Chris Blumas, portfolio manager, Raymond James Investment Counsel
FOCUS: North American large caps
Top Picks: Honeywell, CPKC, TD
MARKET OUTLOOK:
In the words of Bank of Canda Governor Tiff Macklem, “The world looks more shock-prone,” as rising protectionism, the spread of artificial intelligence (AI), and unfavourable demographics create some major uncertainties for the world at large. In the face of this uncertainty, investors are pricing in a lot of optimism for U.S. President-elect Donald Trump’s administration and expecting that higher corporate profits and less government regulation will create a virtuous cycle that will continue to increase profits and push markets higher over the near term.
Last month, the U.S. Federal Reserve continued to signal a slightly faster and slightly shallower easing cycle as it tries to steer the U.S. economy towards a “soft landing.” North American economies are struggling under the weight of higher interest rates and there is a plethora of data points that highlight how quickly economic growth is stagnating across the continent.
Looking at the stock market valuations for larger capitalization, high growth companies, it is clear the equity markets have already accounted for a declining interest rate cycle and the likelihood of a soft landing. However, when you look at the valuations of lower growth companies in defensive sectors that tend to be more interest rate sensitive, valuations are much more reasonable, and dividend yields are more robust.
Overall, I think it’s important for investors to remain disciplined and well diversified and avoid the temptation to chase returns without regard for valuation. In the end, the price you pay determines your rate of return and indiscriminate buying can often lead to increased valuation risk and greater odds of weaker returns.
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TOP PICKS:
Honeywell International Inc. (HON NASD)
Most recent purchase at $228.83 on Dec. 13
Honeywell is an industrial conglomerate with a global presence. The company has a broad portfolio of market leading businesses that include aerospace and defense, industrial automation, building automation, and energy solutions. Over the last five years, earnings per share (EPS) growth and total shareholders returns have been at the low end of the range relative to peers. Going forward, management and some influential shareholders are looking for the company to simplify its operations by spinning off assets and/or separating business units to unlock value and improve long-term capital allocation. There have been several precedent separations within the sector in recent years and the magnitude of value creation is difficult to ignore. The shares currently trade around 21 times forward earnings and have a trailing free cash flow yield of almost four per cent.
Canadian Pacific Kansas City Ltd. (CP TSX)
Most recent purchase at $106.55 on Dec. 13
CPKC is a railway holding company with a strong management team and a unique operating footprint. The company operates in Canada, the United States, and Mexico and is the only rail company to directly connect all three countries. The shares of CPKC are down around 15 per cent from its highs over the last year as uncertainties around North American trade have spooked investors and created an attractive entry point for long-term investors. The shares currently trade around 21 times forward earnings and have a trailing free cash flow yield of around two per cent.
TD Bank (TD TSX)
Most recent purchase at $75.69 on Dec. 11
TD is a retail-focused North American bank. The bank recently announced a resolution to its anti-money laundering investigations and some changes to its senior leadership team. It’s been a rough year for TD and its shares trade at a significant discount to its peers. Going forward, the bank has a strong capital position and the flexibility to direct excess capital towards a number of shareholder-friendly actions. The shares currently trade around 10 times forward earnings and have a dividend yield of 5.4 per cent.
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| HON NASD | Y | Y | Y |
| CP TSX | N | N | Y |
| TD TSX | Y | Y | Y |
PAST PICKS: December 13, 202
CGI Group (GIB.A TSX)
- Then: $143.32
- Now: $156.60
- Return: 9%
- Total Return: 9%
Enbridge (ENB TSX)
- Then: $47.95
- Now: $59.05
- Return: 23%
- Total Return: 31%
YUM China Holdings (YUMC NASD)
- Then: $39.75
- Now: $49.32
- Return: 24%
- Total Return: 26%
Total Return Average: 22%
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| GIB.A TSX | Y | Y | Y |
| ENB TSX | Y | N | Y |
| YUMC NASD | Y | Y | Y |