Michael Sprung, President, Sprung Investment Management
Focus: Canadian large cap stocks
Top Picks: Vermilion Energy, Bank of Nova Scotia, ATCO
MARKET OUTLOOK:
Investors continue to react dramatically to the continuing conflict in the Middle East. The volatility in pricing has been exacerbated as market participants react to every perceived possibility of an end to hostilities or a deepening entrenchment and wider escalation in the combat. The longer this goes on, the greater the economic vulnerabilities to higher inflation, growing credit risks and slower growth become apparent. In the last couple of weeks, federal debt in the United States surpassed Gross Domestic Product (GDP) as it is now greater than US$39 trillion dollars.
At the same time, the tax relief from Trump’s “One Big Beautiful Bill Act” are coming into effect, the Pentagon has requested an additional $200 billion for the war effort and the courts are contemplating whether the U.S. will have to pay back $130 billion in tariffs collected over the past year.
With the private and government sectors over leveraged, demand for debt instruments will fall and investors will demand higher compensation for risk. The longer this continues, the likelihood of a recession with stagflation grows.
In this environment, investors are advised to be cautious and manage for the long term. Companies with steady prospects for profitability and revenues with strong financial integrity are favoured over firms with shorter term objectives.
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TOP PICKS:
Vermilion Energy (VET TSX)
Vermilion is an internationally diversified intermediate with assets in France, Netherlands, Ireland, Australia, Germany and Canada. VET increased its domestic gas exposure in February 2025 with the $1.1B acquisition of Westbrick Energy. Synergies are beginning to accrue in expenses and operational improvements. In Germany, Wisselhorst will come on-stream mid-2026 with expansions in 2027. Montney production is expanding and expected to plateau in 2028.
About 58 per cent of the production in Ireland, Netherlands and Germany has been hedged for this year and 40 per cent in 2027. Demand in Europe is accelerating as energy policies adapt to new realities. The company distributes 50 per cent of free cash flow to shareholders. At current levels, the stock is trading near book value and yields near three per cent.
Bank of Nova Scotia (BNS TSX)
The Bank of Nova Scotia is the third largest Canadian bank by assets and the most international with operations in Canada, Latin America, the Caribbean and Asia. Recent results in capital markets and wealth management have been good as well as improved interest margins and fee income. All the banks are closely monitoring credit in the current environment. The Bank of Nova Scotia has a strong capital base with a Common Equity Tier 1 13.3 per cent.
Management has outlined a strategy to increase return on equity to 14 per cent from 13 per cent as it allocates more capital to North America. At current levels the stock has a yield of 4.7 per cent and trades at 1.5 times book value. The Bank of Nova Scotia is very attractively priced relative to its peers.
ATCO (ACO.X TSX)
ATCO owns a Structures and Logistics business (facilities construction for ownership or management, logistics operations), a 52 per cent interest in Canadian Utilities (CU-T), a 40 per cent interest in Neptune Ports in South America as well as some commercial real estate holdings. Canadian utilities is in the business of electrical and natural gas distribution and transmission, energy (power generation, natural gas gathering, processing storage and liquids extraction, structures and logistics and technologies for business solutions). Canadian utilities has a five year $12 billion capex program that will expand the rate base by 6.9 per cent per year.
ATCO Frontec that helps operate and maintain the North Warning radar system is in a strong position to benefit from increasing defence spending. ATCO has bought a 40 per cent stake in West Kitikmeot with a project to build a $1.2 billion 230 km road north of Yellowknife in the Arctic.
Given the current environment for greater infrastructure and resource development, ATCO is well positioned to prosper. At current levels, ATCO has a 3.6 per cent yield and sells around 1.5 times book value.
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| VET TSX | Y | N | Y |
| BNS TSX | Y | N | Y |
| ACO.X TSX | Y | N | Y |
PAST PICKS: APRIL 28, 2025
Sun Life Financial (SLF TSX)
Then: $81.21
Now: $87.15
Return: 7%
Total Return: 12%
HudBay Minerals (HBM TSX)
Then: $10.29
Now: $29.13
Return: 183%
Total Return: 183%
Canadian Natural Resources (CNQ TSX)
Then: $40.86
Now: $65.92
Return: 61%
Total Return: 67%
Total Return Average: 87%
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| SLF TSX | Y | N | Y |
| HBM TSX | Y | N | Y |
| CNQ TSX | Y | N | Y |
