Brian Madden’s Top Picks for October 30, 2024

Brian Madden, chief investment officer, First Avenue Investment Counsel

FOCUS: North American equities

Top Picks: TFI International, Broadcom, Alimentation Couche-Tarde

MARKET OUTLOOK:

The release of third quarter corporate earnings results are well underway, with several large U.S. mega-cap tech and communications stocks reporting results this week. Broadly speaking, U.S. companies, as proxied by the S&P 500 Index, are reporting high single digit earnings growth versus last year, with about half of the index constituents having reported third quarter results. With only 10 per cent of Canada’s S&P/TSX Composite members having released results, it’s too soon to draw strong conclusions about year-over year growth trends, but early reports show difficult earnings comparisons versus last year and earnings growth lagging relative to U.S. corporates.

Nevertheless, both indices have traded well through the seasonally challenging month of September and are shaking off pre-U.S. election anxiety confidently – a reasonable outcome in our view. Both presidential candidates are largely “known quantities” and both are running fiscally undisciplined campaign platforms, which should prove to be pro-growth, albeit at the likely expense of long-term fiscal sustainability and the short-term consequence of potentially higher trend level inflation and interest rates than would otherwise be the case. Ultimately, U.S. markets are largely agnostic to the political stripe of the governing party – business fundamentals and the economic cycle exert far more influence than the man or woman in the Oval Office and the men and women in Congress. As such, we expect the dissipating of uncertainty post-election, coupled with strong December seasonality to extend what has been a very solid run in stocks this year into year end.

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TOP PICKS:

TFI International (TFII TSX)

TFI International is a truckload, less-than-truckload and asset-light logistics company with a top-flight management team and a lean operating philosophy that maximizes asset turnover by selling the “right” freight that matches their network and assets and keeps the trucks moving. Apart from being an efficient and scale sized operator, TFI also has a long history of consolidating the fragmented trucking industry in Canada and the U.S. After two years of manufacturing recession and freight recession, the bankruptcy last year of Yellow Corp. took meaningful capacity out of the trucking industry. TFI is now poised to return to double digit earnings growth next quarter and analysts expect growth to accelerate in the coming years as freight volumes return to more normal levels, with forecasts calling for 27 per cent earnings per share (EPS) growth next year and 24 per cent growth in 2026. The shares trades at 18 times expected earnings, which represents an excellent combination of value and growth considering the historic five year compound earnings growth rate of 20 per cent and prospective earnings growth rates above that level going into 2025-26.

Broadcom (AVGO NASD)

Broadcom is a leading designer, developer, and global supplier of a range of semiconductor devices, with a focus on radio frequency (RF) and optoelectronic applications. The $70 billion acquisition late last year of VMWare significantly increased their exposure to infrastructure software (i.e. “workload-balancing” for mainframes, distributed computing, cloud infrastructure, etc.), which we expect will attract further re-rating as the software business carries high margin recurring revenue. Broadcom is also an emerging competitor in AI chips, with increasing numbers of networking chips sold into hyper-scalers and others in the AI arms race. Other applications it sells into include cell phones and PCs, servers, enterprise storage equipment, telecom backhaul gear and various industrial applications. Broadcom has grown its dividend at a 35 per cent compound pace since 2016 – a pace that could moderate but that will likely remain elevated, as we expect earnings to grow at a 20 per cent compound pace over the coming three years.

Alimentation Couche-Tard (ATD TSX)

Alimentation Couche-Tarde is the world’s second largest convenience store operator with over 14,500 stores across Canada, the United States, Europe and Hong Kong. The company earns returns on equity of 20 per cent plus and has grown earnings per share at a 13 per cent compound rate over the last decade. The company uses procurement scale to price sharply on fuel, drawing traffic to their sites and then luring shoppers into attractive, modern, well merchandised stores where merchandise gross margins are three to five times higher than their profit margin on gasoline. The company is a very capable acquirer with a demonstrated pattern of realizing significant synergies from acquired businesses in this still highly fragmented industry and is currently in “friendly” pursuit of its largest target to date – Japan’s 7&I Holdings – parent company of the globally ubiquitous 7/11 stores.

PAST PICKS: October 26, 2023

Alphabet (GOOGL NASD)

• Then: $122.28
• Now: $181.35
• Return: 48%
• Total Return: 49%

Intact Financial (IFC TSX)

• Then: $192.14
• Now: $270.47
• Return: 41%
• Total Return: 43%

Dollarama (DOL TSX)

• Then: $96.21
• Now: $144.60
• Return: 50%
• Total Return: 51%

Total Return Average: 48%