Chris Blumas, portfolio manager, Raymond James Investment Counsel
FOCUS: North American large caps
Top Picks: Honeywell, Alimentation Couche-Tard, TD Bank
MARKET OUTLOOK:
There has been a flurry of news lately about tariffs and their impact on the global economy. Ultimately, there is very little to be gained from a tariff war as consumers around the world will pay more for the goods they consume, and the general level of unemployment will rise.
During U.S. President Donald Trump’s first term in office, personal income and corporate tax rates were reduced under the Tax Cuts and Jobs Act of 2018. These tax cuts are set to expire this year and that has sparked a need for additional revenue streams as Trump tries to extend or potentially make these cuts permanent. However, extending these tax cuts is very expensive and the Congressional Budget Office has estimated that it would add more than US$450 billion annually to the federal budget deficit. To put this number in content, last year, the U.S. federal budget deficit totaled $1.8 trillion.
With many deficit critics among the members of Congress, the current U.S. administration is likely looking at government cost cutting and the additional revenues from tariffs to finance the entire cost of extending the 2018 tax cuts.
While this openly hostile approach towards trade is likely to have a negative impact on the Canadian economy, it’s important for investors to avoid a home country bias and hold a portfolio that is global in nature and well diversified by sector. It is true that a weaker Canadian dollar negatively impacts your purchasing power in the U.S., however, it can positively impact your portfolio as your U.S. dollar assets are worth more in Canadian dollar terms.
Overall, I think it’s important for investors to remain defensively positioned and valuation conscious and avoid the temptation to exit the markets and wait on the sidelines. History has shown that it pays to stay invested, and investors should look to enhance their returns by seeking out opportunities to buy at more attractive valuation levels.
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TOP PICKS:
Honeywell (HON NASD)
Most recent purchase at $206.04 on Feb. 7
Honeywell is an industrial conglomerate with a global presence. The company has a broad portfolio of market leading businesses that include aerospace and defense, industrial automation, building automation, and energy solutions. Over the last five years, earnings per share (EPS) growth and total shareholders returns have been at the low end of the range relative to peers. Going forward, management and some influential shareholders are looking for the company to simplify its operations by spinning off assets and/or separating business units to unlock value and improve long-term capital allocation. There have been several precedent separations within the sector in recent years and the magnitude of value creation is difficult to ignore. The shares currently trade around 20 times forward earnings and have a trailing free cash flow yield of more than four per cent.
Alimentation Couche-Tard (ATD TSX)
Most recent purchase at $74.94 on Feb. 6
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 can 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.
TD Bank (TD TSX)
Most recent purchase at $79.53 on Jan. 16
TD is a retail-focused North American bank. The bank recently announced a resolution to its anti-money laundering investigations and some changes to its senior leadership team. It’s been a rough year for TD and its shares trade at a significant discount to its peers. Going forward, the bank has a strong capital position and the flexibility to direct excess capital towards a number of shareholder friendly actions. The shares currently trade around 10 times forward earnings and have a dividend yield of almost five per cent.
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| HON-US | Y | Y | Y |
| ATD-CA | Y | Y | Y |
| TD-CA | Y | Y | Y |
PAST PICKS: February 14, 2024
Brookfield Infrastructure Partners (BIP.UN TSX)
- Then: $41.55
- Now: $46.95
- Return: 13%
- Total Return: 18%
Yum China (YUMC NYSE)
- Then: US$40.38
- Now: US$48.37
- Return: 20%
- Total Return: 21%
RTX Corporation (formally Raytheon) (RTX NYSE)
- Then: US$91.39
- Now: US$127.97
- Return: 40%
- Total Return: 43%
Total Return Average: 27%
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| BIP.UT-CA | N | N | Y |
| YUMC-US | Y | Y | Y |
| RTX-US | N | N | N |
