Brian Madden, chief investment officer, First Avenue Investment Counsel
FOCUS: North American equities
Top Picks: Costco Wholesale, TD Bank, Broadcom
MARKET OUTLOOK:
After two back-to-back years of very strong equity market returns, investors might rightly wonder whether stock prices can continue rising in 2025. We think they can. Looking ahead, we see a number of promising opportunities in front of us, including:
- Ongoing leadership in secular growth areas in the U.S. (i.e. tech, AI, EVs, e-commerce)
- Potential pro-growth policies from the new U.S. administration (i.e. tax cuts, big deficits, broad de-regulation)
- Possible policy shifts in Canada favouring economic growth, investment, and productivity
- Modest rate cuts in both Canada and the U.S. supporting rate-sensitive sectors of the economy and the stock market
- Waning credit loss provisions boosting earnings for banks and easing credit conditions for households & businesses
- Increased merger and acquisition activity driven by improving business confidence and lower financing costs
- On the other side of the ledger, we remain mindful of new and ongoing risks, including:
- Potential re-acceleration of U.S. inflation disrupting the monetary easing cycle
- Risk of recession in Canada if immigration reforms curtail population growth
- Escalation of trade and tariff disputes in North America
- Intensification of U.S./China trade tensions
- Broadening geopolitical conflicts in Ukraine and the Middle East
- Concentrated and “crowded” market leadership in the Magnificent Seven, with the risk of sharp sentiment reversals
Overall, we are cautiously optimistic that the bull market that began in late 2022 will extend into 2025 and we will be working diligently to capitalize on the opportunity this presents.
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TOP PICKS:
Costco Wholesale (COST NASD)
Latest purchase January 2025 at $921.01
Costco is the third largest retailer in the world with its pioneering presence and its undisputed leadership in warehouse club retailing. With nearly 900 stores globally, serving 77 million loyal paying members, Costco enjoys high traffic and repeat business alongside the recurring membership fees – with 93 per cent-member retention despite periodic fee increases. Stores stock a narrow assortment of 4,000 branded and Kirkland (private label) items and rely on an efficient supply chain, procurement clout and rapid inventory turns to price sharply while maintaining healthy gross margins of 11 per cent and robust returns on equity above 30 per cent. Steady store expansion, superior same store sales growth and a growing e-commerce capability have led to an 8.5 per cent compound growth rate in sales over the past decade while earnings have compounded at 14 per cent over that time frame. The shares themselves – which almost always trade at a premium to peers - have nevertheless generated a compound annual return of 17.5 per cent since the initial public offering in 1985 via price appreciation, regular and occasional special dividends.
TD Bank (TD TSX)
Latest purchase December, 2024 at $75.03
TD has had a difficult couple of years, but it remains Canada’s second largest bank, and it remains among the largest banks in America as well. We believe the franchise has been tarnished by recent wrongdoings on both sides of the border, but not irreparably so. The pending CEO change announced late last year and the settlement of regulatory fines and sanctions in the United States brings closure to a difficult period for the bank but also paves the way for a strategy re-set. This will entail restructuring the balance sheet of the U.S. banking business. It may also entail divestiture of their $14 billion 10 per cent stake in discount broker Charles Schwab as well as the opportunity to lean in harder on its very competitive Canadian personal and commercial banking business and its market leading Canadian discount brokerage business. In the meantime, the opportunity at hand is to buy the shares at an unusually wide 15 per cent discount to the Big Six bank average price/earnings and price/book trading multiples and yielding 5.3 per cent - ahead of the full unveiling of the bank’s strategy re-set, likely to occur at an investor day planned for the second half of 2025.
Broadcom (AVGO NASD)
Latest purchase June, 2024 at $171.10
Broadcom is a leading designer, developer, and global supplier of a range of semiconductor devices, with a focus on radio frequency (RF) and optoelectronic applications. The $70 billion acquisition of VMWare in late 2023 significantly increased their exposure to infrastructure software (i.e. “workload-balancing” for mainframes, distributed computing, cloud infrastructure, etc.), which we expect will attract further re-rating as the software business carries high margin recurring revenue. Broadcom is also an emerging competitor in AI chips, with increasing numbers of networking chips sold into hyper-scalers and others in the AI arms race. The recent announcement of a three-nanometer chip with a delivery date of second half 2025 was welcome to investors as it keeps their technology competitive with market leader, Nvidia. Other applications they sell into include cell phones and PCs, servers, enterprise storage equipment, telecom backhaul gear and various industrial applications. With its latest dividend increase last month, Broadcom has grown its dividend at a 25 per cent compound pace since 2016 – a pace that could moderate but that will likely remain elevated, as we expect earnings to grow at a 22 per cent compound pace over the coming three years.
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| COST | N | N | Y |
| TD | Y | N | Y |
| AVGO | N | N | Y |
PAST PICKS: February 6, 2024
Tourmaline Oil (TOU TSX) - **sold July 19, 2024 AT $60.20
- Then: $54.96
- Now: $66.81
- Return: 22%
- Total Return: 28%
Home Depot (HD NYSE)
- Then: US$356.25
- Now: US$409.65
- Return: 15%
- Total Return: 18%
Marsh & McLennan Companies (MMC NYSE)
- Then: US$194.50
- Now: US$216.50
- Return: 11%
- Total Return: 13%
Total Return Average: 20%
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| TOU | N | N | N |
| HD | N | N | Y |
| MMC | N | N | Y |