Chris Blumas, Portfolio Manager, Raymond James Investment Counsel
Focus: North American Large Caps
Top picks: Constellation Software, Brookfield Infrastructure, Abbott Labs
MARKET OUTLOOK:
Earlier this year, U.S. President Donald Trump’s One Big Beautiful Bill Act (OBBBA) was signed into law.
This legislation is poised to increase government budget deficits with huge spending increases slated for security and defense. Last year, U.S. government spending was more than 50 per cent higher than the pre-covid level of spending in 2019.
This huge increase in government spending has been a major factor driving economic growth in the U.S. and it’s poised to continue over the next few years.
In the U.S., the risk to the job market was enough to warrant a further reduction in interest rates at the most recent FOMC meeting that occurred last week.
The U.S. Federal Reserve has a dual mandate to balance inflation and employment and right now, officials seem most concerned with protecting the labour market. Looking ahead into next year, the timing and pace of interest rate moves has divided FOMC members and appears more uncertain.
While the announcement of the federal funds rate captures the most attention, during the most recent press conference, Federal Reserve Chair Jerome Powell confirmed that the Federal Reserve has started expanding its balance sheet and has transitioned to an easing of monetary policy.
This is a significant policy reversal that should not go unnoticed by investors. Growth in government debt is an important factor in determining how much money the Federal Reserve creates and if they don’t monetize enough of the government’s new debt, market liquidity will tighten, bond yields will increase, and the U.S. economy will start to contract.
Given this accommodative macroeconomic backdrop, it’s likely that asset prices will remain high and if the Federal Reserve is forced to act more aggressively, it could push asset prices higher.
While it’s difficult to know how things will play out over the short term, history has proven that it pays to stay invested and remain mindful of company valuations.
Over the long term, financial markets have rewarded patient investors, and those who have stayed invested and taken advantage of price dislocations have achieved significantly better results than investors who have come in and out of the markets.
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TOP PICKS:
Constellation Software (CSU TSX)
Constellation Software is an enterprise software consolidator with a global presence.
Last year, the company generated almost 90 per cent of its revenues outside of Canada. Constellation has six operating subsidiaries that function as independent businesses with a common capital allocation framework. This decentralized operating model has allowed the company to complete hundreds of acquisitions since its initial public offering in 2006.
Constellation typically targets smaller companies that are too small to attract the interest of other IT conglomerates or private equity firms.
Over the years, the company has expanded its operating infrastructure so that it can continue targeting smaller acquisitions and continue compounding cash flows at an above average rate.
Over the last three years, the compound annual growth rate for cash flow per share is 19 per cent. The shares currently trade around nineteen times trailing cash flows and have a trailing free cash flow yield of around 3.5 percent.
Brookfield Infrastructure (BIP.UN TSX)
Brookfield Infrastructure Partners (BIP) is a global infrastructure company with a diversified portfolio of assets. It operates through the following segments: utilities, transport (rails & terminals), midstream (pipelines & processing), and data (towers & data centers).
The utilities and transport businesses are the most significant and accounted for around two-thirds of cash flows last year. BIP’s size, sponsor support, diversified operating model, and global platform are unique and allow the company to recycle capital opportunistically and grow cash flows at an above-average rate.
The shares currently trade around ten times funds from operations (FFO) and have a dividend yield of 4.7 percent with an FFO payout ratio of around 45 percent.
Abbott Labs (ABT NYSE)
Abbott is a medical equipment company with a strong international presence. The company’s two main profit centers are its medical devices business and diagnostic testing business.
Last year, these businesses accounted for more than 80 per cent of Abbott’s operating profit. Abbott is currently working through a decline in demand for pandemic-related diagnostic equipment. As a result, top line revenue growth is not reflective of the organic sales growth for the underlying base business. The shares currently trade around 22 times forward earnings and have a trailing free cash flow yield of around 3.2 percent.
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| CSU TSX | Y | Y | Y |
| BIP.UN TSX | N | N | Y |
| ABT NYSE | N | N | Y |
PAST PICKS: DEC. 18, 2024
Honeywell (HON NASD)
Then: US$226.86
Now: US$201.19
Return: -6%
Total Return: -4%
CP Kansas City (CP TSX)
Then: $105.43
Now: $101.55
Return: -4%
Total Return: -3%
TD Bank (TD TSX)
Then: $74.80
Now: $124.72
Return: 67%
Total Return: 72%
Total Return Average: 22%
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| HON NASD | Y | Y | Y |
| CP TSX | N | N | N |
| TD TSX | N | N | Y |
