pipeline. We also welcome management’s focus on ESG as it aligns its office portfolio to meet the sustainability requirements of its clients. The quality of their portfolio is evident from the fact that its average age is just 11 years compared with 30 years for peers.
We are seeing an increasing number of companies requiring their employees to return to the office. In the long run, we believe that remote work and hybrid remote work solutions will gain increasing acceptance, but offices will continue to be the centerpiece of workplace strategy and will play an essential role in facilitating collaboration, harnessing innovation, and maintaining the company culture,” he says. The next cheapest are Plug Power (PLUG) and Celanese Stock Class A (CE).
On Jan. 21, Plug Power (PLUG) announced a strategic partnership with Johnson Matthey focused on key component manufacturing for fuel cells and electrolyzers. Under the partnership, Johnson Matthey will become a strategic supplier to Plug of membrane electrode assemblies. Castelli maintains his US$23 fair value estimate and continues to view Plug shares as undervalued. “We view this announcement as consistent with Plug's commentary on its most recent guidance call where the company indicated a desire to work more closely with key suppliers in an effort to better manage the scaling of its manufacturing. As such, we view this partnership positively as it brings in an experienced supplier of critical components for Plug's electrolyzer and fuel cell manufacturing,” he says.
“Celanese Stock Class A (CE) should benefit from automakers lightweighting vehicles, or replacing small metal pieces with lighter plastic pieces. Celanese should also see growth from increasing electric vehicle and hybrid adoption, as the company will sell multiple components specific to these powertrains. By 2030, we forecast two thirds of all new global auto sales will be EVs or hybrids. Acetate tow, which is Celanese's smallest segment, produces acetate tow primarily for cigarette filters. Cigarette sales are in secular decline across most countries, and so we expect Celanese’s acetate tow sales will slightly decline over the long term,” Goldstein says.
The close to fair value stocks on the list are the world’s largest manufacturer of aluminum beverage cans Ball Corporation (BALL) and energy firm Enterprise Products Partners (EPD)
“Since the acquisition of Rexam, Ball Corporation (BALL) has divested from specific industries (such as steel food and aerosol containers) and regions (China) to focus on producing aluminum cans in markets where it can earn strong economic profits. Three of Ball's four segments manufacture aluminum cans – beverage packaging, North and Central America (43% of revenue), beverage packaging, EMEA (25%), and beverage packaging, South America (15%). For the countries in which the firm operates, it accounted for 42%, 43%, and 50% of total aggregate beverage container shipments in North America, EMEA (Europe, Middle East, and Africa), and South America, respectively. Over the long term, we expect developed-market demand to normalize as aluminum can market share gains moderate. Future growth will most likely come from faster-growing emerging-market economies and new product launches (for example, aluminum cups),” Liberman says.
The diversity of Enterprise's business shielded the firm from more difficult industry conditions for the time being, and Ellis thinks its fourth-quarter results were strong. “We expect to maintain our US$27.50 per share fair value estimate and wide-moat rating. Despite the mixed results across the overall business, we think Enterprise's Exemplary capital allocation rating continues to be a strength” he says.
The 13th and final stock on the list is the much talked about Tesla (TSLA).
As of January 31st, the stock was still undervalued, but in the run up at the start of February, it entered fairly valued territory, according to Goldstein, who retains his US$220 per share fair value estimate and maintains his narrow moat rating. “Over the long term, we expect Tesla to drive gross margin improvement from lower raw materials prices and the full ramp-up of its new plants, including rising production of its in-house 4680 battery cell manufacturing operation,” he adds.
