Brendan Caldwell, president and CEO of Caldwell Investment Management

FOCUS: North American large cap stocks

MARKET OUTLOOK:

Interest rates are the determining factor. Low rates created the environment for stock markets to rally after the initial COVID shock last spring. The Dow has nearly doubled from 18,500 in March of 2000 to over 34,000 today. Since the start of 2021, rates have increased dramatically. The 10 year Canadian bond yield was 0.67 per cent on New Year’s Eve and it is 2½ times that level now -- over 1.5 per cent, equal to pre-pandemic levels. The question is: where to from here? Low rates have fuelled asset inflation – the price of stocks, real estate and collectibles have all shot higher, but considering how much money governments have printed, there has not been much in the way of consumer inflation in the cost of goods and services – it has been very hard to spend it. This dynamic is changing as demand surges, particularly in the U.S. One of my children told me that her generation is hanging on because they believe that post-pandemic it will be “the roaring 20s”. As the world shifts from entirely online to more in-person, and as manufacturers look to recoup the inflation pressures they have felt due to supply constraints, it will be important to look for companies with strong management teams that can successfully navigate these changes and position themselves to emerge as stronger on the other side.

TOP PICKS

Martin Marietta (MLM NYSE)

A leading producer of aggregates (sand, crushed stone, gravel) and other downstream products like ready-mix concrete and asphalt used in infrastructure, residential and commercial end markets. Its non-replicable asset base combined with a low value-to-weight ratio creates logistical moats as product becomes uneconomical to move over long distances. Over the years, Martin Marietta has become the dominant player in 90 per cent of its markets. Growth prospects look promising in its top 10 states and we saw state budgets hold up better than expected in its top five states through the pandemic. Infrastructure spending has bi-partisan support and a new bill would be a multi-year growth tailwind that could provide additional upside. On the margin side, lack of substitutes creates pricing power and strong expense controls have led to one of the lowest cost structures in the industry. These dynamics have generated strong margin expansion over the last five years.

Watsco (WSO NYSE)

The largest heating, ventilation, air conditioning and refrigeration (“HVAC/R”) distributor in North America, with 600+ distribution facilities across 38 U.S. states, Canada, Mexico and export coverage to Latin America and the Caribbean. The company serves ~90,000 active contractors and dealers that service residential and commercial replacement and new construction markets. Macro tailwinds provide a steady base of long-term growth such as: 90 million U.S. HVAC systems that are 10+ years old; upcoming energy efficiency regulation; urban to suburban migration and; a greater focus on indoor air quality post COVID-19. Multi-year internal investments in technology are starting to pay dividends. Contractors using Watsco’s tech/apps grow faster than non-users, have lower attrition and can generate invoices that are ~30 per cent higher than sales generated offline. Great management team with decentralized business model; 20 per cent compound growth in the dividend over the last five years.

Fastenal (FAST NASD)

A leading industrial and construction supply company with a unique mix of standalone store locations and mini shops located within customers’ manufacturing/production facilities called ‘On-sites’. Its product line has more than 1.4 million SKUs, ranging from items such as fasteners, abrasives and power tools to welding equipment, cleaning and safety supplies, etc. Vending machines (~20  per cent of revenue) are a $22 billion opportunity and the first step towards increasing wallet share of customers’ inventory spend. Management believes the market can support 1.5 million machines vs. the current installed base of ~95,000, highlighting a long growth runway. Benefits of vending machines include automated re-ordering which reduces the risk of stock-outs for customers and provides Fastenal a more predictable revenue stream. Inventory tracking also allows customers to reduce waste, helping prove FAST’s value proposition while laying the groundwork for On-sites. On-sites are a ~$25B opportunity that ultimately allow Fastenal to increase customer stickiness and wallet share of inventory spend while running at significantly lower operating costs than a standalone store (~40-50 per cent less than a standalone branch). Fastenal is relatively underpenetrated with national account customers, having signed 1,000 of a ~20,000 opportunity to date. With an average of 40 manufacturing sites each, these customers are prime vending and on-site candidates and help contribute to the growth runway in both opportunities. Revenues held up well throughout COVID given safety/PPE supply business. With the reopening underway, we note the stock has historically performed well during the early stages of a recovery.

PAST PICKS: December 31, 2020

Home Depot (HD NYSE)

• Then: $265.62
• Now: $329.57
• Return: 24%
• Total Return: 24%

Intercontinental Exchange (ICE NYSE)

• Then: $115.29
• Now: $116.80
• Return: 1%
• Total Return: 2%

Alimentation Couche-Tard (ATD/B TSX)

• Then: $43.38
• Now: $41.74
• Return: -4%
• Total Return: -4%

Total Return Average: 7%

Company Twitter Handle: @Caldwell_Funds

Company Website:  www.caldwellinvestment.com

LinkedIn: https://ca.linkedin.com/company/caldwell-investment-management-ltd