Jordan Zinberg, president and chief executive officer, Bedford Park Capital

FOCUS: Canadian small and mid-cap stocks 

MARKET OUTLOOK:

During the first half of 2023, North American markets have exhibited some notable trends in performance based on both geography and market capitalization. Year-to-date, U.S. equities have recorded impressive gains while Canadian equities have lagged. When comparing the performance of large-cap against small and mid-cap stocks, there is also a sizable gap, with larger companies on both sides of the border outperforming by a wide margin. 

As the global economy continues to slow, high rates of earnings growth will become more difficult for companies to achieve. Investors looking for above-average growth rates should revisit small and mid-cap stocks in the back half of 2023. 

Absent any notable macro or geopolitical news, we expect equity markets to be relatively quiet in the short term until second-quarter results are released. Consistent with the first quarter, higher financing costs will continue to weigh on corporate profits, however, there are still outstanding opportunities available to Canadian equity investors given current valuations.  

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TOP PICKS:

Mainstreet Equity (MEQ TSX)

 For over twenty years Mainstreet has been buying distressed multi-family assets in Western Canada, adding value through capital improvements, and generating substantial growth in its portfolio. Mainstreet has an exceptional long-term track record, high inside ownership and is extremely well positioned given the current dynamics of the Canadian housing market.   

Lumine Group (LMN CVE)

Lumine was spun out of Constellation Software earlier this year and is focused on building a portfolio of vertical market software companies within the media and communications sectors. Lumine shares many characteristics with Constellation, including a similar margin profile, however its smaller size will allow for higher growth rates. 

Source Energy Services (SHLE TSX)

Source is a fully integrated oilfield services company and is one of the largest suppliers of frac sand in Canada. After renewing several large contracts earlier this year at significantly higher prices, profits will rise substantially in 2023.  Source has a very high return on equity, the current valuation is extremely attractive, and we believe the stock will continue to re-rate higher as the balance sheet improves throughout 2023 and 2024.