Posthaste: Canadians are overlooking ‘wonderful buy-and-hold stocks that are in plain sight,’ says CIBC

Long gone are the days when Canada’s stock market could be described as the home for “hewers of wood, drawers of water.”

That’s the opinion of CIBC Capital Markets analysts who say that because of the large share of commodity stocks on the SP/TSX, Canadian investors too often assume that there are limited alternatives for a “set and forget” portfolio.

“We believe that over half the market capitalization of the S&P/TSX is comprised of companies that should provide investors with stable, attractive returns over the long term,” said CIBC’s Ian de Verteuil.

Long-established buy-and-hold candidates are what CIBC calls Canada’s “oligopolies,” businesses with high market share and limited competition. They include

banks , railways, grocers and telecoms, and except for telecoms which has struggled in the past decade, returns have beaten the TSX and over longer periods the SP 500.

The mere 15 companies in these sectors have on average made up 30 per cent of the TSX’s market capitalization, 35 per cent of dividends and 25 per cent of buybacks.

In the past these stocks have had “excellent “buy-and-hold” characteristics,” said de Verteuil. “We don’t see any reason why this shouldn’t continue into the future.”

But the report also identifies four groups of stocks that have or are developing competitive positions that could “challenge the long-term stock price leadership of the oligopolies.”

These “wanna be” oligopolies include life insurance, property & casualty insurance, waste and pipelines — stocks that now make up about 13 per cent of the market capitalization of the S&P/TSX.

“Unlike the oligopolies, these businesses have each experienced significant change since the start of the century,” said de Verteuil.

Consolidation in life insurance has resulted in four large insurers —

Manulife Financial Corp. , Sun Life Financial Inc., Great-West, and iA Financial making up over 70 per cent of the Canadian market.

Waste has also seen consolidation to the point where two waste management stocks now represent 2 per cent of the TSX market cap.

The industry is not as concentrated as the oligopolies, but has strong regional market positions, and plenty of opportunity for the big players to make acquisitions. Stocks include

GFL Environmental Inc. and Waste Connections Inc. Pipelines, or energy infrastructure companies, have close comparisons to CIBC’s “cash flow” oligopolies. Like telecoms, they are capital intensive, their services are essential like grocers and they serve an important role in the logistics of the Canadian economy, like railways.

The “wanna-be oligopolies” are a welcome development for individual and institutional shareholders, said de Verteuil.

“Canada needs more “buy-and-hold” type stocks as part of a domestic portfolio — portfolios that are often overweight in entities with high commodity exposure.”

The report also highlights specific stocks that have shown steady growth in their earnings and book value such as

Dollarama Inc. and BRP Inc. Brookfield Corp. is seen as being set for high single-digit to low double-digit returns over the long run.

Shopify Inc. offers faster growth but higher volatility, they said. International portfolio diversification is still important, said the analysts, especially in IT, consumer and health care sector.

“But too many Canadian investors overlook wonderful buy-and-hold options that are in plain sight.”

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A September interest rate cut by the Bank of Canada may be back on the table after jobs data Friday came in weaker than expected.

Canada’s economy lost 41,000 jobs in July, when economists had forecast a gain of 10,000. The decline was the biggest monthly drop since January 2022, and mostly driven by full-time work.

There is still lots of data to come before the central bank makes its decision on Sept. 17, including another jobs report and two inflation readings.

“However, today’s weaker than expected employment figure is nevertheless supportive for our call of a 25bp interest rate reduction at that September meeting,” said Andrew Grantham, senior economist for CIBC Capital Markets.

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Today’s Posthaste was written by Pamela Heaven with additional reporting from Financial Post staff, The Canadian Press and Bloomberg.

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