Brendan Caldwell, president, CEO and CIO, Caldwell Investment Management

FOCUS: North American large caps 

MARKET OUTLOOK:

The market has done very well this year despite the elevated economic and geopolitical uncertainty. Better-than-expected earnings have supported the market’s positive momentum. The bullishness is likely stemming from the increased perception that the U.S. Federal Reserve has been able to suppress inflation, to a large extent, without causing a full-blown recession and therefore can start cutting interest rates. Labour markets remain strong and the gross domestic product is continuing to grow, diminishing the fear of a recession.

The positive sentiment could change, however, if earnings expectations aren’t met going forward, and if inflation and interest rates do not move in the right direction. This prompts us to maintain our focus on identifying high-quality, well-managed companies with proven track records of navigating through tough environments. Hence, we believe professional investment advice can be extremely valuable in times such as these.

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TOP PICKS:

Parker-Hannifin (PH NYSE)

A diversified manufacturer of motion control, flight control, and a wide variety of hydraulic, fuel, fluid, conveyance, and engine systems and components. Offers thousands of individual products with no single product contributing more than one per cent. PH is continuing to transition its revenue mix toward longer cycle aftermarket and secular growth markets, targeting 85 per cent revenue from these markets by 2027 versus the current level of around two thirds. This should support higher growth and lower earnings cyclicality than in the past, justifying a positive re-rating.

Comfort Systems USA (FIX NYSE)

FIX installs comprehensive heating, ventilation, and air conditioning and also provides maintenance, repairs, and replacement services.Backlog sits at record levels; up 32 per cent year over year and three per cent quarter over quarter. Management believes that the quality of the backlog has never been better. Top-line strength is being driven by strength in Industrial (data centers, semi and battery plants) as well as food, pharma and health care. Margins are being supported by a good work mix as the company is selective in choosing projects in the robust demand environment, as well as through pricing and lapping the supply chain issues that led to sub-optimal efficiency previously.

Dollar General (DG NYSE)

DG specializes in reduced-price distribution of mass-consumption products under the categories of consumption products, seasonal products, household items, and apparel. Operates over 19,000 stores across the U.S. DG has been a growth story consistently growing its store count by over six per cent annually. Its core customer is financially constrained so as the wealth gap unfortunately continues to rise, DG benefits as more people fall into its core customer base. Seventy-five per cent of its stores are located in small communities with populations lower than 20,000 allowing them to require minimal capex to set up new stores due to cheap land etc. Currently, there is a DG located within five miles of 75 per cent of the U.S. population. It is estimated that it could operate around 30,000 stores in the U.S. The stock has been beaten down heavily, however, nothing has structurally changed with the business and the issues it is facing are related to underinvestment in the business that can be corrected.

The company grew its store count rapidly since the COVID-19 pandemic began, not showing enough commitment towards operational efficiency, which has now led to inventory and understaffing issues as most of the expenditures and investments were dedicated toward expansion. However, the guidance has already been cut heavily along with the street consensus, which should ensure that the weakness has adequately been priced in already. This makes the stock ripe to be viewed as a turnaround story, which tends to excite investors.

PAST PICKS: DECEMBER 28, 2022

Johnson & Johnson (JNJ NYSE)

• Then: US$176.66
• Now: US$156.45
• Return: -11%
• Total Return: -9%

ANSYS (ANSS NASD)

• Then: US$234.39
• Now: US$363.01
• Return: 55%
• Total Return: 55%

Boston Scientific (BSX NYSE)

• Then: US$45.78
• Now: US$58.05
• Return: 27%
• Total Return: 27%

Total Return Average: 24%