Teal Linde, Manager, Linde Equity Fund
FOCUS: North American, mid, large cap stocks
Top Picks: BYD, Adobe, Ensign
MARKET OUTLOOK:
November and December are historically the two strongest months of the year for the S&P 500 Index. However, warning signs exist suggesting the market is becoming vulnerable to a correction sometime in the next year as increasing speculation and leverage continues to lift markets higher. The amount of money invested in leveraged ETFs is at an all-time high. According to the Conference Board Survey, the percentage of Americans who believe the stock market will rise in the next 12 months just reached its highest recorded level going back to 1987. The year-over-year percentage increase in Google search queries for day trading, swing trading, trading strategy, and options strategies has also surged to an all-time high underscoring healthy animal spirits in the market.
Yet despite these bearish signals from a contrarian perspective, there are grounds to suggest the market still has legs to rise higher. In the eight instances that the S&P 500 achieved two back-to-back years of 20 per cent or more gains, as appears to be the case for 2023 and 2024, the median returns the following year has been plus 12.8 per cent. Furthermore, the most bearish strategist on Wall Street turned bullish last month. Chief U.S. strategist Mike Wilson of Morgan Stanley now expects the S&P 500 to rise 11 per cent next year, which is a notable call given his largely bearish view on stocks over the last few years. His key points were that it’s rare to see significant multiple compression in periods of above-average earnings growth and accommodative monetary policy, and that he expects the recent broadening in earnings growth to continue in 2025 as the U.S. Federal Reserve cuts rates into next year and business cycle indicators continue to improve. Therefore, overall investors ought to remain vigilant and not overexpose themselves to stocks with considerable downside – don’t be greedy.
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TOP PICKS:
BYD Co. (BYDDF OTC)
BYD is a leader in the electric vehicle market. The company has demonstrated impressive growth, surpassing Tesla to become the world’s largest seller of EVs. The company has three major advantages over western EV markets. First, BYD started off as a battery market and is now the second largest EV battery market in the world supplying lots of other EV makers. So it has a cost advantage of being able to source its own batteries without the mark up that their competitors must pay. Second, the company is vertically integrated to a much greater extent that western automakers where BYD makes almost all of their own parts, including semiconductors, which allows for better control of costs and production volumes. Third, it operates in a country where the government has incentivized a surge in EV manufacturing which has driven down costs such that a high quality BYD EV can be purchased for US$11,000. This is why Elon Musk warned that if trade barriers are not established, Chinese EV makers will “pretty much demolish most other companies in the world.” While BYD does not have plans to sell autos into the U.S. or Canada and some other western nations, they are rapidly expanding sales to many other countries around the world that welcome their more affordable vehicles for their citizens, looking to replicate Toyota’s global expansion strategy.
ADOBE (ADBE NASD)
With so many stocks up this year, next year’s bigger winners will likely be companies that didn’t participate in the rally this year. Among the large cap tech stocks, Adobe is one that actually declined this year, by about seven per cent YTD. Yet the company is continuing to grow its revenue and earning at double digit rates. The company also continues to dominate its industry with roughly 80 per cent share of the enterprise market. One of the reasons why the stock is down this year is due to slower than expected monetization of its AI products. It’s a challenge that all software companies face – which AI functionalities to simply add at no extra charge to an existing software or to add and raise the price, or to sell on a stand-alone basis. As far as Generative AI goes, Adobe is in a sweet spot for leveraging this new technology in enabling graphic designers to become more productive – thus a value-add whether through monetization or simply making their products that much more compelling. And as for the risk of disruption, yes, competing products are being created by smaller companies. However, when selling to enterprise, just having the software isn’t enough. You need strong distribution channels and the ability to integrate with an enterprises existing software. And it helps to be sticky where most enterprise customers couldn’t be bothered to switch to a new competing product. Adobe has all three, which positions it for a comeback year next year.
ENSIGN (ESI TSX)
On past appearances, we’ve talked about Ensign’s aggressive debt paydown schedule providing upside as value is transferred from debt holders to equity holders. It’s been a $600 million dollar paydown that is expected to be completed exactly this month next year. So from a capital structure perspective, the expected $65 million expected to be paid down this current quarter and $200 million next year should continue to support further upside in the stock. The company’s operation front is also looking more constructive for 2025. Up to five additional rigs are expected to be running in Canada, and an additional rig in both the U.S. and International Markets, bring their active rig count up to around 90 rigs. Plus, the Canadian market is also seeing improving rig rates. The combination of further aggressive debt reduction through to the end of 2025 and improving operating metrics heading into next year is bullish for Ensign’s stock.
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| BYD OTC | Y | Y | Y |
| ADBE NASD | Y | Y | Y |
| ESI TSX | Y | Y | Y |
Past Picks: DECEMBER 11, 2023
LINAMAR (LNR TSX)
- Then: $57.79
- Now: $62.34
- Return: 9%
- Total Return: 11%
TC ENERGY (TRP TSX)
- Then: $47.58
- Now: $68.06
- Return: 43%
- Total Return: 53%
TD BANK (TD TSX)
- Then: $81.73
- Now: $74.85
- Return: -8%
- Total Return: -3%
Total Return Average: 20%
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| BYD OTC | Y | Y | Y |
| ADBE NASD | Y | Y | Y |
| ESI TSX | Y | Y | Y |