Brian Madden, chief investment officer, First Avenue Investment Counsel
FOCUS: North American equities
Top Picks: Allied Properties, Newmont, TD Bank
MARKET OUTLOOK:
Canadian and U.S. stock prices have moved once again to fresh all-time highs, with the latest thrust higher fuelled by an enthusiastic response by investors to the long-awaited start of an interest rate-cutting cycle in the U.S., and an ongoing easing cycle well underway here in Canada.
We see myriad examples of companies and sectors poised to benefit from what looks likely to be an extended cycle of loosening monetary policy and are positioning portfolios accordingly, adding exposure to these areas incrementally. This will have impacts across sectors, from real estate and real estate-adjacent themes to long-duration technology and other growth stocks, to classic bond proxy/interest rate-sensitive sectors to gold and gold miners.
With economic growth decelerating in the United States, and very feeble indeed in Canada, we’re avoiding aggressive forays into the most deeply cyclical areas of the market for the time being. However, we are cautiously optimistic that an economic soft landing can be achieved in both countries, despite some tentative signs of softening in the labour markets in recent months. Nevertheless, risks to remain mindful of include the fact that valuations are high – particularly in the U.S., volatility is subdued and geopolitical risk is front and centre with wars ongoing in two different conflict theatres and a nail-biter of a U.S. election cued up for early November.
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TOP PICKS:
Allied Properties REIT (AP.UN TSX)
Allied Properties is an office and retail landlord, best known for gentrifying the former industrial and warehouse corridor along King St. and Front St. in Toronto, and more recently building the iconic The Well retail/office/residential complex nearby. It also has six million square feet of space in Montreal and another three million across Vancouver, Calgary, Ottawa and Kitchener. The shares are former darlings, having compounded at a 17 per cent annual rate from the 2003 IPO to the pre-COVID-19 days but now trade below 0.5 times book value and 65 per cent off its pre-COVID-19 highs, despite ample precedent in the private market for buildings to trade at book value and portfolios of buildings to trade at 0.65 – 0.7 times book value in a full privatization scenario. The nine per cent yield, we believe, is sustainable, even in a more stressed occupancy scenario - which we don’t expect. This is a deep value, turnaround situation with a wide margin of safety and with catalysts looming including: a forecasted improvement in occupancy, de-leveraging via non-core asset sales, debt refinancing opportunities as construction financing is replaced with secured CMHC loans and a macro tailwind from falling interest rates.
Newmont (NEM NYSE)
Newmont is the world’s largest producer of gold and is the only gold producer in the S&P 500 Index. In 2023, Newmont produced over 5.5 million ounces of gold globally across 20 producing mines, with multiple Tier 1 assets primarily situated in geopolitically safe jurisdictions. The company’s focused exposure to gold (over 90 per cent of revenue) should advantage it during the current interest rate cutting cycle and the ongoing unprecedented bullion buying by central banks. Newmont is conservatively financed with a debt-to-EBITDA ratio just above one and a BBB+ credit rating. The shares currently trade at an attractive multiple of 1.5 times price/net asset value and should re-rate upwards as retail investors and generalist professional money managers alike awaken to the reality of record high gold prices, prolific producer cash flows and the exploration optionality implicit in the sector.
TD Bank (TD TSX)
TD has had a difficult couple of years, but it remains Canada’s second-largest bank and it remains among the largest banks in America as well. We believe the franchise has been tarnished by recent wrongdoings on both sides of the border, but not irreparably so – this bank has historic roots that pre-date the Confederation of Canada and we see an enduring franchise value that will regain its lost lustre. Last week’s announcement of a new CEO clears a long lingering uncertainty in the minds of investors about who would take over the reins from the outgoing CEO. Moreover, we believe is a very strong indication that the anti-money laundering investigations in the U.S. have been adequately provisioned for and will likely be concluded by year-end as the company recently indicated they expect. In the meantime, the opportunity at hand is to buy the shares at an unusually wide five to 10% discount to the Big Six bank average price/earnings and price/book trading multiples and yielding nearly five per cent before the last of the regulatory dark clouds part, paving the way for an upward re-rating in the shares.
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| AP. UN TSX | N | N | Y |
| NEM NYSE | N | N | Y |
| TD TSX | N | N | Y |
Past Picks: SEPTEMBER 28, 2023
Hershey (HSY NYSE)
- Then: US$201.84
- Now: US$190.40
- Return:-6%
- Total Return: -3%
Linde PLC (LIN NYSE)
- Then: US$373.49
- Now: US$477.51
- Return:28%
- Total Return: 29%
Bank of Montreal (BMO TSX)
- Then: $114.68
- Now: $122.04
- Return:6%
- Total Return: 12%
Total Return Average: 13%
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| HSY NYSE | N | N | N |
| LIN NYSE | N | N | Y |
| BMO TSX | N | N | Y |