Brendan Caldwell, president and CEO, Caldwell Investment Management

FOCUS: North American large-cap stocks 

MARKET OUTLOOK:

The market did very well last year and coming into this year, despite 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 gross domestic product (GDP) is continuing to grow, causing recession fears to diminish. The positive sentiment, however, could change 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 that 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 and control technologies and systems, providing precision-engineered solutions focused in mobile, industrial and aerospace applications.

It is the midst of a long-term transformation, shifting its revenue mix away from short-cycle "PMI" markets toward longer-cycle, aftermarket and secular growth markets. A key part of this push is deeper penetration into aftermarket aerospace parts, which have higher margins and more stable demand given the lower cyclicality of aircraft maintenance versus new aircraft orders. In the meantime, orders for new narrowbody aircraft are rebounding strongly post-COVID-19 on robust travel demand.

On the shorter cycle side of the business, PMIs have deteriorated for more than a year, leading to channel destocking and lower Industrial volumes. However, PH has decent visibility into the end of destocking activity and a soft-landing scenario could support a solid rebound in volumes within the next 12-18 months

Applied Materials (AMAT NASD)

A leading designer and manufacturer of semiconductor process equipment primarily serving global semiconductor and device manufacturers.

It has a high industry growth outlook supported by secular demand in the underlying semiconductor industry. The company has a strong moat driven by intellectual property and high switching costs. It is a market leading supplier of semi-equipment in multiple process steps.

Applied Materials has balanced exposure between foundry/logic (think TSMC, Intel) and memory customers (think Micron, Samsung); this reduces risk from underperformance in particular markets versus more single-sided players but also allows upside capture in recovering markets.

It has balanced exposure among new and late-generation semiconductor equipment, with the latter seeing robust demand driven by the localization of semiconductor manufacturing around the globe. Applied Materials has a sticky services business and has long growth runway given the expanding base of tools in place.

Transunion (TRU NYSE)

Transunion is a leading global provider of financial data and insights. Primary customers include banks and alternative lenders; credit card issuers; retailers; Insurers and government agencies.

TRU’s data and insights serve as a backbone within core customers' daily workflows, creating high switching costs. TRU has acquired and/or partnered with alternative data providers to expand data products and reach new customers.

Currently in a cyclical downturn - higher rates and tighter lending standards have reduced demand from core customers. We see significant upside in a falling rate/soft landing recession scenario where banks/lenders increase marketing and start to expand credit access in the next 12-18 months. 

PAST PICKS: MARCH 1, 2023

Amazon.com (AMZN NASD)

• Then: US$92.17
• Now: US$157.17
• Return: 70%
• Total Return: 70%

ANSYS (ANSS NASD)

• Then: US$299.20
• Now: US$340.65
• Return: 14%
• Total Return: 14%

Comfort Systems USA (FIX NYSE)

• Then: US$146.94
• Now: US$205.29
• Return: 40%
• Total Return: 40%

Total Return Average: 41%