Brendan Caldwell, president and CEO, Caldwell Investment Management

FOCUS: North American Large Cap Stocks 

MARKET OUTLOOK:

Building on the momentum from last fall, equities continued to rally into 2023 on the back of an anticipated Fed pivot and relatively robust earnings. In combination with declining inflation and a strong labour market, investors took these cues as a signal that a “soft landing” recession scenario was more likely than a “hard landing” scenario. However, cracks started to show in March in the banking sector, exacerbated by the speed at which this tightening cycle has progressed. Cash-strapped companies found themselves running down deposit balances and banks found themselves having to sell bonds at a loss to cover the withdrawals. This led to liquidity and solvency concerns at major U.S. regional banks, some of which ultimately failed despite swift government intervention.

As a result of the banking crisis, investors are anticipating tighter lending conditions, and a string of weaker macroeconomic releases since the incident has brought the possibility of a “hard landing” back into the fore. The upward momentum markets had at the start of the year has faded and underneath the surface, this range-bound period of stability has been supported by only a handful of mega-cap stocks. As we look forward, we think the market may not be discounting the possibility of a hard landing properly and thus believe volatility will remain elevated for the foreseeable future. We continue to focus on identifying high-quality, well-managed companies with proven track records 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

TJX Companies (TJX NYSE)

“Treasure hunt” shopping experience is a differentiated retail concept that tends to attract sticky customers. Strong value proposition for consumers try to make their dollar stretch a bit further- TJX pricing gap vs. full price retail can be between 20-60 per cent (i.e. they should benefit from tradedown. Other retailers with too much inventory provide attractive buying opportunities for TJX at good margins. Struggling retailer bankruptcies/store closures improve competitive landscape for TJX. Longer term, we think they can increase the store footprint by ~50 per cent from today’s levels. Margins headwinds seen over the last two years should abate as inflation cools and supply chain gets better.

Stryker (SYK NYSE)

Procedure volume/hospital staffing headwinds are easing and should become a moderate tailwind in '23. International markets are a large opportunity that can drive topline acceleration. In SYK's view, capital spend on robots has held up relatively well given revenue generating potential and the ability for hospitals to do more with less. Note they expect overall pricing to be -0.5 per cent to flat for the year, better than recent trend; this is supported by higher-priced new product pipeline. Med-term, new shoulder and spine applications on SYK's Mako robot should provide greater value to customers and support greater adoption of the robot over time. Industry-leading R&D supports strong new product pipeline, ultimately supporting topline growth and premium pricing/GMs over time.

Granite REIT (GRT.UN TSX)

Focus on high-quality assets in key markets where supply is more constrained (often near large metropolitan areas); this supports low vacancy rates and strong rent growth. Fifteen per cent of revenue from the GTA with in-place rents that are significantly lower than market rents; this supports rent growth at lease renewals. Looking to diversify and de-risk the portfolio away from specialty purpose assets (that largely serve Magna) towards modern distribution and logistics properties over time given strong secular demand. Overall, they stand to benefit from tailwinds, including growth in e-commerce, re-shoring of supply chains/manufacturing. Strong management team with a proven history of shareholder value creation at the previous employer (Pure Industrial REIT). One of the cleanest balance sheets in the Canadian real estate sector; a conservative payout ratio means well-supported dividend throughout the cycle. Very well positioned in the event of a weaker economic backdrop to acquire distressed assets.

Past Picks: June 24, 2022

Quanta Services (PWR NYSE)

• Then: US$125.98
• Now: US$174.81
• Return: 39%
• Total Return: 39%

Capital Power (CPX TSX)

• Then: $45.30
• Now: $46.30
• Return: 2%
• Total Return: 7%

Murphy USA (MUSA NYSE)

• Then: US$235.06
• Now: US$283.39
• Return: 21%
• Total Return: 21%

Total Return Average: 22%