Alexander MacDonald, portfolio manager, GlobeInvest Capital Management
FOCUS: North American large caps
Top Picks: McDonald’s, Walt Disney, Brookfield Infrastructure Partners
MARKET OUTLOOK:
Second quarter earnings season in the U.S. is coming to an end with almost 90 per cent of companies having reported. Of these companies, 78 per cent beat earnings per share (EPS) expectations and 47 per cent beat on sales. Additionally, with EPS up nine per cent year-over-year and sales up five per cent, broad company fundamentals appear sound.
Despite this, recent volatility highlights just how quickly investors’ opinions can change. July’s weak job numbers in the U.S. served as a reminder that economic growth does not necessarily happen in a straight line. Until recently it had seemingly been months since investors were openly worried about a hard landing. Now, odds are fifty-fifty about whether the U.S. Federal reserve cuts by 50 basis points or 25 basis points in September. Fortunately, with the current Fed Funds Target rate over five per cent, the FOMC has lots of room to cut rates if weakness persists.
This recent volatility also took some of the froth out of certain corners of the market. Fears of missing out and momentum trades in the AI space no longer look like the sound strategies some may have perceived them to be just a few short weeks ago. Increasingly, investors are questioning when (or even if) large-cap tech companies will begin to realize returns on their substantial AI capex. While selloffs like this can be unpleasant in the short run, we believe it offers long-term investors an excellent opportunity to add high-quality companies at more reasonable prices.
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McDonald’s (MCD NYSE)
The world’s largest fast-food chain is re-establishing its value-priced offerings for pressured consumers that are increasingly shifting their food consumption away from restaurants and towards grocery stores. In addition, the company is expanding its digital capabilities; with only 25 per cent of transactions currently made via its app, there is a significant opportunity to increase mobile engagement and expand its loyalty program. MCD has a unique model where it owns much of the land where its franchised locations are located, with rent accounting for 39 per cent of revenue. It has defensible cash flows and has increased its dividend for 47 consecutive years. Twenty-two times price-earnings.
Walt Disney (DIS NYSE)
Shares have been under pressure recently on concerns around two factors. Firstly the transition to its streaming Disney+ content delivery model, and second its weakness at its domestic theme parks. We believe both these concerns should resolve themselves in the medium term and we like Disney for its unparalleled content library. Disney+ became profitable for the first time last quarter, and management believes margins can expand to double-digit levels (for context, NFLX has operating margins of 20 per cent). We believe CEO Bob Iger is the right person to be steering the company through evolution, and think the shares offer excellent value at current levels. Seventeen times price-earnings.
Brookfield Infrastructure Partners (BIP NYSE)
The company is an owner and operator of critical infrastructure such as ports, pipelines, and data centres. It currently has an impressive backlog of $7.7 billion in capital projects, which is up 15 per cent year-over-year, providing strong visibility about where future organic growth will come from. Management has a strong track record of recycling capital, being disciplined with both asset purchases and sales as valuations permit. It targets returns in the 12-15 per cent range, but recent transactions have been upwards of 15-20 per cent. With a yield over five per cent, we believe this is one of the more attractive income stocks in our portfolio.
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| MCD NYSE | Y | Y | Y |
| DIS NYSE | Y | Y | Y |
| BIP NYSE | Y | Y | Y |
Chubb (CB NYSE)
- Then: US$201.67
- Now: US$268.75
- Return:33%
- Total Return: 35%
Brookfield (BN TSX)
- Then: $34.34
- Now: $44.60
- Return:30%
- Total Return: 31%
TD Bank (TD TSX)
- Then: $85.85
- Now: $78.52
- Return:-8%
- Total Return: -4%
Total Return Average: 21%
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| CB NYSE | Y | Y | Y |
| BN TSX | Y | Y | Y |
| TD TSX | Y | Y | Y |
