Brian Madden, chief investment officer, First Avenue Investment Counsel
FOCUS: North American equities
Top Picks: Home Depot, Uber, Agnico-Eagle
MARKET OUTLOOK:
Stocks have largely shaken off the downward pressure that arose around the civic holiday weekend. The prevailing “goldilocks” interpretation of economic data morphed into fear of recession with a soft U.S. jobs report on Aug. 2, amplified the following Monday by a wild selloff in Japanese stocks and a concurrent torrid rally in the Japanese yen, driving volatility to levels only surpassed during the global financial crisis and at the onset of COVID-19.
This was coupled with disappointing news from Amazon and Google and notice of Warren Buffett selling half his Apple shares. Over the last month, the rest of the market has markedly outperformed the Magnificent Seven. Since the Aug. 5 lows, stocks have recovered mightily to within a few points of prior highs on both sides of the border, although with broader leadership than when those highs were first reached – an encouraging development in our view.What does it all mean?Long periods of complacency sow the seeds for bouts of violent correction that shatter the calm. People call these episodes “Minsky moments,” in honour of economist Hyman Minsky whose research held that volatility necessarily follows long uninterrupted stretches of euphoria and complacency, like night follows day.What’s an investor to do? Keep calm and carry on. Just as the risk of summer squalls blowing in ought not to keep us from enjoying the family cottage, neither should brief episodes of market volatility tempt us to undermine a soundly constructed, well-diversified portfolio.
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TOP PICKS:
Home Depot is America’s dominant home improvement retailer, serving the “pro” and do-it-yourself markets.An aggressive pursuit of “pro” clientele and the “one-stop shopping” proposition for complex multi-trade projects is enabling it to take share from its primary rival, as well as from lumber yards, millwork distributors, paint specialty retailers, electrical/plumbing/HVAC supply stores and other specialty suppliers.
Recently the company has expanded into adjacent and less cyclical end markets addressing the repair/maintenance/operations needs of multi-family residential landlords, the hospitality industry, healthcare centres, government/institutional markets, prisons, etc. All told, the company sizes up an addressable market of $950 billion annually, underpinned by the $43 trillion stock of residential housing in the U.S., which wear and tear depreciates like clockwork, requiring repairs and renovation. Stepped-up e-commerce and omnichannel capabilities are enablers of growth for Home Depot, complementing their knowledgeable expert sales floor staff in stores. The result has been a 17 per cent compound growth rate in dividends over the past decade and regular large share buybacks as supplemental capital returns to shareholders. Trading still 12 per cent below its 2021 peak levels and at just over 24 times expected earnings, the shares are inexpensive relative to historical and prospective earnings growth.
Uber is the global leader in ride-sharing with 156 million monthly active users. Beyond mobility, Uber has expanded into food and other deliveries, freight and autonomous vehicles and has launched a premium subscription service offering members priority pick-ups and deliveries as well as savings opportunities (i.e. like Amazon Prime).Uber’s platform benefits from scalability and strong network effects, such that more connected riders and drivers make the platform more valuable for both parties – this creates high barriers to entry for competitors. More recently, advertising has become a major revenue line for both the mobility and delivery businesses, bringing with it very high incremental margins. Financial performance has decisively turned the corner, with the company finally in the black in 2023 after years of growth and investment, and we expect profits to grow at a 21 per cent compound rate from 2023-26.Uber shares, on the surface, don’t appear cheap, but the company’s rapid growth over the next two and a half years warrants a premium and on 2025 expected profits, the shares trade at a sensible multiple of 30 times earnings.
Agnico-Eagle is Canada’s largest gold miner, since completing its transformational merger with Kirkland Lake Gold in 2022.The shares are almost a pure play on gold, unlike some of the other polymetallic producers, with 2024 planned production of 3.45m ounces and revenues comprised 99 per cent of gold and one per cent silver. The company has paid a dividend every year since 1983 and has increased its dividend by 17 per cent per annum on average over the past decade, such that the shares now yield 1.9 per cent, slightly above the ten-year average dividend yield of 1.7 per cent the shares have historically offered. With 12 producing mines in Canada, Finland, Mexico and Australia, single mine concentration risk is low, and political risk is negligible in these mining-friendly jurisdictions. The company has a well-deserved reputation among investors for credibility and execution against strategy, as its history of exceeding production guidance in nine of the last 10 years and its record of exceeding consensus earnings forecasts in 18 of the last 20 quarters demonstrates.
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| HD NYSE | N | N | Y |
| UBER NYSE | N | N | Y |
| AEM TSX | N | N | Y |
PAST PICKS: AUGUST 29, 2023
Alimentation Couche-Tard (ATD TSX)
- Then: $71.31
- Now: $80.51
- Return:13%
- Total Return: 14%
Royal Bank of Canada (RY TSX)
- Then: $122.66
- Now: $153.66
- Return:25%
- Total Return: 30%
Public Storage (PSA NYSE)
- Then: US$278.93
- Now: US$329.74
- Return:17%
- Total Return: 23%
Total Return Average: 17%
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| ATD NYSE | Y | N | Y |
| RY TSX | Y | N | Y |
| PSA NYSE | N | N | N |
