David Driscoll, president and CEO, Liberty International Investment Management
FOCUS: Global stocks
Top Picks: Alfa Laval AB, Comfort Systems, Intertek Group
MARKET OUTLOOK:
Given all the volatility today in stock markets, investors should focus on:
- The company, not the stock price
- Management’s ability to allocate capital
- Dividend growth
- Diversification
Stock price only matters the day you buy it and the day you sell it. Everything else is just noise. This noise during market sell-offs often causes investor panic. Instead, their focus should be on the company’s future growth prospects, not the current stock price.
With current fears of higher interest rates, inflation, tariffs, and potential recession, it’s equally important for investors to understand management’s success at allocating capital in the long term.
This can be determined by comparing a company’s return on invested capital (ROIC) to its weighted average cost of capital (WACC). For every $1 of capital invested, how much does a company make in return? ROICs greater than 15 per cent are considered to be the best. If the WACC is nine per cent, the six per cent difference becomes free cash flow, providing the firm with abundant financial flexibility to survive market sell-offs or bear markets.
Investors should also understand that as the dividend grows, the share price will eventually follow. It must. For example, CN Rail’s dividend in 2015 was $1.25 a share. Today, the dividend is $3.55 a share, up 184 per cent. During that time, the stock price has risen from $52 to $140, up 169 per cent.
Finally, investors should stay focused on being fully diversified globally with their stock holdings as diversification always wins in times of “risk off” trading environments.
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TOP PICKS:
ALFA LAVAL AB (ALFA SS)
The company trades on the Swedish exchange and has three main product lines, Separation (centrifuges), Fluid Handling (pumps and valves) and Heat Transfer (heat exchangers).
The company occupies a market leadership position in most categories it competes in with the opportunity to grow faster than its markets. The return on invested capital is 15% per cent while WACC is nine per cent, leaving lots of free cash flow for dividend growth (12 per cent annually for the past 10 years) and a compound annual stock growth rate (CAGR) of 12 per cent this past decade.
COMFORT SYSTEMS (FIX NYSE)
A leading provider of commercial, industrial, and institutional heating, ventilation, air conditioning and electrical contracting services. Advanced technology projects, particularly in the data center sector, and institutional markets like healthcare and education, are expected to continue supporting the backlog and revenue pipeline. Return on invested capital is 29 per cent while WACC is 12 per cent, leaving lots of free cash flow for dividend growth (40 per cent annually for the past 10 years) and a compound annual stock growth rate (CAGR) of 35 per cent this past decade.
INTERTEK GROUP plc (ITRK LN)
It trades on the London exchange and offers product inspection services. It inspects products for safety to governments, exporters and importers, as well as certifies that import duties are declared and paid. Intertek’s improving operational leverage, aided by productivity gains, underpinned a 100-bp increase in its medium-term margin guidance to 18.5 per cent. The company sees three pillars to its medium and long-term earnings growth: mid-single-digit organic growth, mergers and acquisitions mergers and acquisitions and margin expansion. The recent acquisition of TESIS expands Intertek’s ATIC offering in the building and construction industry, growing its geographic footprint in Latin America. Return on invested capital is 18 per cent while WACC is 11 per cent, leaving lots of free cash flow for dividend growth (17 per cent annually for the past 10 years) and a compound annual stock growth rate (CAGR) of 12 per cent this past decade.
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| ALFA SS | Y | Y | Y |
| FIX NYSE | Y | Y | Y |
| ITRK LN | Y | Y | Y |
PAST PICKS: December 19, 2023
COGECO COMMUNICATIONS (CCA TSX)
- Then: $55.77
- Now: $66.28
- Return: 19%
- Total Return: 29%
ATRION (ATRI NASD)
- Atrion was acquired by Nordson Corp. on Aug. 21, 2024. Does not trade publicly anymore.
- Then: US$350.538/20/2024: US$459.92
- Return: 31%
- Total Return: 32%
JARDINE MATHESON (JM SP)
- Then: US$39.78
- Now: US$48.13
- Return: 21%
- Total Return: 31%
Total Return Average: 31%
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| CCA TSX | Y | Y | Y |
| JM SP | Y | Y | Y |
