Brian Madden's Top Picks: April 19, 2023

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Brian Madden's Top Picks

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Brian Madden, chief investment officer, First Avenue Investment Counsel

FOCUS: North American equities

MARKET OUTLOOK:

First-quarter earnings releases will soon be in full swing, and we expect they will be sobering, at least in terms of the rate of change. Average earnings growth for the S&P TSX Composite Index is forecast to slide. The decline is expected from the heady levels of 12.4 per cent two quarters ago, down below the negative two per cent growth of last quarter, all the way to a decline of 10 per cent versus the comparable period in 2022.

Average earnings growth for the S&P 500 Index is also forecasted to slide. The decline is expected from seven per cent two quarters back, and down below the tepid 1.4 per cent pace of last quarter, all the way down to an eight per cent decline in the first quarter of 2023 versus the same quarter last year.

Not surprisingly and consistent with our approach for much of the last year, we are underweighting cyclicals, whose earnings fall the most and typically are the most seriously overestimated at economic turning points.

Our portfolios are just 10 per cent invested in manufacturers, just four per cent in oil and gas producers and a very scant one per cent invested in industrial commodities producers. We are finding select new opportunities in gold, in technology (mainly below most investors’ radar, outside of the mega-cap, household names) and in China reopening thematic trades across our three portfolios. At the same time, many of the defensive companies we own in the consumer staples, telecom and utilities sectors continue to execute flawlessly upon their business plans and as a result are trading very well.

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TOP PICKS:

Brian Madden's Top Picks

Brian Madden, CIO at First Avenue Investment Counsel, discusses his top picks: BCE, Osisko Gold Royalties, and Las Vegas Sands.

BCE (BCE TSX)

Latest purchase April 2023 at $63.35

BNN Bloomberg is owned by Bell Media, which is a division of BCE.

BCE is the country’s largest telecommunications and media company with wireline and wireless businesses, conventional and specialty TV channels as well as various smaller lines of business. The company earns a robust 16 per cent return on its shareholder’s equity and has grown dividends at a five per cent compound rate over the past decade. Both the profitability (return on equity) and the pace of dividend growth are well supported by declining capital intensity as the company has invested heavily in network expansion and is poised to reap the cash flows from this initiative in the coming years. BCE has a clear edge in financial strength and in operational focus versus several of its peers who are now digesting large acquisitions – one of the reasons we opted to switch shares of Quebecor for BCE recently.

Osisko Gold Royalties (OR TSX)

Latest purchase April 2023 at $22.57

Osisko Gold Royalties is a precious metals royalty and streaming company with 20 producing assets generating about 100,000 gold equivalent ounces and a further 30 development assets. The company’s biggest exposure is to Canadian Malartic, the second largest gold mine in Canada, and a mine the board and management team know well, having discovered and built it before selling it to the current operators a decade ago.

The existing portfolio can sustain a 10-12 per cent organic growth rate in gold equivalent ounces produced with little to no capital required. Accordingly, Osisko’s ample free cash flows in a rising gold price environment can flow entirely back to shareholders as dividends or share repurchases or fund growth in the royalty and streaming portfolios. Shares surged through an eight-year-long resistance level just under $19 one month ago. The breakout is a powerful and telling sign of momentum and investor accumulation. Even so, Osisko still trades at a discount to larger, better-known royalty businesses, but we expect the company will earn the admiration of investors and re-rate higher as gold prices continue to rise.

Las Vegas Sands (LVS NYSE)

Latest purchase March 2023 at $54.33

Las Vegas Sands sold its U.S. casinos in early 2022 to focus on the high-growth Asian gaming market. With five properties, it is now the largest operator in Macau with a 33 per cent share of hotel rooms and a 30 per cent share of all gaming tables. It also operates the only casino in Singapore – the iconic Marina Bay Sands. Macau eased COVID-19 restrictions several months ago, and visitors are returning in droves. Gross gaming revenues in Macau are rising at a triple-digit pace yet remain 50 per cent below pre-COVID-19 levels. LVS is expected to post a 600 per cent increase in EBITDA this year buoyed by pent-up demand for services with the reopening of the Chinese economy. We expect LVS shares to re-rate higher from their current multiple of 11x EBITDA as the company’s financial strength and momentum improve.