Bryden Teich, partner and portfolio manager, Avenue Investment Management
FOCUS: North American stocks

MARKET OUTLOOK:

As we enter the fall of 2021, we think it is fair to expect the market to have to digest the gains we have seen so far this year. For the next couple of months, we see some risks on the horizon that the market is not discounting trading near all-time highs. Because we expect growth to continue to slow over the next few quarters, we have transitioned out of some of the more cyclical companies that we owned and have added to positions that we think are more defensive.

Although markets have been steady near the highs, there has been considerable rotation under the surface particularly in the U.S. markets. Whereas earlier in the year investors were concerned about higher growth pushing up interest rates to the point that technology was less attractive. With interest rates now lower over the past few months we have seen strong performance from the technology sector. 

The violent rotation back and forth between different market sectors tells me that the overall market is looking for a sense of direction as we enter the fall. When the market has made a large move like it has so far this year and then loses a bit of momentum, that is a sign that we are likely to see some choppiness and a pullback into the early fall, before a likely strong end to the year.

One risk that is worth discussing is the outlook for the U.S. Federal Reserve for the balance of the year. I think the Fed has trapped themselves into a very difficult situation. Firstly, they are causing significant distortions in the mortgage market, and this has helped in pushing up U.S. home prices back to record levels.

Additionally, it is clear that the policy of quantitative easing is not impacting bank lending or the real economy and is just helping inflate asset prices. The banks are stuffed full of deposits and excess reserves and yet there is no lending going on. 

TOP PICKS:

Cargojet (CJT TSX) 
CargoJet is the leading provider of overnight cargo services in Canada. The company recently announced an official strategic partnership with Amazon which will provide a strong opportunity for future growth. With this new agreement, Amazon will become an equity holder in Cargojet and is also set to deliver substantial volume growth over the next several years. Cargojet has spent the last few years optimizing its fleet which we expect will provide further operating leverage and new avenues of revenue growth. Cargojet is a great way to play the continued growth in e-commerce sales in Canada.

Andlauer Healthcare (AND TSX) 
Andlauer is a leading healthcare logistics provider in Canada with a business that focuses on the highly regulated space of temperature-controlled delivery of pharmaceuticals. They have a nationwide presence and one of the best management teams in the country. They generate good returns on their invested capital and have the ability to continue to grow through acquisitions.

AutoZone (AZO NYSE) 
AutoZone is a leading retailer and distributor of automotive replacement parts and accessories with more than 6,000 stores in the U.S. Each store carries an extensive line for cars, sport utility vehicles, vans and light trucks, including new and remanufactured hard parts, maintenance items and accessories. AutoZone derives their largest segment of customers from the DIY (do-it-yourself) customer. With the average age of used cars expected to approach a multi-year high over the next few years, we think the automotive parts retailers are a good investment to benefit from this trend.