Brendan Caldwell, president and CEO, Caldwell Investment Management
FOCUS: North American large caps
Top Picks: META Platforms, Argan, Interactive Brokers
MARKET OUTLOOK:
Equity markets have exhibited remarkable strength over the past two years. The S&P 500 Index in the U.S. delivered a particularly strong performance, generating annual returns of approximately 25 per cent in both 2023 and 2024 consecutively, exceeding the S&P/TSX Composite Index’s returns of approximately eight per cent and 18 per cent, respectively. The U.S. Federal Reserve’s pivot with rate cuts geared towards a soft landing have provided considerable support to equities.
Furthermore, Donald Trump’s re-election delivered a considerable boost to stocks, as investors expect his pro-business approach — centred on tax cuts, deregulation, and policies encouraging capital spending, mergers and acquisitions activity, and other investments — to spur economic growth. On the flip side, while increased tariffs are expected to drive a near-term wave of reshoring and economic expansion, a particularly prosperous economy could reignite inflationary pressures. This scenario might compel the Federal Reserve to pause or reverse its pivot, potentially disappointing markets currently pricing in two rate cuts next year.
Additionally, equity valuations are quite elevated, as demonstrated by the S&P 500’s forward price-to-earnings ratio of 22 times — now nearly in-line with the post-COVID-19 highs and not too far below the dot-com bubble’s peak of 25 times. Although elevated valuations do not inherently point towards weaker returns going forward and may be justified given that the high expectations of a robust economy next year may be achievable, they do, however, put in place a hurdle that is appropriately just as high.
This prompts us to maintain our focus on identifying high-quality, well-managed companies with proven track records of navigating through dynamic environments.
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TOP PICKS:
META Platforms (META NASD)
Leading social and advertising platform with over 10 million advertisers and over three billion monthly active users. Its main platforms are Facebook, Instagram, WhatsApp, and Threads.
It has power consolidating among leading ad platforms driven by more effective (e.g. AI-driven) ad targeting and user engagement algorithms. This helps drive more time spent on the platform and higher ad rates in a positive feedback loop.
Meta has a strengthening moat with AI/data center investments, which should continue driving the above flywheel over the long term. Good traction/user growth with newer platforms like Threads, which just announced monetization. Meta has strong cost and margin controls following force reductions in 2022; believe AI can create more efficiency with a smaller work force. Potential benefits from Tik Tok ban and long-term optionality with Reality labs division (Meta Ray-Bans selling well above expectations).
Argan (AGX NYSE)
A builder of natural gas-fired and renewable power generation plants in the U.S. It has underlying secular demand growth driven by rising power consumption (data centers, EV adoption, solar and battery factories) and decommissioning of coal-fired power plants across the U.S.
It has strong activity levels, high backlog and good medium-term visibility on renewable projects given long length of new power gen contracts (e.g. AI customers often sign 10 plus year contracts with utilities for dana center-specific power sources.
Renewable backlog at record levels; the only thing holding back the pace of progress is regulatory/permitting issues. Lean, efficiently run company supports margin stability.
Interactive Brokers (IBKR NASD)
Automated global electronic broker that processes trades in stocks, options, futures, FX, bonds, mutual funds, ETFs, cryptocurrencies and precious metals on more than 150 exchanges and market centers in 34 countries and 27 currencies globally.
A large global TAM of over 70-80 million sophisticated investors is underpenetrated relative to IBKRs around three million accounts. A tech-focused brokerage that automates as much as possible to keep costs low. This allows IBKR to pass lower costs along to customers while maintaining industry leading margins. Plug and Play APIs are attractive to introducing brokers from other countries, which gets more sticky clients on IBKR’s platform. Large international growth opportunity, shown by international account growth well above the U.S.
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| META | N | N | Y |
| AGX | N | N | Y |
| IBKR | N | N | Y |
Past Picks: Dec 29, 2023
Parker-Hannifin (PH NYSE)
- Then: US$460.70
- Now: US$628.70
- Return: 36%
- Total Return: 38%
Comfort Systems USA (FIX NYSE) –
- Then: US$205.67
- Now: US$421.14
- Return: 105%
- Total Return: 105%
Dollar General (DG NYSE) –
- Then: US$135.95
- Now: US$73.34
- Return: -45%
- Total Return: -43%
Total Return Average: 33%
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| PH | N | N | N |
| FIX | N | N | Y |
| DG | N | N | N |