Brendan Caldwell’s Top Picks for October 11, 2024

Brendan Caldwell, president and CEO, Caldwell Investment Management

FOCUS: North American large-cap stocks

Top Picks: ResMed, Carrier Global Corp, Equifax

MARKET OUTLOOK:

After robust gains in the first three quarters of the year, with the S&P 500 Index and the S&P/TSX Composite Index both rising double digits, the stock markets entered the fourth quarter with increased volatility. This is due to uncertainties in the U.S. labour market, geopolitical tensions in the Middle East, and the upcoming U.S. presidential election.

However, positive developments suggest that despite ongoing challenges, the solid fundamentals of the U.S. and Canadian economies support a cautiously optimistic outlook for the stock markets. Some of these positive developments include a stronger-than-expected U.S. nonfarm payrolls report, anticipated job growth in Canada, moderating inflation, and central banks poised to adjust monetary policies through 2025.

Equity markets tend to perform well when the federal banks ease monetary policy, particularly when interest rate cuts occur without a concurrent recession. We maintain our focus on identifying high-quality, well-managed companies with proven track records of navigating through dynamic environments. Hence, we believe that professional investment advice can be extremely valuable in times such as these.

• Sign up for the Market Call Top Picks newsletter at bnnbloomberg.ca/subscribe
• Listen to the Market Call podcast on iHeart, or wherever you get your podcasts

TOP PICKS:

ResMed (RMD NYSE)

A global leader in the development and marketing of medical devices used to treat sleep apnea and other respiratory conditions. Products include positive air pressure (PAP) machines and consumables such as masks and dental devices.

A large per centage of the global population (around 1 billion) has undiagnosed sleep apnea highlighting the massive total addressable market (TAM) and long growth runway (only around 20-25 per cent of cases are diagnosed and treated). We think the rise of GLP-1s are a tailwind to awareness as sleep apnea is commonly associated with obesity. The proliferation of wearables/smart watches also drives increased awareness and can help alert people with sleep apnea to seek treatment. Growing use cases in other conditions such as Chronic Obstructive Pulmonary Disease (COPD), Congestive Heart Failure (CHF) and Asthma further expands TAM. Long-term benefits on the consumables side of the business from competitor troubles given 70-80 per cent mask attach rates over the long term. It has a 90 per cent share of PAP machines in the U.S. and has gained share while a main competitor (Philips Respironics) has stumbled with a major safety recall. Once new patients start treatment, they seldom switch device providers; thus, it’s unlikely RMD will cede share when Philips resolves their recall issues. Additionally, while mask preferences vary between individuals, they are also less likely to switch to a competitor once they have found a comfortable fit. Thus RMD is well positioned to capture higher consumable revenues over the life of treatment (which can be for life itself). Margin expansion potential from easing supply chain issues and mix benefits as consumers are prescribed the latest generation PAP machines.

Carrier Global Corp (CARR NYSE)

Leading provider of HVAC and cold chain solutions to residential and commercial end markets.

Distributor channel destocking on the residential side is largely over in North America; CARR’s unit volumes were more negatively impacted than peers in 2023, so it should see a stronger bounce back in 2025. Regulatory changes going into effect Jan. 1, 2025, will drive higher efficiency (read higher priced) units as part of the restocking – higher volumes plus prices equate to strong top-line growth in the medium term. Commercial demand is strong and broad-based across healthcare, education (stimulus funding tailwind) and data centers (only about four per cent of sales currently but backlog doubled in the first quarter 2024 and expected to grow well above company average for the next five years). Recent acquisitions and divestitures have turned CARR into a pureplay HVAC. Still a question of execution on the recent Viessmann acquisition in Europe (partially weighed down by soft-end markets) but significant deleveraging is already underway and guidance re-set de-risks 2025 numbers.

Equifax (EFX NYSE)

Global data and analytics company providing information solutions to businesses, governments and consumers along with human resource business process automation and outsourcing services for employers. Client base includes financial institutions, government agencies, mortgage lenders, telecommunications, and individuals.

Misunderstood company with transformation over last five years. Still thought of as primarily a credit bureau but the largest segment is workforce solutions which provide income, employment, educational, and criminal verification for employers as well as unemployment claims, onboarding services, and tax credits/incentives in the U.S., U.K. and Australia. The strong competitive moat around the workforce solutions business, which has around 40 million more records than the next largest competing database; contributes to durable pricing power. Around half of the employment records come directly from employers (three million plus), who are likely reluctant to share this data with just anyone given its confidential nature. Large potential re-rating on falling rates: a recovery in the mortgage market could generate an incremental $1.1 billion in sales and about $4 in earnings per share (EPS) over the next few years, representing significant upside to current consensus numbers. Margin expansion: migrating the company’s on-prem databases to the cloud is expected to generate $60 million in opex reductions by the end of 2024, with incremental upside in 2025 as the project is completed. This frees up FCF that can be used for mergers and acquisitions or shareholder returns.

PAST PICKS (October 2, 2023)

Ares Management (ARES NYSE)

· Then: US$102.44

· Now: US$ 159.15

· Return:55.35%

· Total Return: 59.59%

Brown & Brown (BRO NYSE)

· Then: US$ 69.50

· Now: US$ 104.70

· Return:50.60%

· Total Return: 51.58%

Jacobs Solutions (J NYSE)

· Then: US$134.36

· Now: US$137.00

· Return:22.12%

· Total Return: 23.11%

Total Return Average: 44.76%