Brian Madden’s Top Picks for May 23, 2025

Brian Madden, chief investment officer, First Avenue Investment Counsel

FOCUS: North American equities

Top Picks: Constellation Software, Lennox, Bank of Montreal

MARKET OUTLOOK:

First quarter earnings for Canadian and U.S. companies have mostly been released and generally have met or surpassed expectations. Nevertheless, analysts are forecasting a slowdown in earnings growth over the remainder of the year as trade, tariff and policy uncertainties persist. In both countries, analysts now forecast six to seven per cent earnings growth this year, down from 12 to 13 per cent growth forecasts at the start of the year. The degradation in corporate profit outlook mirrors the degradation in overall economic growth forecasts, with the consensus of economists calling for 1.4 per cent gross domestic product (GDP) growth in the U.S. this year, down from 2.1 per cent at the start of the year.

In Canada, GDP growth forecasts have been trimmed to 1.2 per cent from 1.8 per cent at the start of the year. Nevertheless, major equity indices have recouped most of their mid-February, early April selloff as hopes mount for trade reconciliation and tax cut extensions in the United States. We have fine tuned our equity portfolios over the last month, but have not made radical changes, as our two disciplines are designed to be resilient to shifting economic and political winds. Our Dividend Growers mandate continues to own companies with high structural profitability, wide competitive moats, strong balance sheets and a demonstrated history and ongoing ability to steadily increase dividends year after year while our Momentum mandate owns companies with first-mover or leadership positions in secularly advantaged sectors and niches, where sales, earnings and expected earnings are growing much faster than the overall market, validated by strong price momentum.

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TOP PICKS:

Constellation Software (CSU TSX)

Constellation Software is a software holding company that acquires mission-critical vertical market software companies and helps them to grow. With its unique operating philosophy, Constellation equips unit operating managers with best practices, procurement and shared services efficiencies but empowers them to make decentralized decisions at the grass roots level. Notoriously and deliberately tight-lipped and non-communicative with the investment community, the company’s results do the talking for it. Earnings per share have grown at a 24 per cent compound rate over the last decade, despite operating primarily in sluggish organic growth markets and the share price has generated a total return of over 36,000 per cent since the 2006 initial public offering. With the shares trading at 40 times expected earnings, we see a good combination of value and growth here.

Lennox (LII NYSE)

Lennox is a manufacturer and distributor of HVAC (heating, ventilation & air conditioning) systems to residential homeowners and into commercial and industrial markets. Approximately 75 per cent of its revenues stem from replacement units, with the remainder linked to new construction and to maintenance and repair parts on their existing units in service. Climate change is driving a secular increase in demand for bigger and more powerful air conditioning units as once temperate regions become uncomfortably hot for longer periods of time. Moreover, a new environmental regulation that came into effect this year in the United States phasing out the use of R410-A refrigerants in air conditioners in favour of less greenhouse gas intensive refrigerants is creating favorable price and mix benefits for the company. With a ubiquitous distribution footprint, a new state of the art manufacturing facility ramping up and a focussed plan to improve operating margins, we conservatively foresee low double-digit earnings growth over the next few years. This should enable the company to extend the 12 per cent compound pace of dividend growth it has delivered over the past decade.

Bank of Montreal (BMO TSX)

Bank of Montreal is Canada’s third largest bank and post the acquisition of Bank of the West is one of the 15 largest banks in the United States as well, operating physically in 32 states. The bank’s strong suit on both sides of the border is in commercial banking and lending. A large Canadian wealth management business, a large North American capital markets business and a small insurance business round out the deposit and lending franchise nicely. The bank has articulated a detailed plan to increase its return on shareholders equity back towards the mid-teen’s historical levels after some recent weakness via better management of its balance sheet, among other initiatives. These efforts should continue to support a seven per cent compound growth rate in dividends – like the last decade and the shares offer upward re-rating potential from the current trading multiple of 1.3 times book value as elevated credit provisions last year start to moderate and as earnings growth accelerates.

PAST PICKS: May 10, 2024

TC Energy (TRP TSX)

• Then: $52.78
• Now: $68.43
• Return: 42%
• Total Return: 50%

Agnico Eagle (AEM TSX)

• Then: $93.53
• Now: $161.09
• Return: 72%
• Total Return: 75%

Microsoft (MSFT NASD)

• Then: US$414.74
• Now: US$449.98
• Return: 8%
• Total Return: 9%

Total Return Average: 45%