Martin Cobb, senior vice-president, equities, Lorne Steinberg Wealth Management
FOCUS: Global equities
Top Picks: Techtronic Industries, Alphabet, Canadian Natural Resources
MARKET OUTLOOK:
Hoped I might get to write something here that didn’t mention tariffs but apparently not. The U.S. appears keen to continue shooting itself in the foot, whether it be demanding the completely unrealistic manufacturing of iPhones in the country or slapping 50 per cent duties on what its consumers pay for stuff from the European Union.
I’ve seen several headlines of late that purport to give investors advice on how to position themselves ahead of a recession. I put that into the very same bucket as trying to somehow optimize one’s portfolio heading into an earnings season. Whatever it is, it isn’t investing. The U.S. economy spends some 95 per cent of its time not in recession but it feels like investors at times spend 95 per cent of their time fretting about it. Yes, we live with a great deal of uncertainty. But that’s always the case. It’s just that investors tend to forget it from time to time (Buffett’s “all-in” comments back in 2010 come to mind).
I’m not one for forecasting (other than that markets tend to go up over time) but reiterate that the stock market is a discounting mechanism. In April, it felt like some element of the inevitable slowdown in growth and impact on corporate profits was starting to be reflected in share prices. But less so today. Aggregate valuations levels remain fairly full (S&P 500 Index on 21-22 times prospective earnings with the S&P/TSX Composite Index in the upper teens) but there are always opportunities in some industry in some part of the world.
- Market-moving news, fast: Get the BNN Bloomberg App now
- Sign up for the Market Call Top Picks newsletter at bnnbloomberg.ca/subscribe
TOP PICKS:
Techtronic Industries (669 HK)
A global leader in power tools and floor care products, albeit with 75 per cent of sales in North America. Home to iconic brands like Milwaukee which has a leading / growing market share in the U.S. professional tools market and Ryobi, which is increasingly the go-to brand for the DIY enthusiast. Its portfolio also includes brands such as Hoover and Vax in floor care. Spends three to four per cent of sales annually on R&D and has really driven the cordless / battery powered tools market which has the added benefit of effectively locking its customers into its ecosystem through the interchangeable battery systems. Exclusive relationship with Home Depot which has been a boon to both parties. Following a bumper pandemic period, had witnessed a couple of flattish years (growth still outperforming its peers) but since reestablished close to 10 per cent annual sales growth. On top of which margins have room to continue to improve (still only earnings about two thirds of what Stanley Black & Decker has historically done in its tools division). Net cash balance sheet, large founder family ownership, one of the cleanest set of accounts I’ve personally come across. Trades on a mere 16-17 times 2025 earnings for anticipated mid-teens eps growth (a valuation multiple that, in my view, might conceivably be double that were it listed in the U.S.).
Alphabet (GOOGL NASD)
Best known as the parent of Google, Alphabet is an advertising juggernaut with strong positions in search (Google), video (YouTube), and mobile (Android), with 90 per cent plus share in global online search. Core advertising business still growing nicely, with secular tailwinds from digitization and increasing ad budgets shifting online, but faces new challengers (see below). Firmly the number three player globally in cloud behind AWS and Azure, but growing faster and gaining share and with a strong upwards drive in profitability (Amazon and Microsoft make two to three times as much in terms of operating margins). YouTube (which they paid less than $2bn for in 2006) now has revenues on a par with Netflix. Massive optionality in “Other Bets” including driverless cars (Waymo), quantum computing, medical tech, AR/VR, machine learning etc. as well as ability to further monetize the nine products today that have more than one billion active users. Large language models pose possibly the first ever real threat to Google’s search business. But must be put into context: perhaps 20-25 per cent of group revenues is at real risk. And Google is not sitting idle, spending $50 billion a year on R&D and now having a leading foundational model in Gemini as well as increasingly embedding AI across its products. Bulletproof balance sheet: over $80 billion in net cash and generating about the same in annual free cashflow. Fears over inevitable loss of market share driven the valuation down to sub 18 times this year’s earnings which just seems too low.
Canadian Natural Resources (CNQ TSX)
Our largest energy company, with a diverse portfolio spanning oil sands, conventional crude, natural gas, and natural gas liquids and with proven reserves of over 30 years. More of a purer upstream play than its peers and an operator of long-life, low-decline (group average around 11 per cent pa) assets such as Horizon and Athabasca Oil Sands projects. Obviously exposed to commodity price volatility but, given its efficiencies, has one of the lowest break-evens, as evidenced in 2020: WTI averaged just US$39 per barrel, and they remained solidly free cash flow positive. Benefiting from Canada’s improving pipeline capacity (Trans Mountain expansion) which should reduce the WCS discount over time. Strong capital discipline including being committed to dividend growth (24 consecutive years of increases since they started paying one in 2021) and share buybacks. Maintains a conservative balance sheet despite some recent deals and has explicitly communicated plans for capital allocation (quite rare). Paying only 12 times earnings in arguable a semi-depressed oil price environment, enjoying a near 10 per cent free cashflow yield which comfortably pays for a 5.5 per cent dividend yield
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| 669 HK | Y | N | Y |
| GOOGL NASD | Y | N | Y |
| CNQ TSX | Y | N | Y |
PAST PICKS: February 5, 2025
Saputo (SAP TSX)
- Then: $24.03
- Now: $26.77
- Return: 11%
- Total Return: 12%
Smith & Nephew ADR (SNN NYSE)
- Then: US$26.12
- Now: US$29.06
- Return: 11%
- Total Return: 13%
Electronic Arts (EA NASD)
- Then: US$130.47
- Now: US$146.75
- Return: 12%
- Total Return: 13%
Total Return Average: 13%
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| SAP TSX | Y | N | Y |
| SNN NYSE | Y | N | Y |
| EA NASD | Y | N | Y |
