Three TSX-listed laggards with upside potential

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Mike Archibald is vice-president and portfolio manager at AGF Investments Inc.

There’s no question that Canada’s equity market has been a good place to invest lately. The S&P/TSX Composite Index has returned 24.1 per cent since the end of 2019, and has mostly rivalled the performance of its global counterparts throughout much of the global pandemic to date. Certainly not all the companies that make up the country’s top benchmark have experienced share gains equally. Fifty-five members of the S&P/TSX have netted negative returns since Dec. 31, 2019.

For some of these laggards, it’s easy to see how the volatile economic environment of the past two years has resulted in negative price performance. Yet, because of that, there are at least a few among the pack that seem well-positioned for strong upside as the recent surge in COVID-19 variants peaks in most parts of the developed world and the economy continues to grow in their absence.

Perhaps the best case in point is Parkland Corp., an operator of gas stations and convenience stores across Canada, parts of the United States and the Caribbean. Its shares have fallen more than 20 per cent in the time frame mentioned. The company, which also operates an oil refinery in British Columbia, has broadened its geographic reach and diversified its revenue and earnings streams with several large, transformative acquisitions over the past five years. It is expected to report earnings per share for 2021 that are double the previous year – with expectations to grow by another 150 per cent year-over-year in 2022, according to Bloomberg data.

While investors may be focused in the near term more on exploration and production companies whose cash flows are rapidly expanding with the move higher in oil prices, Parkland should benefit from a return to higher road fuel demand and increased Caribbean vacation travel in the coming quarters. As such, the stock seems poised to play catch-up with North American peers that operate similar businesses such as Murphy USA Inc. and Casey’s General Stores Inc., both of which have dramatically outperformed Parkland since December, 2019, and on a year-to-date basis.

Another underperforming stock worth consideration is Restaurant Brands International Inc. Best known for its three major North American franchises – Tim Hortons, Burger King and Popeyes – the fast-food holding company has experienced a 14.6-per-cent drop in share value since the end of 2019, which significantly lags the stock performance of McDonald’s Corp., its most obvious competitor, as the impact of pandemic restrictions over the past two years has taken its toll on customer demand. Tim Hortons, which makes up about 45 per cent of the Restaurant Brands business, has been especially affected by the work-from-home movement that has disrupted morning routines for millions of their customers. And while Tims has innovated its menu and customer service, business remains slow in places such as downtown Toronto where foot traffic is still not close to 2019 levels and, in many cases, working hours have been adjusted for later starts and different daily routines.

It’s reasonable to assume that many employees in Canada will likely return to work over the coming months and resume many of their old routines in the process. Moreover, Burger King and Popeyes sales have rebounded in recent months, owing, in part, to customer demographics and menus that are not nearly as dependent on people’s morning commutes. While Restaurant Brands’ third-quarter results fell short of expectations and disappointed some investors this week, the company remains poised to report positive revenue and earnings growth this year and next, which could give its share price a much-needed lift in the longer term.

Lastly, Air Canada may represent the one company that has faced the greatest amount of business uncertainty and stress over the past 20 months. Worldwide air passenger revenue declined by 65.9 per cent in 2020, according to the International Air Transport Association, and many global airlines seemed on the verge of insolvency at the height of the pandemic last year. But that was then, and now the demand for air travel is starting to return and in some cases is already back to 2019 levels. In Canada, for instance, booking trends suggest winter travel will be markedly higher than it was a year ago and it is widely expected that business travel will pick up once again in 2022.

Air Canada stands to benefit from these encouraging trends, especially given its prudent management. While the airline will still lose money for the 2021 calendar year, it seems determined to return capacity in a measured way, which should protect pricing increases and margins in the future. Meanwhile, its fleet of aircraft continues to turn over and modernize, resulting in Air Canada having one of the newest and most fuel-efficient fleet in North America, a huge competitive advantage in the domestic market. All in, the stock may continue to be a volatile name going forward, but if the global recovery takes further hold as expected next year, it will likely make for material gains over time.

Indeed, it may be a while before any of these three stocks fully regain their footing, but for those who are patient, the opportunity may be worth the wait.

AGF owns stock in Parkland Corp., Restaurant Brands International Inc. and Air Canada.

Mike Archibald is a vice-president and portfolio manager at AGF Investments Inc.

The views expressed are those of the author and do not necessarily represent the opinions of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies. References to specific securities should not be considered as investment advice or recommendations.