Zach Curry, director and portfolio manager, Greenrock Capital Partners

FOCUS: North American large caps 

MARKET OUTLOOK:

The months of September and October are often the most difficult for markets, and 2023 has been no exception. One of the biggest factors affecting stocks and markets has been the changing expectations of interest rates and the levels they will stay at for the foreseeable future.

Different industries and companies have different valuations, but in essence, the more of a company’s cash flows that are in the future, the more its valuation will decline when interest rates (and the discount rate) rise. This is what has taken place during September and October, as interest rate expectations have shifted from possibly declining towards the end of this year and into 2024, to perhaps staying at higher levels into next year and 2025.

Within each sector, we believe that individual security selection is crucial given the disparity of company characteristics. With certain sectors having more than 100 different companies, it is important to focus on company characteristics and traits that will provide positive long-term performance and lower volatility, while reducing downside exposure to specific negative effects, such as rising interest rates for example.

The investments we hold for clients generally have strong balance sheets with lower-than-average debt levels and generate cash flow. A number of companies have excess cash (which is positive when interest rates rise) and those companies that do have debt are able to service it easily with internally generated funds.

 What we don’t look for are companies that need debt to grow or companies that will need to spend money servicing their increasing debt load instead of improving product or service offerings. The ability to pass cost increases through to consumers and companies that generate recurring revenue are two other characteristics that we think are important when investing in specific companies.

• 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:

Tourmaline Oil (TOU TSX)

It is a Canadian energy company engaged in the exploration, development and extraction of crude oil and natural gas. It became the largest natural gas producer in Canada in 2021, and approximately 80 per cent of its production is weighted to natural gas. The shares currently yield 1.4 per cent, however, this is supplemented by special dividends ($5.50 declared in 2023) with more expected in 2024. TOU has one of the best balance sheets in the industry and a proven management team with experience and significant equity ownership in the business. Earlier this month, TOU announced the acquisition of Bonavista Energy, building on the company’s existing assets in the Deep Basin region of Alberta.

Constellation Software (CSU TSX)

It is a Canadian technology conglomerate that acquires, manages, and grows businesses that provide mission-critical software that targets small to mid-size businesses in attractive, niche vertical markets. Growth is driven via funding new initiatives and acquisitions using a disciplined approach. Constellation is a global company with six operating groups in more than 100 vertical markets. Year-to-date in 2023, CSU spent more than $2 billion on acquisitions (including the Optimal Blue and Empower acquisitions), a 17 per cent increase over the full-year spend in 2022, which was a record for the company.

Walmart (WMT NYSE)

It is the largest retailer in the world with more than US$600 billion in sales in full-year 2023 (ended January) across a portfolio of approximately 10,500 stores. WMT has three business segments: Walmart U.S. (69 per cent of sales), Walmart International (17 per cent of sales), and Sam's Club (14 per cent of sales). Walmart also operates e-commerce strategies within each of its three business segments. Every Day Low Prices (EDLP) is the cornerstone of the company’s long-term strategy – offering customers the lowest prices on a wide range of goods (including grocery) – allowing for one-stop shopping through three store formats as well as online.