Teal Linde, manager, Linde Equity Fund
FOCUS: North American, mid, large cap stocks
Top Picks: UiPath, TD Bank, Alphabet
MARKET OUTLOOK:
With a U.S. presidential race that has seemingly been too close to call for months with little movement in the polls, eyes are glued to what will happen in tomorrow’s election. This begs the question about what historically happens in the aftermath of U.S. presidential elections?
In spite of some level of anxiety that usually hangs over the election, the fourth quarter of an election year tends to be a decent one for the U.S. stock market, using the S&P 500 Index as a gauge. Excluding the financial crisis fourth quarter of 2008, since 1952, the U.S. market has averaged a four per cent gain (compared to 2.2 per cent for the average quarter) in the quarter in which the election takes place. These results tend to be the case regardless of which party is elected. Also, most of the gain tends to take place after the election is over, particularly when a new president is elected, which is guaranteed to be the case this year.
As for the calendar year following the election, the market tends to generate a fairly average return of 6.9 per cent (again excluding the 2008 election). But in these years, the markets have done far better when a Democrat has been elected instead of a Republican. The S&P 500 has risen an average of 16.5 per cent in the first presidential year under Democrats since 1952 while returning just 0.3 per cent under Republicans. Notably, the biggest historical exception to this rule was Donald Trump’s first term where the markets performed strongly in the aftermath of his election, generating a 19 per cent return in 2017.
If history provides a reliable guide, the U.S. market should see continued strength for the rest of 2024 no matter who wins. But for the first calendar year following the election, a Democratic win by Kamala Harris would be more bullish if historical patterns repeat. But then, Trump could be an exception again in 2025.
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TOP PICKS:
UiPATH (PATH NYSE)
UiPath is being recommended as a fallen angel. UiPath is the industry leader in providing robotic process automation software solutions. More specifically, the company develops software to automate repetitive digital tasks normally performed by people. The technology emulates how humans read computer screens (using AI computer vision) and gives users access to pre-built automation components that can be combined to automate routine processes. The company had an initial public offer (IPO) in 2021 trading around $75 on opening day back during covid when automation and digitization was a big deal, but now trades below $13, down over 83 per cent, as the company’s growth has slowed down dramatically. But even today, the company is expected to grow revenues 11 per cent and 13 per cent over the next two fiscal years, respectively. The company is trading around 29 times next year’s expected earnings per share (EPS) which isn’t a bargain. But we consider it fair considering the company’s leadership position, high insider ownership, exposure to AI driven automation, and with net cash of $1.7 billion representing roughly one fourth of the company’s value.
TD BANK (TD TSX)
TD Bank suffered a worst-case scenario with regard to its money laundering penalties. It has been fined US$3.1 billion and will be subject to an indefinite asset cap in its U.S. retail business. However, earnings per share growth is only expected to slow by about two percentage points per year, allowing for a still tolerable mid-single-digit earnings per share (EPS) growth, due to the asset cap as the bank is still able to grow its much larger Canadian banking division and its capital markets business in the U.S. The asset cap slows down growth but does not eliminate it. Currently, TD is trading at 9.6 times fiscal 2025 expected EPS, which is nearly a 20 per cent discount to its peer average. It now trades at the lowest P/E of the six major Canadian banks despite being expected to remain the third most profitable bank next year on a return on equity (ROE) basis. Thus, the decline in its share price appears overdone, settings its stock up for at least a partial recovery over the next year. From its current price of $77, a return to just $81 would still result in a double-digit total return when including its five per cent dividend yield.
ALPHABET (GOOGL NASD)
The mega cap tech stocks have been largely responsible for driving up the S&P 500 Index over the last two years. While concerns about their increasing dominance creating a riskier concentrated market are justified, we can not knock the superior revenue and earnings growth these companies have been achieving. Among the mega cap tech stocks, Alphabet currently looks the most attractive from a growth / valuation / consistency perspective. Partly due to a larger pullback, Alphabet trades at the cheapest P/E multiple of the Magnificent Seven at 19.5 times next year’s expected earnings. Apple, Microsoft and Amazon are trading over 30 times earnings.
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| PATH NYSE | Y | Y | Y |
| TD TSX | Y | Y | Y |
| GOOGL NASD | Y | Y | Y |
PAST PICKS: NOVEMBER 6, 2023
Colliers (CIGI TSX)
- Then: $132.91
- Now: $215.71
- Return: 62%
- Total Return: 63%
Royal Bank of Canada (RY TSX)
- Then: $116.22
- Now: $169.96
- Return: 46%
- Total Return: 52%
Delta Airlines (DAL NYSE)
- Then: US$32.92
- Now: US$57.84
- Return: 75%
- Total Return: 77%
Total Return Average: 64%
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| CIGI TSX | Y | Y | Y |
| RY TSX | Y | Y | Y |
| DAL NYSE | Y | Y | Y |