How to reward the right opportunities?

“Inflation that was thought to be transitory has turned out to be persistent and central banks are struggling with raising rates. The desired effect is to slow down the economy. We are therefore witnessing a reversal of the efforts of economic recovery from the pandemic. Meanwhile, unemployment is exceptionally low and consumers are very eager to spend, bringing significant changes for companies and uncertainty for investors. But in any period of volatility there are good investment opportunities” , assures Colum McKinley.

A sensible approach, he says, is to look for companies that have the power to set prices in their market, that is, to pass the price increase on to customers. In Canada, he cites Canadian Pacific and Canadian National, two railroad companies that have fixed costs and great power to set prices, which have risen steadily over the past ten years.

“Both have a very strong presence. Their physical footprint takes the form of a giant P across North America, where they are connected to the wider economy and continue to raise prices while improving their services and shipping times. We believe that both will be able to defend their profitability in an inflationary environment. Already, they generate net margins of 25 to 30%, so they start from a very high base to pass the economic period that is starting, “analyses Colum McKinley.

Other good opportunities lie in quality corporate stocks that are unfairly overreacted by the market. Give the example of Ontario auto parts manufacturer Magna International.

“Its stock has been under pressure from many factors, including supply chain issues related to the war in Ukraine. But we believe these factors are transitory, but this company is exceptionally well managed, has little debt, and is a technological leader that motorists always choose first. So I believe that his title is undervalued in the long run,” concludes the expert.

This script is part of CIBC’s Managers Online program. It was written without input from the sponsor.

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