The TSX is mainly driven by the financial and energy sectors. But with both of those areas facing challenges, investors must search harder for opportunities.
So, are there any overlooked sectors they can turn to? “I can’t say right now that we’ve seen screaming bargains in a variety of sectors, but there are some interesting stock-specific ideas,” says Stephen Carlin, head of equities and managing director at CIBC Asset Management. He manages the Renaissance Canadian Dividend Fund.
First, he explains, “We’ve seen a fairly sizable shift of investors’ interest away from the natural resources sectors.” One area where people have added exposure is the consumer discretionary space, which, “on a valuation perspective, is at the higher end of the range that we’ve seen say over the last 10 years. As people shift away from energy stocks, for example, that does increase bids for many names in the sector.”
But, even though the shift away from energy is pushing up prices of many consumer discretionary names, not all stocks in the sector are overvalued.
Secondly, investors are looking at the information technology sector. “We’ve seen the U.S. market somewhat weaker when it comes to the IT sector,” says Carlin. “But, in Canada, I could point to a couple names we still find quite attractive, such as CGI Group and DH Corp.”
CGI has a strong growth profile, he adds, because “the company has the capability to make acquisitions [and] a business that’s global—this means it’s not reliant on Canada. When we look at the valuation for the stock, it’s currently trading that’s in line with the market. So, we still see good upside potential from a total return perspective.”
For its part, “DH Corp. has transformed itself through a variety of acquisitions over the last number of years,” says Carlin. And, “Over the last 12 months, [the company] has made an effort to move into the financial technology sector, or into fintech, which is a key growth area and [a] well-installed base of business for the company [that] provides strong recurring revenues.”
DH Corp. works with banks and smaller financial institutions — mostly in the U.S., but also globally. So, says Carlin, “We like the stability of the business, [its] cash flow generation [and] the fact that it’s diversified away from Canada. Also, we like that it’s diversified within the financial services sector in the U.S., which continues to be strong.”