Bruce Campbell, president and portfolio manager, StoneCastle Investment Management
FOCUS: Canadian stocks
Top Picks: Enterprise Group, Hammond Power Solutions, Aecon Group
MARKET OUTLOOK:
The investment markets have been active and exciting for investors this year. We continue to see very interesting rotations beneath the surface. Most investors would not have guessed three months ago that utilities would be the top-performing sector in the U.S. year to date.
Financials and real estate have joined utilities at the top of the best-performing sectors in 2024. This rotation is extremely healthy for the longevity of a bull market, especially considering the frustration many investors experienced in the first half of the year.
In the last month, we have started to see large-cap stocks losing some of their dominant performance. Small and mid-cap stocks have begun to outperform. While we can’t say this marks a long-term trend change, short-term trends often lead to long-term shifts, and this is something we need to keep an eye on.
In Canada, large-cap stocks continue to dominate, with gold and consumer staples leading the pack.
For Canadian small-cap stocks, the market is more bifurcated. Companies with strong earnings profiles that don’t require additional capital are performing well. However, those that are unprofitable or require capital continue to struggle.
Each month we do a deep dive into the sector rotation with our monthly indicator update. When examining longer-term relative strength tools in comparison to the S&P 500, we observe longer-term trends that are just beginning to shift.
Technology, communication and energy sectors appear to be taking a pause, while Canadian small-cap stocks (including the TSX Venture), financials, gold and real estate are starting to accelerate. It will be important to monitor these trend changes in the months ahead.
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TOP PICKS:
Enterprise Group (E TSX)
It is an energy services company that is introducing a newish technology that will reduce emissions and save their clients money. Its Evolution Power Projects division is driving the accelerated growth with their natural gas power generation for work sites. The company is generating strong earnings before interest, taxes, depreciation, and amortization (EBITDA) margins, producing free cash flow and trades at an attractive multiple based on the growth potential in the future. Last purchase was $1.72, funds own, none owned personally, and none owned by my family.
Hammond Power Solutions (HPS.A TSX)
It is a manufacturer of dry-type transformers that they build and sell worldwide to a variety of industries. The consumption of power continues to increase, and Hammond’s business continues to expand. The company has been growing revenue and EBITDA in the double digits while trading at a multiple 65 per cent of its peers. The company has cash on the balance sheet and no debt. Last purchase was $134.73, funds own, personally none and none owned by my family.
Aecon Group (ARE TSX)
It is a Canadian infrastructure construction company. The company has a growing backlog of projects as global infrastructure is being built and replaced. The company is growing both organically and via acquisition which has led to a history of strong dividend growth. Recently the company turned its focus to better margins on the projects. As this is recognized the stock price should trade in line with historical multiples that are higher than current valuation. Last purchase was $19.64, funds own, none owned personally, and none owned by my family.
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| E TSX | N | N | Y |
| HPS.A TSX | N | N | Y |
| ARE TSX | N | N | Y |
PAST PICKS: JANUARY 2, 2024
Rekor Systems (REKR NASD)
- Then: US$3.14
- Now: US$1.25
- Return:-60%
- Total Return: -60%
Payfare (PAY TSX)
- Then:$6.11
- Now: $8.50
- Return:39%
- Total Return: 39%
Goeasy (GSY TSX)
- Then: $154.81
- Now: $185.38
- Return:20%
- Total Return: 21%
Total Return Average: 0%
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| REKR NASD | N | N | Y |
| PAY TSX | N | N | Y |
| GSY TSX | N | N | Y |
