Jennifer Radman, head of investments and senior portfolio manager, Caldwell Investment Management 
FOCUS: North American large cap stocks 

MARKET OUTLOOK:

Market volatility has spiked recently as investors digest how central banks will navigate the cross-currents of strong economies and rising inflation against the ongoing uncertainty and disruption from a changing COVID-19 environment. 

These cross currents are happening at a time when the S&P 500 Index sits over 30 per cent higher than its pre-COVID highs. From our perspective as bottom-up investors, markets over the last year+ have felt like a series of macro-driven trades, with narratives and investor positioning shifting rapidly under a ‘shoot-first, questions later’ mindset. 

Companies that benefited from the initial COVID-19 economy are now facing tough earnings comparisons. On the flip-side, companies that were badly hurt by the COVID-19 economy have seen their share prices sharply recover in anticipation of stimulus-supported recoveries in their earnings. 

Structural winners reflect premium valuations while structural losers risk being value traps. Without ongoing central bank stimulus and in the face of rising interest rates, markets lose a powerful tailwind. 

Beyond the macro, technology has enabled a relatively new set of investors and investment vehicles, where investment decisions are not necessarily driven by bottom-up, fundamental analysis. It is hard to argue that their influence on markets is fully understood. In such an environment, we continue to actively manage portfolios, focusing on stocks with strong company-specific catalysts.

TOP PICKS:

Martin Marietta (MLM NYSE)
The company supplies aggregates and heavy building materials (crushed stone, sand, gravel, concrete, asphalt) to the construction industry. Within aggregates, MLM has the #1 or #2 market position. When you look at the nature of the industry, given how heavy these items are, the markets are very localized given logistical barriers. There are barriers to entry from capital and permitting. Limited local competition. Combined, it leads to strong pricing power. The infrastructure stimulus should be a great tailwind for the company. The management team has shown strong operational execution and they have a good track record of adding value through acquisitions, which can add value beyond the strong demand backdrop. 

ATS Automation (ATA TSX)
The company provides manufacturing automation and test solutions to a diverse set of end markets, with a focus on regulated industries such as life sciences, food and nuclear. The company is seeing strong bookings as global supply chains re-arrange themselves and as companies contend with rising labour costs. It also well positioned within EVs (electric vehicles) given its expertise in battery assembly packs. An active acquisition pipeline drives additional value creation for shareholders.  

Watsco (WSO NYSE)
The company is the largest distributor of air-conditioning, heating and refrigeration products in the Americas. It operates in a fragmented industry and the company has used its scale to leverage technology to create differentiation versus its competitors. This is leading to both organic share gains and value-adding acquisition opportunities.

PAST PICKS: October 7th, 2020

Richelieu Hardware (RCH TSX) 

• Then: $37.17
• Now: $41.79
• Return: 12%
• Total Return: 14%

Maxar Technologies (MAXR TSX) 

• Then: $28.69
• Now: $26.78
• Return: -7%
• Total Return: -7%

Tetra Tech (TTEK NASD) 

• Then: $101.44
• Now: $187.81
• Return: 85%
• Total Return: 86%

Total Return Average: 31%