Brian Madden, Chief Investment Officer, First Avenue Investment Counsel
Focus: North American Equities
Top picks: Telus, Nutrien, Arista Networks
MARKET OUTLOOK:
Macroeconomic uncertainties are melting away in fits and starts as we move towards the middle of the quarter. Early in July, the U.S. administration passed their “One Big Beautiful Bill” budget, extending and expanding previous tax cuts and codifying into law massive fiscal stimulus via deficit spending, which supports economic growth.
More recently, various countries have come to terms with the United States on trade and tariff issues, although key counterparties like Canada and the EU have yet to do so. In both Canada and the United States, the easing macro uncertainty is creating a “rising tide that lifts all boats”, with both the S&P TSX Composite Index and the S&P 500 Index reaching fresh all time highs, crucially underpinned by broad based strength, with most stocks and sectors trading higher in July, and with equal weighted indices outperforming the traditional market capitalization weighted indices.
Our team respects market rallies that are broadly based much more so than rallies that are narrowly based, and as such we interpret recent strength as being stable and durable. Our current research pipeline has us investigating new opportunities in the technology sector, in energy and in the aerospace and defence sectors, among others.
Our ongoing maintenance research regimen on existing investments entails a close review of second quarter financial and operating results. Thus far, seven of our 46 stocks have reported results, with all seven exceeding sales and earnings forecasts, and with five of the seven rallying in price post release of results.
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TOP PICKS:
Telus (T TSX)
Telus is the highest quality telecom business in Canada and currently offers a yield of 7.4 per cent. That is very elevated, relative to the ten year average yield of 5.3 per cent it has typically traded at.
Not only do we believe this dividend is secure, but we also believe it will continue to grow at a faster pace than the dividends paid by Canada’s other telecoms validated by its decisions in November and May to increase the dividend a cumulative seven per cent. All the telecoms should face easier earnings comparisons in the coming quarters as they lap the price war that started a year and a half ago to the determinant of the overall industry profit pool.
All the telecoms should also benefit from macro and money flow tailwinds from income hungry Canadian investors realizing that their guaranteed investment certificates (GICs) are rolling over at three to 3.5 per cent versus 4.5 to five per cent a year ago. Telus, in particular, is advantaged by its ownership of some faster growing non-telecom businesses, by its financial strength and flexibility as well as by its operational focus while its rivals are distracted integrating their recent acquisitions.
Lastly, we believe Telus has some intriguing unpriced catalysts in front of it, including a plan to monetize $3 billion of surplus urban real estate via re-development into high rise housing.
Nutrien (NTR TSX)
Nutrien is the world’s largest crop nutrient business with upstream segments mining potash and phosphates and producing nitrogen fertilizers, vertically integrated with a downstream retail segment comprised of 2,000 outlets that sell fertilizer, seeds and pesticides and herbicides to farmers primarily in Canada and the U.S.
We believe fertilizer pricing has bottomed across all three key nutrients, supported by slowly improving cash crop prices and the unavoidable imperative of replenishing soil nutrients depleted by farmers’ restrained application of them during the 2021 to 2023 price spike.
Nutrien shares have bounced 36 per cent off their September lows, but remain 44 per cent below their all time high, trading at 1.2 times book value and yielding 3.6 per cent, both in line with longer term averages of 1.3 times book value and a 3.5 per cent yield since the 2018 merger of the two predecessor companies, Potash Corp. of Saskatchewan and Agrium.
The company has grown its dividend by 36 per cent since then and has also retired 23 per cent of its outstanding shares via normal course issuer bids.
Arista Networks (ANET NYSE)
Arista Networks is a cloud networking company selling products and services into the data center, campus and large enterprise end markets with ethernet switching and routing platforms and related software solutions for monitoring and network detection.
Cloud titans like Meta, Oracle, Amazon, Alphabet and Microsoft, who collectively comprise roughly half of Arista’s consolidated revenues, are engaged in a capital spending arms race to build out AI-compute capabilities and data centres.
With ethernet infrastructure a strict necessity for AI data centres, and with Arista situated “upstream” of these deep pocketed customers, the company stands to benefit from heavy capital spending that fuels the ongoing AI arms race.
Arista Networks trades at 40 times expected earnings, a premium valuation, but one we believe is well warranted by the 17 per cent expected pace of compound earnings growth over the coming 3 years, underpinned by compelling secular growth prospects in AI and data centres.
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| T TSX | N | N | Y |
| NTR TSX | N | N | Y |
| ANET NYSE | N | N | Y |
PAST PICKS: JULY 22, 2024
Cameco (CCO TSX)
Then: $65.45
Now: $107.24
Return: 64%
Total Return: 64%
Roper Technologies (ROP NASD)
Then: US$576.55
Now: US$561.27
Return: -3%
Total Return: -2%
Canadian National Railway (CNR TSX)
Then: $167.94
Now: $130.48
Return: -22%
Total Return: -20%
Total Return Average: 13%
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| CCO TSX | N | N | Y |
| ROP NASD | N | N | Y |
| CNR TSX | N | N | N |
