Brian Madden, chief investment officer, First Avenue Investment Counsel

FOCUS: North American equities 

MARKET OUTLOOK:

Stock markets find themselves on much stronger footing in November after three back-to-back months of drawdowns in August, September and October. The proximate explanation for the renewed enthusiasm for stocks is the increasing confidence investors have that the U.S. Federal Reserve and the Bank of Canada are done raising overnight interest rates. We concur with this view but remain mindful of risks to the economy and the outlook for corporate earnings, noting that Canada’s economy is in a confirmed recession by the conventional yardstick, with gross domestic product (GDP) having slipped in two consecutive quarters starting in April. Overall reported earnings growth during the latest quarter remains positive, although growth in Canada is more sluggish than in the United States, where some of the global giants and secular growth themes remain very much in gear, despite increasing evidence of pressure on consumer and household spending, particularly in more discretionary categories. Our portfolios accordingly have measured exposure to a number of these companies and themes and also remain well-positioned in defensive and economically resilient sectors and companies on both sides of the border.

• Sign up for the Market Call Top Picks newsletter at bnnbloomberg.ca/subscribe
• Listen to the Market Call podcast on iHeart, or wherever you get your podcasts

TOP PICKS:

Brookfield Corporation (BN TSX)

Brookfield is among the world’s foremost managers and operators of long-duration real assets like real estate, private equity, infrastructure, renewable energy and utilities with deep expertise in sourcing transactions and surfacing value. With significant assets in Canada, the United States, the U.K., Australia, Brazil and India among other areas, the company has tremendous reach and geographic diversity. Brookfield’s size and scale allow it to field expert teams with deep operating expertise across industry verticals and geographic areas. Moreover, its financial strength and variety of funding sources afford it the advantage of being among the first calls sellers of world-class assets make when looking to consummate a transaction. Flows into alternative assets are outstripping flows into stocks and bonds as institutions like pension funds increase its allocations to these less efficient markets which better match its long-duration liabilities. Accordingly, Brookfield enjoys consistently strong inflows and now manages over $850B.  The company has generated a compound annual return for shareholders of 15 per cent over the last twenty-five years such that $1 invested in its shares has grown to over $31, courtesy of these many structural advantages. 

Mondelez International (MDLZ NYSE)

Mondelez is an international packaged food company focused on snacks including biscuits, chocolate, gum and candy, cheese and grocery as well as beverages sold in over 150 countries. The company is well diversified geographically, including in rapidly growing emerging markets. With iconic brands like Cadbury, Oreo, Trident, Tang, Toblerone and Halls among others, Mondelez enjoys market leadership and strong pricing power allowing it to hold or gain share in its key categories, which are in many cases, low ticket impulse snack purchases. Yielding 2.4 per cent and having grown dividends at a compound rate of 13 per cent over the past decade, we see good visibility into ongoing double-digit total shareholder returns for this defensive secular grower. 

Constellation Software (CSU TSX)

Constellation Software is a software holding company that acquires mission-critical vertical market software companies and helps them to grow. With its unique operating philosophy, Constellation equips unit operating managers with best practices, procurement and shared services efficiencies but empowers them to make decentralized decisions at the grassroots level. Notoriously and deliberately tight-lipped and non-communicative with the investment community, the company’s results do the talking for them. Earnings per share have grown at a 25 per cent compound rate over the last decade, despite operating primarily in slower organically growing end markets. With the shares trading at 29x expected earnings, we see a good combination of value and growth here. 

PAST PICKS: February 21, 2023

Tourmaline Oil (TOU TSX)

• Then: $56.39
• Now: $66.84
• Return: 18%
• Total Return: 27%

Dollarama (DOL TSX)

• Then: $78.26
• Now: $99.29
• Return: 27%
• Total Return: 27%

Humana (HUM NYSE)

• Then: US$503.38
• Now: US$502.70
• Return: 0%
• Total Return: 0%

Total Return Average: 18%