Ernest Wong, Head of Research, Baskin Wealth Management
Focus: North American Large Caps
Top picks: Restaurant Brands, CCL Industries, Constellation Software
MARKET OUTLOOK:
The stock market and the economy are both bifurcated: in the US, the top eight companies have generated over 60 per cent of the S&P 500’s gains this year, while 40 per cent of the S&P 500 has a negative return.
The S&P 500 is up 17 per cent, while the equal-weight S&P 500 is only up seven per cent.
This is reflected in the fundamentals of the companies as well, where NVIDIA is expected to grow sales by 50 per cent this year, and mega-cap technology firms are growing revenues and spending hundreds of billions on AI while entire sectors such as restaurants, homebuilding, consumer, and industrials are struggling with interest rates, tariff uncertainty, and weakness especially in the low-end consumer.
It is a similar story in Canada as well: the best performers this year are gold miners and AI or datacenter related companies such as Celestica, Shopify, and Hammond Power.
As a Canadian wealth manager, we are finding good opportunities in both Canada and the US.
Investors are understandably nervous about AI, but the demand is real and we are seeing new applications of AI by companies daily. Meanwhile, we think there are great opportunities to purchase well-run, high-quality companies that the market is currently ignoring at attractive valuations.
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TOP PICKS:
Restaurant Brands (QSR TSX)
Restaurant Brands is currently three years into a turnaround led by former Domino’s Pizza CEO Patrick Doyle. The effort to renovate the stores and improve the culture has been long and expensive but are starting to bear fruit, with positive same-store sales growth at both Tim Hortons and Burger King this year in a very difficult consumer environment. Going forward, the capital intensity and free cash flow will improve as the Carroll’s restaurant portfolio gets refranchised, and Restaurant Brands shares trade at a material discount to other fast-food chains.
CCL Industries (CCL.B TSX)
CCL Industries is a leader in the labels space that makes labels for everything from shampoo bottles to cars and participates in trends such as the premiumization of consumer goods, labels for GLP-1 drugs, and RFID labels used by retailers.
Under CEO Geoffrey Margin, CCL has a very good track record of making acquisitions and entering adjacent markets. The balance sheet is clean, and shares are trading at an attractive price for a consistent compounder.
Constellation Software (CSU TSX)
The market is concerned that Constellation can complete mergers and acquisitions at the same pace given the abrupt resignation of legendary CEO Mark Leonard and risks that AI will displace Constellation’s portfolio of software businesses. We think this is a good chance to buy a great compounder at an attractive price, as Constellation’s decentralized capital allocation should allow it to continue making acquisitions, as demonstrated by the spinoffs of Topicus and Lumine. We further think AI will both enhance their core business given their deep customer relationships, while creating more opportunities for acquisitions.
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| QSR TSX | Y | Y | Y |
| CCL.B TSX | Y | Y | Y |
| CSU TSX | Y | Y | Y |
No past picks
