Ottawa’s ‘mega-deduction’ tax write-off could boost these TSX stocks, analysts say

Canada's big banks could benefit from the expansion of Ottawa's productivity mega deduction tax write-off program. Photo by Ben Nelms /Bloomberg

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How David Rosenberg is reducing stock market risk, which sector’s shares could take a hit from rate hikes and more from The Week in Stocks.

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Stock of the week: BlackBerry Ltd.

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BlackBerry Ltd. closed out the week among the top 10 gainers on the S&P/TSX composite index, rising 5.2 per cent. CIBC Capital Markets analyst Todd Coupland said in a note on Sept. 10 that he expects the company to report a “clean” quarter when it reports earnings on Sept. 24. Coupland is also calling for the company to upgrade its guidance on QNX software division and Secure Communications services division. Coupland has a price target on the shares of $17.96. Shares closed Friday at $11.16. “Expectations remain achievable, the catalyst pipeline is strengthening and continued execution should drive a QNX-led re-rating. We would own BB” into the release of earnings, Coupland said. BlackBerry has a 12-month price target of $14.00 based the calls of seven analysts, according to Bloomberg.

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Keeping score

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Why David Rosenberg is building a ‘cash buffer’

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It’s time to reduce stock market risk and build a “cash buffer,” said David Rosenberg, president of Rosenberg Research & Associates Inc., in a note on Sept. 14. “The macro and policy backdrop is becoming less supportive for risk assets,” Rosenberg said, citing several challenges including signals from the bond market that are flashing overinvestment in artificial intelligence. Tightening financial conditions and rising oil prices are also standing in the way of “real growth prospects.” Further, “U.S. fiscal supports are increasingly in the rear-view mirror,” and the Nov. 3 U.S. midterm election is likely to result in “fiscal gridlock,” he said. Given all this, Rosenberg said he is dropping gold miners via the Van Eck Gold Miners ETF (GDX) — a source of volatility — but hanging onto gold. He is also exiting the Global X Uranium ETF (URA). “This year’s performance has been more volatile, while some of the return-generating trends that supported the theme last year have faded,” he said. Lastly, he is dropping the iShares MSCI India ETF because of geopolitical risks and rising interest rates. Rosenberg said he still likes Asia for investments but focused away from artificial intelligence and Japan. He still likes two-year and 10-year Treasuries. “Bonds have been beaten up badly via ever-rising risk premia and inflation uncertainty, but the yield cushion is appealing at this point, especially relative to the S&P 500 equity and dividend yields,” he said.

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Who could win from Ottawa’s expanded tax write-off

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The federal government announced during the Canada Investment Summit this week that a tax write-off program —  the productivity mega deduction (PMD) — would be extended to capital investments in oil and gas pipelines, mining property, fibre-optic cable, software, research and development, computer equipment, aircraft and vehicles, patents, rail track, bridges and roads. The program allows for the deduction of 100 per cent of the depreciation of capital assets in the first year of operation on a greater percentage of assets. Analysts at TD Cowen think the tax program can benefit several sectors and companies. “We believe the broad nature of the PMD should support commercial and wholesale loan growth among banks,” analysts led by Mario Mendonca said in the note on Sept. 15. In another TD Cowen note on Sept. 15, energy analysts said the PMD expansion could help push projects such as LNG Canada phase 2, Ksi Lisims LNG, TMX optimization and the West Coast oil pipeline across the finish line. The Immediate expensing component allowed by the tax write-off could boost the economics of gas-fired power projects for Capital Power Corp. (CPX:TSX) and TransAlta Corp. (TA:TSX), Brookfield Renewable Partners (BEP:NYSE) and Northland Power Inc. (NPI:TSX), TD analysts said. Other companies that could benefit from the new tax policy include Finning International Inc. (FTT:TSX) and Toromont Industries Ltd. (TIH:TSX) — both Caterpillar dealers in Canada — and Wajax Inc. (WJX:TSX), which distributes Hitachi equipment, though analyst noted much of the upside from the “build Canada” push is already baked into the shares.