Brendan Caldwell, president and chief executive officer, Caldwell Investment Management

FOCUS: North American large cap stocks

MARKET OUTLOOK:

Making predictions about the future is difficult in the best of times and especially challenging in the current environment. As major exporters of key commodities such as wheat, corn, steel, oil and natural gas, Russia’s invasion of Ukraine has put upward pressure on global commodity prices and will likely worsen already-elevated levels of inflation. The loss of container ships and disruption of major shipping routes are likely to exacerbate ongoing supply chain challenges and hamper businesses’ ability to ‘return to normal.’ 

Rising interest rates are causing investors to re-evaluate multiples placed on higher valuation companies. This is causing a rotation towards value/cyclical stocks and away from growth names, particularly in the information technology sector which has been a key driver of the S&P 500’s performance over the last decade and certainly throughout the pandemic.

With all that said, if there is one thing we can be reasonably sure of, it is that the markets will likely experience elevated levels of volatility for the foreseeable future. We will continue to focus on high quality, well-managed companies with proven histories of navigating through tough environments and believe professional investment advice can be extremely valuable in times such as these.

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TOP PICKS:

CME Group (CME NASD)

Most recent purchase: Feb. 24, 2022

One of the leading derivatives exchange operators with offerings across most asset classes, CME is coming off a period of historically low volatility in some key products. Their set-up over the next 1-2 years is attractive as investors reposition their portfolio for higher volatility in interest rates and energy. They’re also seeing very strong volume performance across their new crypto currency products. CME has a competitive advantage here in essentially being the only regulated exchange for bitcoin futures which helps attract high-volume institutional investors to the platform. Longer term their SOFR product should see rising volumes as the world transitions away from Libor.

Quanta Services (PWR NYSE)

Most recent purchase: Mar. 9, 2022

This is a well-run engineering and construction company with a lower risk profile than its competitors. End markets are benefiting from strong secular tailwinds. Utilities are investing to harden/modernize and expand the grid to prepare for things like EV charging. Telecoms are building out 5G infrastructure over a multi-year period.

The majority of their revenue is from smaller maintenance-type contracts that are unit price/cost-plus, which means they can account for higher input costs vs. fixed-price contracts. These contracts also contribute to greater revenue and earnings stability over time, versus other engineering and construction peers.

Lastly, the industry is highly fragmented and PWR has demonstrated a strong history of growth through acquisition; so we think there’s still a long growth runway there.

Micron Technology (MU NASD)

Most recent purchase: Jan. 14, 2022

This company worked hard to become a technology leader over the years and is now well positioned as we transition to the next generation of memory products. Memory semiconductor market has consolidated over time which has improved the structural profitability of the industry, which means less excess supply and price wars throughout the cycle.

Memory semi-growth should outpace the overall semi market over the next few years on rising content in next generation applications, particularly things like high power servers in data centers, smart car/autonomous driving applications, 5G phones, etc. Lastly, the combo strong end markets and improved profitability gave the company confidence to recently initiate their first ever dividend fairly recently. This is a positive signal about good things to come.

PAST PICKS: December 21, 2021

Texas Instruments (TXN NASD)

• Then: $186.37
• Now: $189.02
• Return: 1.42%
• Total Return: 2.03%

Motorola Solutions (MSI NYSE)

• Then: $261.61
• Now: $239.22
• Return:  -8.55%
• Total Return: -8.25%

Church & Dwight (CHD NYSE)

• Then: $98.40
• Now: $98.79
• Return: 0.39%
• Total Return: 0.66%

Total Return Average: -1.85%