Teal Linde, Manager, Linde Equity Fund
Focus: North American mid and large cap stocks
Top picks: Pembina Pipeline, Delta Air lines, UiPath
MARKET OUTLOOK:
Three of the largest stock market peaks over the last 60 years were in 1968, 2000, and early this year. Each of these peaks have also coincided with peaks in U.S. household equity holdings as a percentage of total financial assets. In 1968, the percentage reached 28 per cent and in 2000 it was 25 per cent. Today, it is around a record 30 per cent, surpassing prior peaks in 1968 and 2000.
Foreign investors also hold more U.S. equities as a percentage of their total financial assets than ever before. All this crowding by both foreign and domestic investors into the U.S. stock market has contributed to a rich valuation for the U.S. market. At the same time, as U.S. stocks have reached peak popularity, historical evidence suggests that whenever the valuation of the S&P 500 has reached its current level, the forward 10-year annualized return has averaged around zero. And if you think you can’t do worse than zero per cent over 10 years, after the booming 1990s, the S&P 500 declined 23 per cent over the next decade.
There is no certainty that a similar pattern of underperformance will be upon us as the market’s higher concentration of tech stocks could support higher valuations. Regardless, investors should become more vigilant in what they own.
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TOP PICKS:
Pembina Pipeline (PPL TSX)
Pembina is the third largest energy infrastructure company in Canada after Enbridge and TC Energy. It owns the largest infrastructure network in the natural gas rich Montney region of British Columbia. Its dominance in this active area gives Pembina meaningful exposure to increasing natural gas development in Western Canada arising from expanding LNG projects on the B.C. coast. The company has an attractive current and potential suite of infrastructure projects to support growth into the late 2020s including its floating Cedar LNG 50/50 joint venture in Kitimat, which the B.C. government has just put on its initial list of resource projects to fast track to completion amid U.S. tariff threats. Between the company’s excess cashflow after paying out dividends and its less leveraged balance sheet than both Enbridge and TC Energy, the company has significant capacity to self-fund major projects over the next few years without having to issue shares. Pembina’s stock has recently pulled back, providing a decent entry point while offering a 5.6 per cent dividend yield.
Delta Air Lines (DAL NYSE)
Delta is the dominant carrier in Atlanta, the world’s busiest airport by passengers. It has 73 per cent share in that airport, which is a level in a very busy airport that is beneficial to margins. Delta is also the least unionized airline in the world. Roughly 20 per cent of employees are unionized, compared to typically closer to 80 per cent at others. Their low unionization rate was achieved years ago by creating a profit-sharing program that pays out 10 to 20 per cent of operating income to employees in return for more flexibility on work rules and pay. In a high fixed cost business such as airlines, this flexibility provides Delta a real advantage over its peers. Delta also owns a fuel refinery in Pennsylvania which further saves them money on fuel costs. This leading and competitively advantaged airline can be bought today at only seven times next year’s expected earnings.
UiPath (PATH NASD)
UiPath is being recommended as more of a thematic play on the emergence of agentic AI, which follows in the footsteps of generative AI. Generative AI acts mostly as a creative assistant that responds to prompts from humans, while agentic AI functions as an autonomous problem-solver and decision-maker with minimal human intervention, which also learns and improves from its ongoing interactions. Currently, UiPath is the industry leader in offering robotic process automation solutions, which emulates the ability of people to do repetitive digital tasks. Agentic AI, on the other hand, emulates the human mind. The potential is to enable the use of AI agents to analyze, decide and act autonomously, thereby doing a wider range of both structured and unstructured work on behalf of human workers or managers. UiPath already has over 10,000 customers that utilize its robotic processing automations solutions, therefore, the company is well positioned to introduce its agentic AI solutions to its existing customers, expanding the use cases of UiPath’s offerings. Analysts have mostly a hold on the stock because they are waiting to see more traction, but if you wait for that to happen, you typically end up having to pay a higher price. We prefer to initiate a position now.
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| PPL TSX | Y | Y | Y |
| DAL NYSE | Y | Y | Y |
| PATH NASD | Y | Y | Y |
PAST PICKS: JUNE 17, 2024
Brookfield Corp (BN TSX)
Then: $56.38
Now: $81.24
Return: 44%
Total Return: 45%
Kinsale Capital (KNSL NYSE)
Then: $389.75
Now: $477.87
Return: 23%
Total Return: 23%
Linamar (LNR TSX)
Then: $67.42
Now: $62.75
Return: -7%
Total Return: -5%
Total Return Average: 21%
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| BN TSX | Y | Y | Y |
| KNSL NYSE | Y | Y | Y |
| LNR TSX | N | N | N |
