Gordon Reid, president and CEO of Goodreid Investment Counsel

FOCUS: U.S. equities

MARKET OUTLOOK:

Financial markets continued their strong pace higher in the first quarter of 2024. The reasons are clear: inflation has come off the boil and is approaching the monetary authorities’ target levels and interest rates for the cycle appear to have peaked and are poised to fall. Finally, the U.S. economy continues to perform extremely well, with employment strong and corporate profits surprising on the upside. The story in the Canadian economy is not as reassuring as cracks in gross domestic product (GDP) growth and employment are appearing. This leads us to expect the recent strength in the U.S. dollar will continue, supported by the likelihood of Canadian interest rates dropping sooner and farther than those in the U.S., at least in the short term.

The balance between the support equity markets are receiving from excellent economic results and the strong desire markets have for rate reductions is tenuous. Any correction will likely be born out of a fear that economic strength is waning, or inflation is too sticky. Expect the U.S. Federal Reserve to be resolute in its fight to snuff out inflation. So far, that has led to a “higher for longer” stance regarding rates. Goodreid has argued that this would be the likely outcome and our sector positioning has benefitted.

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TOP PICKS:

Bank of America (BAC NYSE)

As the market becomes accepting of higher interest rates for longer, BAC, along with other banks will grow more attractive. Already trading at attractive valuations, we believe BAC is poised to excel in both the investment and market-based areas.

Chevron (CVX NYSE)

The energy market led all sectors in performance in the first quarter of 2024, after an extended period of underperformance. This spark is a sign that undervaluation is finally being recognized. Demand for fossil fuel products remains steady, commanding 82 per cent of total energy demand. Earnings potential is high, as is the continuation of capital returns to shareholders.

Dycom (DY NYSE)

The U.S. Investment & Jobs Act allocated US$40 billion for the construction of rural communications networks, which will allow Dycom’s backlog of work to continue to grow. At its current level of more than $6 million, it represents more than 18 months of revenue. Although financial progress tends to be lumpy because of weather disruptions and uneven capital allocations from large telecom companies, we believe the rate of growth of revenue and earnings will accelerate over the next few years.

PAST PICKS: April 21, 2023

Chubb (CB NYSE)

Then: US$201.19
Now: US$241.60
Return: 20 per cent
Total Return: 22 per cent

Elevance (ELV NYSE)

Then: US$450.74
Now: US$507.52
Return: 12 per cent
Total Return: 14 per cent

Lear (LEA NYSE)

Then: US$132.49
Now: US$131.31
Return: -0.9 per cent
Total Return: 1 per cent 

Total Return Average: 12 per cent