Chris Blumas, portfolio manager, Raymond James Investment Counsel
FOCUS: North American large caps
Top Picks: Brookfield, Alimentation Couche-Tard, Constellation Software
MARKET OUTLOOK:
It’s been a rough start to the year for equity markets as changes to U.S. trade policy have been more drastic than initially expected.
While it’s unfortunate that things have escalated so abruptly, it is likely to cause a global recession as countries around the world look to retaliate, consumers pay more for the goods they buy, and the general level of unemployment rises.
In the end, financial market volatility is likely to remain heightened going forward as investors react to geopolitical events. While it’s difficult to know when this volatility and negative news cycle will subside, history has proven, time and time again, that it pays to stay invested and avoid panic selling. Over the long term, financial markets have rewarded patient investors and investors that have stayed invested have achieved significantly better results than investors that have come in and out of the markets.
Going forward, I think it’s important for investors to remain well diversified and defensively positioned. While market volatility can be unsettling for some investors, it can also provide opportunity to other investors with a longer time horizon.
I think investors should focus on companies that generate positive free cash flow and are self-sufficient from a financing perspective. Companies with strong, investment grade balance sheets and access to credit markets control their own destiny. These companies can endure tough times and are well positioned to create additional value for their owners by operating in a counter cyclical manner and can raise dividends, invest in organic initiatives, complete opportunistic acquisitions, and accelerate share buybacks.
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TOP PICKS:
Brookfield (BN TSX)
Brookfield is a direct investor and third-party asset management firm with a unique focus on real assets and private equity. The company has a controlling interest in each of its publicly traded affiliates and a portfolio of other private investments. Brookfield is one of a handful of global private equity players that are uniquely positioned to raise large amounts of capital from institutional clients as they shift more of its portfolios towards private markets. While the company has four publicly listed operating subsidiaries (BAM, BBU, BEP, and BIP), the parent company has the unique ability to allocate capital across its platform and operate in a counter cyclical manner. Currently, Brookfield has around $160 billion in group liquidity available to deploy across its platform and is uniquely positioned to benefit from weakness in the global macroeconomic environment. The shares currently trade around 12.5 times distributable earnings and have a core free cash flow yield of more than six per cent.
Alimentation Couche-Tard (ATD TSX)
Couche-Tard is a Canadian-based convenience store operator with a global presence. The company has a coast-to-coast presence across North America and leading market share across several markets in Europe. In its most recent fiscal year, Couche-Tard generated around two-thirds of its revenues and gross profit in the United States. The company recently completed a global rebranding initiative under the Circle K banner and is well positioned to continue consolidating a fragmented industry. While there are a few notable pressures facing the industry, including rising labor costs and the structural decline of cigarette sales, Couche-Tard has been able to offset some of these pressures with its scale and purchasing power. The shares currently trade around 17 times forward earnings and have a trailing free cash flow yield of more than five per cent.
Constellation Software (CSU TSX)
Constellation Software is an enterprise software consolidator with a global presence. Last year, the company generated almost 90 per cent of its revenues outside of Canada. Constellation has six operating subsidiaries that function as independent businesses with a common capital allocation framework. This decentralized operating model has allowed the company to complete hundreds of acquisitions since its initial public offer (IPO) in 2006. Constellation typically targets smaller companies that are too small to attract the interest of other IT conglomerates or private equity firms. Over the years, the company has expanded its operating infrastructure so that it can continue targeting smaller acquisitions and continue compounding cash flows at an above average rate. Over the last three years, the compound annual growth rate for cash flow per share is 19 per cent. The shares currently trade at 32 times trailing cash flows and have a trailing free cash flow yield of around two per cent.
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| BN TSX | Y | Y | Y |
| ATD TSX | Y | Y | Y |
| CSU TSX | Y | Y | Y |
PAST PICKS: APRIL 2, 2024
CGI (GIB.A TSX)
- Then: $148.20
- Now: $144.48
- Return: -2%
- Total Return: -2%
Yum China (YUMC NYSE)
- Then: US$39.89
- Now: US$44.16
- Return: 11%
- Total Return: 13%
Brookfield Infrastructure Partners L.P. (BIP.UN TSX)
- Then: $40.16
- Now: $39.74
- Return: -1%
- Total Return: 4%
Total Return Average: 5%
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| GIB.A TSX | Y | Y | Y |
| YUMC NYSE | Y | Y | Y |
| BIP.UN TSX | N | N | Y |
