Brian Madden, chief investment officer, First Avenue Investment Counsel
FOCUS: North American equities
Top Picks: Telus, Microsoft, Allied Properties
MARKET OUTLOOK:
With U.S. election risk resolved in the most market friendly way imaginable – quickly, uncontested and with a Republican sweep of the House, Senate and White House, the table is set for a fiscally undisciplined and inflationary, but decidedly pro-growth economic policy agenda in 2025.
Meanwhile, favourable December seasonality is underway, with December among the most consistently positive months of the year on both sides of the border. The S&P 500 Index and the S&P/TSX Composite have advanced in 18 of the last 25 Decembers, and we expect 2024 to be no exception in light of very strong year to date returns for stocks – tax loss selling candidates are few and far between.
We are adding incrementally to interest rate sensitive names, particularly in Canada where we expect faster interest rate cuts than we foresee in the U.S., while maintaining or adding to structural growth champions we own in both countries. While we acknowledge that during the first Trump presidency there was often a wide “say” versus “do” gap on all manner of things. We are treading carefully with respect to businesses that export goods from Canada, Mexico or China to the United States in light of the aggressive opening gambit the President-elect has made with respect to import tariffs. Fortunately, the service sector of both the Canadian and U.S. economy is much larger than the manufacturing sector, leaving us with no shortage of opportunities in software, telecom, financial services, utilities, retailing, etc.
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TOP PICKS:
Telus (T TSX)
Telus is the highest quality telecom business in Canada and currently offers a yield of 7.3 per cent - very elevated relative to the ten year average yield of five per cent it has typically traded at. Not only do we believe this dividend is secure, but we also believe it will continue to grow at a faster pace than the dividends paid by Canada’s other telecoms. This belief was validated by its decision last month to increase the dividend 3.4 per cent on top of the 3.5 per cent hike back in March. All the telecoms should face easier earnings comparisons in the coming quarters as they lap the price war that started a year ago to the determinant of the overall industry profit pool. All the telecoms should also benefit from macro and money flow tailwinds from income hungry Canadian investors realizing that their GICs are rolling over at three to 3.5 per cent versus five to 5.5 per cent a year ago. Telus, in particular, is advantaged by its ownership of some faster growing non-telecom businesses, by its financial strength and flexibility as well as by its operational focus while its rivals are distracted integrating their recent acquisitions. Lastly, we believe Telus has some intriguing unpriced catalysts in front of it, including a plan to monetize $3 billion plus of surplus urban real estate via re-development into high rise housing.
Microsoft (MSFT NASD)
Microsoft is the world’s fourth largest company and is by far the largest global software company. Operating across personal computing, productivity and business process and intelligent cloud segments, the company is a scale-advantaged, defensive growth company with excellent exposure to several long-term secular infotech themes, including digital transformation/cloud computing, business intelligence/analytics/AI, security and collaboration. With nearly 70 per cent of revenues recurring, and much of its product offering “mission critical” whether to a corporate entity or to a personal user, the company has a strong incumbency advantage over rivals and a wide competitive moat to defend its market share and margins. With earnings expected to grow at a 14 per cent compound rate over the coming three years and the shares trading at 31 times earnings, we see a good combination of value and growth in the stock.
Allied Properties Real Estate Investment Trust (AP.UN TSX)
Allied Properties is an office and retail landlord, best known for gentrifying the former industrial and warehouse corridor along King Street and Front Street in Toronto. More recently building the iconic The Well retail/office/residential complex nearby, but it also has six million square feet of space in Montreal and another three million across Vancouver, Calgary, Ottawa and Kitchener. The shares are former darlings, having compounded at a 17 per cent annual rate from the 2003 initial public offer (IPO) to the pre-COVID-19 days but now trade below 0.4 times book value and 70 per cent off their pre-COVID highs. This is despite ample precedent in the private market for buildings to trade at book value and portfolios of buildings to trade at 0.65 times – 0.7 times book value in a full privatization scenario. The 10 per cent yield, we believe, is sustainable, even in a more stressed occupancy scenario - which we don’t expect. This is a deep value, turnaround situation with a wide margin of safety and with catalysts looming including: a forecasted improvement in occupancy, de-leveraging via non-core asset sales, debt refinancing opportunities as construction financing is replaced with secured CMHC loans and a macro tailwind from falling interest rates.
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| T TSX | N | N | Y |
| MSFT NASD | N | N | Y |
| AP.UN TSX | N | N | Y |
PAST PICKS: DECEMBER 20, 2023
Franco Nevada (FNV TSX)
- Then: $145.39
- Now: $172.09
- Return: 18%
- Total Return: 19%
McKesson (MCK NYSE)
- Then: US$445.96
- Now: US$617.30
- Return: 38%
- Total Return: 39%
UBER Technologies (UBER NYSE)
- Then: US$60.68
- Now: US$71.37
- Return: 18%
- Total Return: 18%
Total Return Average: 25%
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| FNV TSX | Y | N | Y |
| MCK NYSE | N | N | Y |
| UBER NYSE | N | N | Y |