2025 Diversified Industries Outlook
The Question of the Marginal Dollar
A Record-Setting 2024
While still not fully in the books, 2024 has been a remarkably strong year of returns for many of the names across our coverage universe and for stocks in general. In many cases, several of our names have fundamentally rerated, moving from deep value stories with something to prove to becoming part of the broader investor universe, including their inclusion in benchmark indices. This year has seen Bird Construction (BDT-T, OP, $36.00 PT), Aecon Group (ARE-T, OP, $33.00 PT), and NFI Group (NFI-T, OP, $22.00 PT) added to the S&P/TSX Composite Index broadening their interest for many investors and reflecting a rerating of their stories.
Significant Opportunities Remain
We continue to see several opportunities in 2025 for investors across our coverage universe, with many names in deep value territory, while others are ready to continue to extend their leadership in their respective subsectors. Our universe covers a wide breadth of the Canadian landscape. While companies will all feel the impact of broader economic trends, including what could be some economic bottoming and the effect of interest rate expectations on share prices, we believe Company and subsector-specific factors and positioning will be necessary for investors. In short, we see picking stocks on a fundamental basis, reflecting their ability to provide capital-efficient growth in cash flows and earnings to remain significant in 2025.
Valuations Look Stretched, But Not Equally So
Stock market and individual share valuations, particularly for AI/technology stories, are at long-term highs. However, we would note that many of the sectors in our coverage universe have also rerated higher. Index performance, particularly in the US, continues to be concentrated in a small number of stocks, which we also believe opens the discussion to smaller cap names or names with good fundamentals which have not seen as significant an increase, which affords more upside opportunity. We continue to see dividend-paying shares, with strong underlying cash flow support, as attractive in a falling rate environment. Furthermore, larger returns of capital could provide support for several names that are likely to be more active with normal course or special buybacks in 2025.
Top Ideas for the Next Dollar
Entering 2025, there are several names in our universe which are either trading at valuations below what we see as fair value or that are expected to have unique catalyst events that we see having an impactful effect on shares. While some of these names have already seen significant share price appreciation or at least a return to norms in 2024, we continue to see them with further opportunities to outperform the broader universe. Our best ideas over the coming year include Air Canada (AC-T, OP, $28.00 PT), AtkinsRéalis Group Inc. (ATRL-T, OP, $80.00 PT), Exchange Income Corp. (EIF-T, OP, $68.00 PT), NFI Group Inc. and Pet Valu Holdings (PET-T, OP, $41.00 PT).