David Burrows, President and Chief Investment Strategist, Barometer Capital Management
Focus: North American large caps
Top picks: GE Aerospace, Agnico Eagle, Imperial Oil
MARKET OUTLOOK:
Steady improvement in the equity market breadth for equities and commodities globally since the U.S. President Donald Trump tariff shock suggests that the more fulsome factors impacting markets continues to be positive for risk assets.
With both monetary policies getting looser globally and populist fiscal spending remaining the order of the day, investors need to protect themselves from the debasement of their purchasing power.
Liquidity drives equity prices especially pro cyclical investments. Clear outperformance of both equities and commodities versus bonds and bond proxies sends a clear message that flows continue to favor economic expansion.
Earnings reporting period will give investors a clearer set of data points. Market leadership globally is found in financials, industrial companies including defense, communications and materials and some areas of energy. After a year of correction, semis have re-emerged as cyclical leadership as well.
Barometer is focusing on self-financing and free cashflow producing companies that have pricing power and a record of solid dividend growth. Ideally, we want companies with accelerating cashflow growth which can lead to multiple expansion.
We are watching market internals (breadth) for signs of rally exhaustion but so far breadth globally continues to be solid even though momentum is showing signs of slowing. We are keeping an eye on seasonality but so far so good.
When there have been positive conditions coming into the third quarter, it tends to overwhelm the risk posed by August through October.
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TOP PICKS:
GE Aerospace (GE NYSE)
GE Aerospace is a great example of our process recognizing positive change. Legacy GE has now been cleaned up. Both GE Aero and GE Vernova are stellar businesses, much better as separate businesses than inside the conglomerate.
The aircraft aftermarket parts and services is an industry we have been involved in for years now. Howmet Aerospace Inc (turbine blades), GE (engine production & service) are our current positions.
Due primarily to Boeing’s supply issues over the last five years, aircraft fleets are as old as they have ever been. Because aircraft fleets are older, they require more maintenance, especially more engine maintenance. As GE has grown engine service and maintenance revenue, engine sales have become less meaningful. Service and maintenance business is reoccurring which leads to much better revenue visibility and leads to multiple expansion.
Reported earnings this morning beat nicely over a high bar. It beat across both segments, commercial and defense. It gave long-term guidance this morning that it will grow revenue at least double digits over the next three years and will boost capital returns to shareholders by at least 20 per cent over the next three years.
Service revenue continues to outpace engine sales revenue. Service revenue now is 70 per cent of total, growing 30 per cent year over year. Three out of four commercial flights are powered by GE engines. At any given time, there are 950,000 people flying on a GE powered aircraft and 3.4 billion passengers flew on GE powered flights in 2024
Agnico Eagle (AEM TSX)
About 90 per cent of production for Agnico Eagle comes from Canada and Australia. It is low-cost producer with a strong pipeline of mostly brownfield development opportunities focused in Canada.
It finished the last quarter in a strong liquidity position with US$922 million in cash and $2 billion undrawn credit facility.
With net debt quickly approaching flat, capital allocation priorities going forward remain focused on buybacks and mergers and acquisitions (M&A), with the possibility of raising their dividend if gold prices remain at current levels, and management hits their net cash target.
The company intends on increasing their Normal Course Issuer Bid (NCIB) to allow for $1 billion in buybacks, up from $500 million.
Management has noted that they will resume dividend increases if they achieve their target of $1 billion in net cash. The company hasn’t increased their dividend since Feb 2022.
Imperial Oil (IMO TSX)
The company has high quality, long-life assets with approximately 25 years reserve life. It has a diversified business model between upstream, downstream and chemicals. The Balance sheet remains in pristine shape and it has a strong history of return of capital to shareholders completing three separate Substantial Issuer Bids between 2022 to 2024
The company recently renewed it’s NCIB to buyback five per cent of shares outstanding. It has 30 years of consecutive dividend growth with five year dividend growth Compound Annual Growth Rate (CAGR) of 22 per cent. It has a slight step up in capital expenditure (Capex) in 2025 but will step back down in 2026. That should be beneficial for future cash flows.
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| GE NYSE | Y | Y | Y |
| AEM TSX | Y | Y | Y |
| IMO TSX | Y | Y | Y |
PAST PICKS: MAY 17, 2024
Freeport McMoran (FCX NYSE)
Then: US$54.23
Now: US$43.74
Return: -19%
Total Return: -17%
Goldman Sachs (GS NYSE)
Then: US$467.72
Now: US$708.67
Return: 51%
Total Return: 54%
Thompson Reuters (TRI TSX)
Then: $232.72
Now: $287.96
Return: 24%
Total Return: 25%
Total Return Average: 21%
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| FCX NYSE | Y | Y | Y |
| GS NYSE | Y | Y | N |
| TRI TSX | N | N | N |
