Chris Blumas, portfolio manager, Raymond James Investment Counsel
FOCUS: North American large caps
Top Picks: Nike, Alphabet, Brookfield Infrastructure Partners
MARKET OUTLOOK:
Last month, the U.S. Federal Reserve surprised many market participants with a 50-basis point cut to interest rates. Going forward, the central bank is signalling a slightly faster and slightly shallower easing cycle as it tries to steer the economy towards a “soft landing.”
Considering the new federal funds midpoint rate (4.875 per cent) and the new longer-run forecast rate (2.9 per cent), there are another 200 basis points or so of interest rate cuts that are expected to occur by the end of 2026.
North American economies are struggling under the weight of higher interest rates and there is a plethora of data points that highlight how quickly economic growth is stagnating across the continent.
Looking at the stock market valuations for larger capitalization and high-growth companies, it is clear the equity markets have already accounted for a declining interest rate cycle and the likelihood of a soft landing. However, when you look at the valuations of lower growth companies in defensive sectors that tend to be more interest rate sensitive, valuations are much more reasonable and dividend yields are very robust.
Overall, I think it’s important for investors to remain disciplined and avoid the temptation to chase returns without regard for valuation. In the end, the price you pay determines your rate of return and indiscriminate buying can often lead to increased valuation risk and increase the odds of poor returns.
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TOP PICKS:
Nike Inc. (NKE NYSE)
Most recent purchase at $80.4 on Oct. 8, 2024.
Nike is an athletic footwear and apparel company with a global presence. In addition to manufacturing footwear and apparel, the company also operates a global network of retail stores. Nike has fallen on tough times this year as weakness in consumer spending and a loss of market share have negatively impacted profitability and led to a significant decline in its share price. The company recently appointed a new CEO to refocus the company and turn things around. While a turnaround of this magnitude ultimately takes time, Nike has the brand power, marketing capabilities, and financial strength necessary to be successful. The shares currently trade around 29 times forward earnings and have a trailing free cash flow yield of almost six per cent.
Alphabet Inc. (GOOGL NASD)
Most recent purchase at $150.7 on Sept. 11, 2024.
Alphabet is an investment holding company. The company’s main asset is Google which accounts for more than 90 per cent of Alphabet’s revenue. Google generates around 90 per cent of its revenues from online advertising and generates the remainder from the sale of apps and content. As advertising dollars continue to move online, Google is uniquely positioned to continue growing revenues and cash flow. On the negative side, Google continues to face greater regulatory pressure to safeguard user privacy and to lessen its online dominance. The shares currently trade around 21 times forward earnings and have a trailing free cash flow yield of almost three percent. However, these valuation metrics do not account for the excess cash on the company’s balance sheet ( around $90 billion or about $7 per share) or the hidden value associated with its rapidly growing cloud services business and its portfolio of early-stage technology investments, all of which currently generate negative operating income.
Brookfield Infrastructure Partners L.P. (BIP.UN TSX)
Most recent purchase at $46.36 on Oct. 2, 2024.
Brookfield Infrastructure Partners (BIP) is a global infrastructure company with a diversified portfolio of assets. It operates through the following segments: utilities, transport, midstream and data. The utilities and transport businesses are the most significant and accounted for around two-thirds of cash flows last year. BIP’s size, sponsor support, diversified operating model, and global platform are unique and allow the company to recycle capital opportunistically and grow cash flows at an above-average rate. The shares currently trade around 10 times funds from operations and have a dividend yield of 4.7 per cent with funds from operations payout ratio of around 50 per cent.
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| BIP.UN TSX | N | N | Y |
| GOOGL NASD | Y | Y | Y |
| NKE NYSE | Y | Y | Y |
PAST PICKS: OCTOBER 18, 2023
Alimentation Couche-Tard (ATD TSX)
- Then: $73.93
- Now: $73.28
- Return:-1%
- Total Return: 1%
Enbridge (ENB TSX)
- Then: $44.11
- Now: $57.19
- Return:30%
- Total Return: 38%
Walt Disney (DIS NASD)
- Then: $84.68
- Now: $94.35
- Return:11%
- Total Return: 12%
Total Return Average: 17%
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| ATD TSX | Y | Y | Y |
| ENB TSX | Y | N | Y |
| DIS NYSE | N | N | N |