Brian Madden’s Top Picks for Feb. 28, 2025

Brian Madden, chief investment officer, First Avenue Investment Counsel

FOCUS: North American equities

Top Picks: TFI International, Alamos, Nutrien

MARKET OUTLOOK:

We expect the ongoing bull markets in both Canada and the U.S. to extend further in 2025. Price charts tell an investor what the market is doing whereas economists and strategists tell investors what markets should be doing. With both the S&P 500 Index and the S&P/TSX Composite Index making successively higher lows and higher highs, charts are telling investors the bull market is very much intact. Fundamentally, American leadership in secular growth areas like electric vehicles, AI, defense and global consumer brands, coupled with a strong mandate for the new administration to enact pro-growth, investor friendly policies underpin our ongoing constructive view on U.S. stocks.

In Canada, where growth is less dynamic, our constructive view is predicated on connectivity to the U.S. economy via trade. Our view is also based on the lagged effects of interest rate cuts last year reaching our very interest rate sensitive economy and strong likelihood of a change in federal leadership. This change can only plausibly move policy in a more pro-growth, more investment friendly direction.

Apart from those factors, the TSX trades at a historically extreme discount to the S&P 500, with price/earnings ratios of 16.7 times and 24.5 times for the two indices, respectively. Moreover, the Canadian dollar is discounted versus its 50-year average of 81 cents and versus the OECD estimate of purchasing power parity or “fair value” of 88 cents. This affords global contrarian investors a unique opportunity to benefit from both a re-rating in the local stock market plus a currency appreciation kicker.

• Market-moving news, fast: Get the BNN Bloomberg App now
• Sign up for the Market Call Top Picks newsletter at bnnbloomberg.ca/subscribe

TOP PICKS:

TFI International (TFII TSX)

TFI International is a truckload, less-than-truckload and asset-light logistics company with a top-flight management team and a lean operating philosophy that maximizes asset turnover by selling the “right” freight that matches their network and assets and keeps the trucks moving. Apart from being an efficient and scale sized operator, TFI also has a long history of consolidating the fragmented trucking industry in Canada and the U.S. The weak fourth quarter results last week, coupled with fears of tariffs and a fumbled and then retracted plan to redomicile the business to the United States have brought about a 40 per cent drawdown in the stock price since mid-December…it’s fifth largest such drawdown in 35 years. Since the turn of the century, the shares have returned 16,000 per cent - clear evidence that management are very capable – problems, when they occur, get addressed and resolved, and as such pullbacks, especially big ones are to be bought aggressively. The shares trades at 14 times expected earnings, 35 per cent discounted versus North American trucking peers and 10 per cent discounted versus its own five year average trading multiple of 16 times earnings.

Alamos Gold Inc (AGI TSX)

Alamos is a $14 billion gold miner with two operating mine districts in Canada and one in Mexico. The $700 million acquisition of Argonaut Gold last year affords the company a compelling opportunity to realize $375 million of life-of mine processing and general/admin costs as well as $140 million of capital cost synergies. This can be done by centrally milling ore from the adjacent Island Gold mine alongside ore from the acquired Magino mine in a single mill. The company has good visibility towards its goal of producing one million ounces of gold per year via existing mines by the end of the decade, representing a compound growth rate in production of over 12 per cent - a pace of growth few mid-size or large miners can match. Alamos’ investment appeal, on a standalone basis, or potentially to a growth-starved strategic acquiror is further enhanced by the very low political risk jurisdictions that host its’ mines.

Nutrien Ltd (NTR TSX)

Nutrien is the world’s largest crop nutrient business with upstream segments mining potash and phosphates and producing nitrogen fertilizers, vertically integrated with a downstream retail segment comprised of 2,000 outlets that sell fertilizer, seeds and pesticides/herbicides to farmers – primarily in Canada and the U.S. We believe fertilizer pricing has bottomed across all three key nutrients, supported by rising cash crop prices and the unavoidable imperative of replenishing soil nutrients depleted by farmers’ restrained application of them during the 2021-23 price spike. Nutrien shares have bounced 26 per cent off their September lows, but remain 49 per cent below their all time high, trading at book value and yielding 4.1 per cent, both favourable versus longer term averages of 1.3 times book value and a 3.5 per cent yield since the 2018 merger of the two predecessor companies, Potash Corp. of Saskatchewan and Agrium. The company has grown its dividend by 35 per cent since then and has also retired 23 per cent of its outstanding shares via normal course issuer bids.

PAST PICKS: March 8, 2024

Pool Corporation (POOL NYSE)

• Then: US$415.06
• Now: US$346.92
• Return: -16%
• Total Return: -15%

The Hershey Company (HSY NYSE)

• Then: US$194.56
• Now: US$172.99
• Return: -11%
• Total Return: -8%

Shopify Inc. (SHOP TSX)

• Then: $102.87
• Now: $159.50
• Return: 55%
• Total Return: 55%

Total Return Average: 11%