Alexander MacDonald, portfolio manager, GlobeInvest Capital Management
FOCUS: North American large caps
Top Picks: Otis Worldwide, Bank of Nova Scotia, Canadian National Railway
MARKET OUTLOOK:
It has been the U.S. versus the world when it comes to equity market returns this year. The MSCI All-Country World ex-USA Index, which includes approximately 85 per cent of global equities outside of the U.S., is down eight per cent since the end of September and up just four per cent year-to-date. Compare that to the S&P 500 Index, which has rallied five per cent just since election day in the U.S. and is now up 25 per cent year-to-date.
The fundamentals of U.S. companies continue to look strong as well. Of the S&P 500 companies that have reported third quarter results so far, 53 per cent beat revenue estimates and 75 per cent beat on earnings. That said, concerns about the state of the U.S. consumer continued to be a topical discussion point on these earnings’ conference calls. Furthermore, there are growing concerns that equity valuations are stretched, as markets have perhaps taken an overly optimistic view of how the new U.S. administration’s policies will benefit domestic companies.
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TOP PICKS:
Otis Worldwide (OTIS NYSE)
The elevator company operates in a global oligopoly, owning the largest share at about 20 per cent. This share of the global installed elevator base is important, as margins on service work are three times higher than new equipment installations, resulting in the company’s service work accounting for 80 per cent of consolidated profits. Recent weakness in China has led to fewer new installations for Otis, however, the rest of the company’s global operations continue to perform well. We believe the current valuation at 24 times forward price to earnings (P/E) represents an attractive entry point for this stable operator.
Bank of Nova Scotia (BNS TSX)
Scotiabank has been a laggard versus its peers recently. It currently trades at the second-lowest P/E and price to book (P/B) multiples in the group, in addition to the largest historical discount to its own P/B multiple. In the short-term, it is the only Canadian bank whose NII would benefit from further rate cuts. Longer-term, we believe the bank is heading in the right direction by shifting its strategic focus away from Latin America to North America.
Canadian National Railway (CNR TSX)
After a summer that featured strikes and wildfires, the company’s operations appear to be again resembling that of a well-oiled machine. A recent guidance cut likely added to the already-negative sentiment on the name, but we believe the company is in a strong position to potentially exceed expectations over the medium term. Additionally, the stock is trading at historically low P/E multiples, both versus the peer group and its own valuation.
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| OTIS NYSE | Y | Y | Y |
| BNS TSX | Y | Y | Y |
| CNR TSX | Y | Y | Y |
PAST PICKS: OCTOBER 30, 2023
RTX (RTX NYSE)
- Then: US$78.57
- Now: US$120.65
- Return: 53%
- Total Return: 57%
Alphabet (GOOGL NASD)
- Then: US$124.46
- Now: US$176.43
- Return: 42%
- Total Return: 42%
Mondelez International (MDLZ NASD)
- Then: US$65.98
- Now: US$65.70
- Return: 0%
- Total Return: 2%
Total Return Average: 34%
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| RTX NYSE | Y | Y | Y |
| GOOGL NASD | Y | Y | Y |
| MDLZ NASD | Y | Y | Y |