James Telfser, managing partner and portfolio manager, Aventine Investment Counsel

FOCUS: North American stocks 

MARKET OUTLOOK:

Despite the uncertainty, and central banks raising rates, the S&P 500 is off to its best start to a year since 1997, while the Nasdaq Composite has recorded its best first seven months since 1975. While the market has erased all losses from when the hiking cycle first began, the consumer appears to be deteriorating as a result of shrinking excess savings and increasing use of revolving credit. We continue to believe that the consumer price index is trending lower, but not as quickly as the market is predicting, which may lead to rates being higher for longer, a likely headwind for equity markets. 

Our risk model, which incorporates volatility and credit spreads, has started to blink yellow, and given the persistently low volatility this year, we are utilizing options to hedge our portfolios and client accounts. Our renewed focus on quality over the past 12 months has served our clients well and we continue to stay active within the equity markets, concentrating on stocks with predictable growth profiles.

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TOP PICKS:

Zoetis (ZTS NYSE)

Zoetis is a global leader in the oligopolistic animal health industry, focused on the complete spectrum of the value chain. It discovers, develops, manufactures and commercializes medicines, vaccines, diagnostic products, and services, biodevices and genetic tests. The company’s products are developed for both companion animals and livestock. The company’s intention is to build and integrate a portfolio that covers everything about animal care, at each stage of diseases. The core animal health market has seen steady and resilient growth over the long term, growing five per cent annually since 2013, however, ZTS has managed an eight per cent revenue compound annual growth rate (CAGR) over the same timeframe, and grown market share from 15 per cent to 18 per cent. Finally, the company experiences steady growth and margin expansion through annual price increases, averaging 2.5 per cent since 2018 and 4.5 per cent expected for 2023. While the company commands a premium valuation, it is warranted due to the above-average growth rate and profitability.

CAE Inc. (CAE TSX)

CAE is one of the world’s largest aviation simulation and training providers, covering both the commercial and defence markets. We believe the company will continue to benefit from industry growth trends, as pilot shortages and training needs increase in the coming years. CAE currently forecasts mid-20 per cent earnings per share (EPS) growth rates through 2025 which could prove to be conservative if we see margin improvement in the defence business. The total backlog currently sits at $11.2 billion, which provides significant revenue visibility, a rarity within the sector. We believe CAE is close to seeing a valuation multiple increases as investors reward their high-quality attributes and strong growth profile.

Danaher (DHR NYSE)

Danaher is a high-quality, growth-by-acquisition business operating in the biotechnology, life sciences, and diagnostics industries. We are always attracted to businesses that demonstrate the ability to effectively allocate cash flow resulting in high returns on capital, and in this regard, Danaher is one of the best. The pandemic brought unprecedented demand for its products and caused a significant increase in its valuation. The resulting moderation in growth has had a significant impact on the stock price, and corresponding valuation metrics, creating an attractive entry point for new long-term investors. It is important to note that there will be a spin-off of its environmental and applied solutions division on Sept. 30, 2023, which currently makes up $4.8 billion in sales (25 per cent EBITDA Margin) in the product. 

PAST PICKS: October 5, 2022

Intact Financial (IFC TSX)

• Then: $203.69
• Now: $195.00
• Return: -4%
• Total Return: -3%

Brookfield Infrastructure (BIP NYSE)

• Then: US$36.72
• Now: US$32.32
• Return: -12%
• Total Return: -8%

Fortis (FTS TSX)

• Then: $52.56
• Now: $53.99
• Return: 3%
• Total Return: 7%

Total Return Average: -1%