Jennifer Radman, vice-president and senior portfolio manager at Caldwell Investment Management
Focus: U.S. large-caps

MARKET OUTLOOK

Markets remain dominated by macro headlines. There’s been a huge turn in sentiment over the last 12 months as central banks committed to accommodative policies. The low rate environment continues to be the key driver for asset pricing: whether a stock is expensive or not depends on the discount rate you’re using. Multiples on growth and quality stocks continue to expand while value continues to struggle. While trade tensions have impacted the industrials space, weakness there has not spilled over into the consumer space. Worries of a recession keep getting pushed to the right.

TOP PICKS

CGI (GIB/A TSX)

CGI provides IT consulting and business process services. This has been a long-term core holding for us. It’s a combination of strong execution, attractive end markets and significant growth runway. Companies around the world are in the early innings of implementing technology to improve their businesses and CGI Group is benefitting from this secular trend of technology adoption. Reading through earnings calls and analyst days, technology is a key part of most companies’ strategies and you’ve seen these discussions moving from the tech group into the C-suite.

CGI has very strong return on invested capital, the industry is fragmented so acquisitions complement organic growth and the stock currently generates a 5 per cent free cash flow yield. It’s been a very steady performer and we expect that to continue.

MOTOROLA SOLUTIONS (MSI NYSE)

Motorola is a leading global provider of communication solutions and services. It’s the leader in land mobile radio (LMR), the push-to-talk two-way communication between radio transceivers used by police, firefighters and security personnel. This is a very steady business given its mission-critical nature. Motorola provides 43 of the 46 state and provincial LMRs and has used this dominant position to more than double its addressable market by making investments into related offerings, such as video and command centre software. These investments have started to pay off, with the company recently recording a record backlog.

Margins have also moved meaningfully higher as these new areas carry a higher margin profile. The growth runway is significant, with $8 billion in revenue versus $39 billion in market opportunity. End-market demand is strong given heightened demand for security and public safety and antiquated command centre offerings. Motorola is in a strong competitive position given its 90-year relationships with key public-safety leaders, unique end-to-end solutions and growing distrust of Chinese products. As such, we expect revenue and margin growth to continue. Free cash flow should also move higher as little capital is required to drive growth.

THE MIDDLEBY CORPORATION (MIDD NASD)

Middleby manufactures commercial cooking and food preparation equipment, industrial food processors and premium residential kitchen equipment. This is a high-quality company going through some execution issues and dealing with some end-market softness, which means we’re able to pick up a high-quality name at an attractive valuation. The company has a long history of profitable growth and is the leader in a fragmented market, which provides a considerable growth runway ($3 billion revenue versus a $25 billion market opportunity).