We recently compiled a list of the 10 Best Canadian Stocks To Buy According to Wall Street Analysts. In this article, we are going to take a look at where Brookfield Business Partners L.P. (NYSE:BBU) stands against the other Canadian stocks.
In the ever-evolving landscape of investment opportunities, keeping an eye on the broader economic environment can be as crucial as analyzing individual stocks. As we delve into the best Canadian stocks to buy, it’s important to consider the country’s current economic outlook. Canada’s economic environment reveals a complex mix of challenges and potential opportunities. The global economy is still reeling from historically high inflation, which has triggered the most aggressive monetary tightening in decades. While the U.S. economy has demonstrated an unexpected resilience, balancing robust growth with moderating inflation, Canada’s situation requires closer scrutiny. The Canadian economy, though strong in many respects, is particularly sensitive to interest rates. High levels of household debt and relatively short mortgage terms amplify the effects of rising interest rates, making Canadian consumers and businesses more vulnerable compared to their U.S. counterparts. Nevertheless, the latter part of 2023 showed unexpected economic strength, buoyed by record immigration and positive spillover from a resilient U.S. economy, leading to a significant easing of recession fears in Canada.
Yet, the Canadian economy is not entirely out of the woods. Growth is anticipated to remain below trend in 2024, with the Bank of Canada forecasting a modest GDP increase of 1.25% to 1.5%. This slowdown is partially attributed to Canada’s distinct economic vulnerabilities. For instance, productivity growth has been alarmingly weak, with Canada’s senior deputy governor labeling it as an “emergency”. This decline is largely due to insufficient business investment in key areas such as equipment and intellectual property, compounded by limited competition in essential sectors like telecommunications and banking. On a positive note, this slower growth is expected to ease inflationary pressures. Headline inflation has been gradually decreasing, and core inflation, which excludes volatile food and energy prices, is moving closer to the Bank of Canada’s target range. This scenario provides the Bank with some flexibility, with expectations for a 50-75 basis point reduction in interest rates later this year.
Despite strong job creation, particularly a notable surge in April 2024, employment growth of 2.0% over the past year has not kept pace with the 3.4% rise in population. This disparity has pushed the unemployment rate up by nearly a full percentage point to 6.2%, and it is projected to remain high through the rest of this year before beginning to decline in 2025. Wage growth, which averaged 5.3% in 2023, has decelerated to 3.9% (annualized) in the first quarter of 2024. With inflation pressures easing, this slower wage growth is expected to continue through 2024 and into the following year. Although the Bank of Canada’s decision to cut its policy rate is a step in the right direction, Canadian households remain the most indebted in the G7. The interest rate hikes since 2022 have strained household finances, resulting in a decline in real consumer spending per capita over five of the last seven quarters as more income is diverted towards servicing mortgage and loan interest payments.
The housing market has felt these effects more acutely. Real residential investment per capita dropped by 22.8% in the first quarter of 2024 compared to two years earlier. Looking forward, consumer spending and residential investment are expected to recover as lower interest rates stimulate demand. However, with low consumer confidence, hesitation to make significant purchases, ongoing housing affordability issues, and elevated savings rates, the pace of recovery in the latter half of 2024 is likely to be slow. Deloitte forecasts that more substantial improvements in consumption and residential investment will occur next year as confidence improves. Overall, Canada’s economy performed better in the first half of 2024 than expected, but this strength is projected to be counterbalanced by slower real GDP growth in the latter part of the year due to reduced household spending. The updated forecast anticipates real GDP growth of 1.2% for 2024, accelerating to 2.6% in 2025. On a per-capita basis, real GDP is expected to decline by 1.6% this year before rebounding to 1.1% growth in 2025.
For investors looking to capitalize on these evolving conditions, understanding the underlying economic indicators and trends is essential. With this context, we now turn to a detailed examination of the best Canadian stocks to buy according to Wall Street analysts.
Our Methodology
For this article we first used a stock screener to identify Canadian stocks that analysts see material upside to, as of September 9. From this list we chose 10 stocks that have the highest upside potential from their current price based on average analyst price targets.
