Brian Madden, Chief Investment Officer, First Avenue Investment Counsel
Focus: North American Equities
Top Picks: Fortis, Eli Lilly, Exxon Mobil
MARKET OUTLOOK:
The S&P 500 touched a fresh all time high this week before backpedalling somewhat in recent days. On the surface, this looks bullish, however, beneath the seemingly calm surface lurks some turmoil. A very narrow group of companies are leading the market capitalization weighted S&P 500 index higher, with fewer than 5 per cent of stocks making new highs alongside the index.
Moreover, the median S&P 500 index member is trading 16 per cent below it’s 52-week high and fully 214 of the 504 index constituents are trading more than 20 per cent below their 52 weeks highs – a drawdown threshold commonly associated with a bear market.
In Canada, the S&P TSX Composite index has drawn down approximately five per cent below its late August all time highs, and in similar fashion to the S&P 500, it’s median constituent is trading 16 per cent below recent highs and 93 of it’s 216 constituents are trading more than 20 per cent below their 52 week highs. Narrow markets are fragile and can conceal an otherwise hidden or “stealthy” bear market in a growing number of individual stocks.
With high oil prices, high inflation, 20 year highs in bond yields and extremely difficult earnings growth comparisons pending in 2027 after blockbuster earnings growth this year, the time is drawing closer for when our team will prioritize “the bird in the hand” over the “two in the bush”, favoring companies with near iron clad certainty of hitting modest growth targets versus companies with riskier opportunities to achieve loftier growth targets.
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TOP PICKS:
Fortis (FTS TSX)
Fortis is a utility conglomerate with 100 per cent of its revenue rate-regulated (i.e. very stable & non-cyclical) across nine Canadian, U.S. & Caribbean subsidiaries operating power transmission and distribution networks and natural gas distribution networks.
We might be somewhat early in de-risking the portfolio and adding to low beta bond proxies, but it’s hard to argue that bonds and bond proxies are well loved and well owned at present, with 10-year bond yields flirting with 20 year highs.
Fortis yields 3.4 per cent and aspires - and succeeds, historically - in growing its dividend at a four to six per cent compound pace, supported by a growing rate base and a board approved five-year $29B capital plan. It’s a well capitalized, strong investment grade credit with outstanding business visibility that has increased its dividend in each of the last 52 years.
With very limited risk or variability, Fortis shares have generated a 10 per cent plus compounded total shareholder return over the last decade - and crucially in a portfolio context – the shares have a very low or negative correlation with two thirds of the other stocks owned in the First Avenue Dividend Growers portfolio.
Eli Lilly (LLY NYSE)
Best known nowadays for its leading GLP-1 drugs (Zepbound and Mounjaro) Eli Lilly has a 150-year history of healthcare innovation as the first commercial marketer of insulin, penicillin, polio vaccines, Prozac and Cialis among other distinctions.
Obesity and diabetes markets are enormous in the U.S., and the addressable market overseas multiplies the opportunity further still over their drugs’ remaining decade of patent protection.
Enhanced Medicare/Medicaid coverage for their initial GLP-1 molecules (i.e. capping co-pays at US$50/month) began this summer, dramatically increasing their domestic addressable market which we expect will drive significant growth in volume demand. Beyond their leading weight loss/diabetes franchises, Eli Lilly markets oncology, immunology, neuroscience and other drugs.
With one of the longest weighted average remaining patent lives among U.S. pharmaceuticals and furthermore with nearly 80 per cent of its marketed drugs being biologics, Lilly has materially less patent cliff exposure versus its peers. Free cash flow is prolific and growing rapidly, and this year is funding an M&A bonanza (US$24 billion plus on 19 biotech deals) to infill the drug development pipeline alongside a robust internal R&D program. Cash flow also funds a dividend that has grown at a 15 per cent compound rate the last five years.
Exxon Mobil (XOM NYSE)
Exxon Mobil is one of the world’s largest integrated oil producers, with 4.5mm barrels a day of oil (two thirds) and natural gas (one third) production. A descendant of Standard Oil (John Rockefeller), Exxon has a long operating history and a 43 year uninterrupted streak of dividend growth.
Beyond upstream production, the company owns 16 refineries in the United States, Canada, Europe and Asia with a combined capacity of 4.4mm barrels per day. Many of these refineries are further downstream integrated into co-located petrochemical plants. Exxon is the majority shareholder of Imperial Oil with a 70 per cent stake and distributes retail gasoline via distribution partners at 19,000+ gas stations and convenience stores globally under the Esso, Exxon and Mobil brands.
Post the US$68B acquisition of Pioneer Natural Resources in 2024, reserves and production increased by 15 per cent, and their land position in the Permian Basin, which is among the world’s premiere energy production basins expanded drastically. Elsewhere, Exxon is developing an offshore field in Guyana which is the largest new oil discovery globally in at least a decade.
Their natural gas production is geographically diverse with major hubs in Texas and the U.S. Gulf Coast (conventional and LNG), as well as in Qatar (LNG).
The company has become more capital disciplined post 2021, divesting smaller, older and geographically disadvantaged refineries, and stepping up their share buyback to a planned cadence of US$20B annually, which it can easily fund having essentially zero net debt and a pristine AA- credit rating.
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| FTS TSX | N | N | Y |
| LLY NYSE | N | N | Y |
| XOM NYSE | N | N | Y |
PAST PICKS: OCT. 24, 2025
MDA Space (MDA TSX)
Then: $35.15
Now: $38.96
Return: 11%
Total Return: 11%
Waste Management (WM NYSE)
Then: US$214.66
Now: US$209.62
Return: -2%
Total Return: -0.6%
Allied Properties REIT (AP-UN TSX)
Then: $18.95
Now: $5.98
Return: -68%
Total Return: -64%
Total Return Average: -18%
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| MDA TSX | N | N | Y |
| WM NYSE | N | N | Y |
| AP-UN TSX | N | N | N |
