Brian Madden, chief investment officer, First Avenue Investment Counsel
FOCUS: North American equities
Top Picks: Cameco, Roper Technologies, Canadian National Railway
MARKET OUTLOOK:
Canadian stocks have belatedly joined their U.S. counterparts in surging to all-time highs in the last week or so. Also notable in recent trading has been a thematic rotation away from the leaders of the last 18 months (i.e. the Magnificent Seven) and into lagging sectors and stocks. The broadening out of market strength is a welcome development for active managers and has benefitted those practitioners that embrace styles other than “growth at any cost,” including income and dividend growth mandates.
We are enthusiastic and bullish on select commodities, including gold and also have been slowly building some exposure to housing adjacent/hardlines/durable goods themes in recent months, perhaps early, but we believe via quality businesses acquired at attractive prices and valuations.
There is no shortage of macroeconomic, policy and geopolitical risks and opportunities visible on the horizon between now and year-end, including likely interest rate cuts in both Canada and the United States as well as the U.S. elections and the usual monthly inflation and jobs reports. For the time being though, our team is diligently scrutinizing second-quarter earnings results from companies we own and those we might like to own. The early results are rolling in nicely, but active management never sleeps and any stock we own on any given day could be determined to be a sell candidate, and any stock we do or don’t own on any given day could be identified as a buy opportunity.
- Sign up for the Market Call Top Picks newsletter at bnnbloomberg.ca/subscribe
- Listen to the Market Call podcast on iHeart, or wherever you get your podcasts
TOP PICKS:
Cameco (CCO TSX)
Cameco is among the world’s largest producers of uranium and is among a very small number of public companies globally that produce solely uranium, as seven of the 10 largest global producers who collectively control 70 per cent of global output are state-owned companies. With 485 million pounds of reserves across its two majority-owned and operated mines in Saskatchewan and a joint venture in Kazakhstan, Cameco is well positioned to benefit from strong demand from utilities for secure supplies of fissile material from safe jurisdictions (i.e. not Russia).
Having resumed production at their McArthur River mine last year, Cameco benefitted from both a 76 per cent increase in production volumes and a 16 per cent boost to realized pricing. This led to 136 per cent earnings growth, with analysts expecting a further 36 per cent growth in earnings this year and another 91 per cent growth next year amidst tight uranium markets. India and China have been driving most of the growth in the installed fleet of nuclear reactors globally.
However other big countries, including Japan, Canada, the U.S. and various European countries are greenlighting new reactor builds and reactor life extensions to power their electrical grids in light of ESG commitments as well as security of supply concerns surrounding oil and natural gas-fired electrical plants. The icing on the cake for Cameco is the $8 billion acquisition late last year of Westinghouse Electric in partnership with Brookfield Renewable Partners, which integrates them downstream into the design/build and maintenance of nuclear reactors.
Roper Technologies (ROP NASD)
Roper is a long-established consolidator of the vertical market software space in the United States. The dividend has grown at a 14 per cent compound rate over the last decade all while the company has executed a string of 40 typically friendly and cash-financed acquisitions of companies large and small, aggregating to $18.3 billion in deal volume.
The typical acquiree company has recurring revenue, strong cash flows, and provides mission-critical support to customers in oligopolistic and small addressable niche markets where their retention rates tend to be > 95 per cent.Some of the larger de-centralized business units operate in water metering, freight matching, enterprise solutions for law firms, media and entertainment post-production tools and enterprise software for daycares.The management team’s exemplary capital allocation track record has produced compounded total shareholder returns of 17 per cent over the last three decades, with remarkable consistency.
Canadian National Railway (CNR TSX)
CN Railway is a class one rail company with operations spanning the continent, from the Atlantic to the Pacific and the Gulf of Mexico. Rail is essential long-life critical economic infrastructure that is difficult to technologically disrupt.
The North American railway industry has consolidated into an oligopoly with rational pricing for the most part.CN has grown its dividend at a 13 per cent pace over the last decade, and since its initial public offering, its shares have generated a compound total shareholder return of 19 per cent. mTrading at 20 times expected earnings, we see a good combination of value and growth in the shares.
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| CCO TSX | Y | N | Y |
| ROP NASD | N | N | Y |
| CNR TSX | Y | N | Y |
PAST PICKS: JULY 25, 2023
Northrop Grumman (NOC NYSE)
- Then: US$457.19
- Now: US$437.41
- Return:-4%
- Total Return: -3%
Shopify (SHOP TSX)
- Then: $85.62
- Now: $87.32
- Return:2%
- Total Return: 2%
Brookfield (BN TSX)
- Then: $46.98
- Now: $63.97
- Return:36%
- Total Return: 37%
Total Return Average: 12%
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| NOC NYSE | N | N | N |
| SHOP TSX | N | N | Y |
| BN TSX | Y | N | Y |
