Brian Madden, Chief Investment Officer, First Avenue Investment Counsel
Focus: North American equities
Top Picks: Nutrien, UnitedHealth, Bombardier
MARKET OUTLOOK:
After struggling through the first quarter, U.S. stocks crashed briefly into bear market territory intraday on April 7 in the aftermath of the “Liberation Day” tariff announcements. A series of clumsy on again, off again concessions, carve outs and deferrals to these tariffs have somewhat soothed the initial sting, but U.S. stocks remain well below where they started the quarter, let alone the year as investors have begun questioning bedrock assumptions about the role of the United States as a safe haven in currency markets and bond markets, and certainly the notion of “American exceptionalism” is less and less taken as orthodoxy.
Our portfolios have for several quarters favoured gold, defensive and interest rate sensitive sectors like consumer staples, utilities, telecom and real estate in both Canada and the U.S. as we expect a growth slowdown in both countries while trade and tariff confusion plays out. We’ve selectively added to core holdings outside of these areas however in recent weeks, taking advantage of macro-economic and geopolitically driven extreme volatility to add to core holdings at bargain prices.
It’s too early to sound the “all-clear” on the trade war, with tariffs merely deferred, rather than outright cancelled. While the recent bounce in stocks may bring comfort to some, we are taking the current lull in U.S. policy driven selling pressure as an opportunity to rebalance and “high-grade” portfolios, taking profits in fully valued names and redeploying proceeds into “trophy” businesses that have been unduly dragged down into the fray this month.
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TOP PICKS:
Nutrien (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 slowly improving 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 21 per cent off their September lows but remain 50 per cent below their all time high, trading at 1.1 times 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 36 per cent since then and has also retired 23 per cent of its outstanding shares via normal course issuer bids.
UnitedHealth (UNH NYSE)
UnitedHealth Group is the largest U.S. provider of health insurance and managed care, serving 50 million members in individual and corporate plans as well as Medicare and Medicaid funded members. While publicly funded health care has been under some pressure in recent years, generous rate increases for Medicare Advantage plans are in the pipeline for 2026.
United is taking market share in all segments that it serves – at a short-term cost to their profitability – but building long term value for shareholders, in our view, given secular demographic and morbidity trends in the United States. With a strong balance sheet and an A+ credit rating, the company has valuable optionality at hand to step up its consistent share buyback program to higher levels to take advantage of the currently discounted valuation with the shares trading just over 15 times earnings, relative to the five-year average multiple of 19.4 times earnings.
Bombardier (BBD/B TSX)
With a new management team, a slimmed down single segment focus on private aviation, and a market leading product portfolio, Bombardier now has a high visibility path to growing free cash flows and balance sheet de-leveraging after two lost decades of blundering. The company has a $14.4 billion order backlog and is well ahead of rivals in driving innovation in medium and long-range aircraft and in fulfilling robust demand.
Moreover, with an increasing installed base of Challenger and Global Express aircraft in service, the addressable market opportunity for aftermarket parts and service continues to expand and Bombardier is opening new service centres globally to capture market share in this less discretionary aspect of their business. Further upside opportunity exists in the high margin military command/control and reconnaissance planes they furnish to NATO allies as a European imperative to fund NATO commitments gels.
This is a “long memory” stock, having burned a whole generation of investors with a 99 per cent drawdown from 2000-20. As such, many investors have yet to refresh their research and still consider the company un-investable – which it no longer is. Despite having risen a mighty 1250 per cent off the 2020 lows, the shares remain undervalued at a mere 10 times expected earnings and we foresee blue skies ahead, with the recent tariff induced turbulence likely to be fleeting.
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| NTR TSX | N | N | Y |
| UNH NYSE | N | N | Y |
| BBD/B TSX | N | N | Y |
PAST PICKS: April 11, 2024
Netflix (NFLX NYSE)
Then: US$628.78
Now: US$1082.00
Return: 72%
Total Return: 72%
Service Corp (SCI NYSE)
Then: US$70.52
Now: US$80.05
Return: 13%
Total Return: 15%
Cameco (CCO TSX)
Then: $69.03
Now: $58.27
Return: -15%
Total Return: -15%
Total Return Average: 24%
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| NFLX NYSE | N | N | Y |
| SCI NYSE | N | N | Y |
| CCO TSX | N | N | Y |