At Insider Monkey we are obsessed with the stocks that hedge funds pile into. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A busy construction site with workers hard at work, illustrating the industrials division.
Brookfield Business Partners L.P. (NYSE:BBU)
Upside Potential: 60%
Average Analyst Share Price Target: $30.86
Brookfield Business Partners L.P. (NYSE:BBU) offers an upside potential of 60%, with analysts assigning an average share price target of $30.86. Brookfield Business Partners L.P. (NYSE:BBU) offers a diverse portfolio with strong fundamentals across its business services, infrastructure, and industrial operations segments. While recent financial results showed a slight earnings miss with a reported EPS of -$0.09 compared to the expected $0.86, the company remains well-positioned for long-term growth. The dip in earnings was largely attributed to one-time events, including a cybersecurity incident at its CDK Global operation and increased costs in a construction project nearing completion. Despite these short-term setbacks, Brookfield Business Partners L.P. (NYSE:BBU) continues to demonstrate resilience by focusing on value creation and operational improvements across its business segments. Its access to capital has enabled it to refinance $11 billion in debt, reducing borrowing costs and improving future profitability. The company’s proactive approach to monetizing mature businesses has generated $3 billion in proceeds over the past 1.5 years, showcasing its ability to strategically recycle capital for growth.
Brookfield Business Partners L.P. (NYSE:BBU) diversified portfolio includes stable, cash-generating businesses that provide mission-critical services. The company’s efforts to improve its operations and capitalize on value opportunities place it in a strong position for future performance. Its focus on cybersecurity, cost management, and debt reduction highlights a sound management approach. Given its robust fundamentals, strategic initiatives, and a history of realizing strong returns, Brookfield Business Partners L.P. (NYSE:BBU) offers investors a promising long-term value proposition.
Emeth Value Capital made the following comment about Brookfield Business Partners L.P. (NYSE:BBU) in its Q2 2023 investor letter:
“Brookfield Corporation has $5.5 billion invested through Brookfield Business Partners L.P. (NYSE:BBU), a publicly traded permanent capital vehicle that invests in industrials and business services companies. The group spun off from Brookfield in 2016 and was seeded with sixteen existing private equity investments across industrials, construction, oil and gas, and business services. Notable holdings included GrafTech, the leading producer of graphite electrodes, and Multiplex, a prominent Australian construction company. The portfolio value at inception was $2.5 billion, and Brookfield retained seventy-eight percent ownership. To date, under the leadership of Cyrus Madon, Brookfield Business Partners has realized $5.5 billion in proceeds while generating an average four times multiple on capital and thirty percent IRR across twelve concluded investments. In addition, the partnership has executed more than twenty new investments, totaling $8.0 billion in deployed capital, over the last seven years. What’s more, the quality of portfolio companies improved meaningfully over this time as proceeds were recycled from the sale of smaller, more cyclical businesses to fund the acquisition of larger businesses with increased scale, significant barriers to entry, and more resilient cash flows. For instance, the four largest companies within the current portfolio – Nielsen, Clarios, Sagen, and CDK Global – generate over ten times the cash flow of the four largest companies in 2016. However, what has remained unchanged over the years is Brookfield’s intense operational approach. At the outset of each investment, Brookfield crafts a detailed value creation plan, which, given the capital structure often employed in leveraged buyout transactions, has an outsized influence on shareholder outcomes. For example, over the last five years on an average equity capital base of less than $5.0 billion, Brookfield Business Partners has improved EBITDA at its underlying companies by $275 million. In other words, these improvements, which are often implementable regardless of the macro environment, added $2.75 billion in net asset value at a ten times multiple. Likewise, Brookfield has plans in motion across its portfolio companies to surface an additional $500 million in EBITDA over the coming years, which has the potential to significantly increase the existing $8.5 billion net asset value. Indeed, when coupled with natural deleveraging, these initiatives provide visibility to a base return of 1.7x – 2.0x, or approaching $11 billion for Brookfield Corporation’s share over the coming monetization cycle.”
Overall BBU ranks 7th on our list of the best Canadian stocks to buy according to Wall Street Analysts. While we acknowledge the potential of BBU to grow, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than BBU but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
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