Alexander MacDonald, portfolio manager, GlobeInvest Capital Management

FOCUS: North American large-cap stocks 

MARKET OUTLOOK:

First quarter earnings season in the U.S. is drawing to a close, and it has been one of the strongest reporting periods in nearly two years. Not since the second quarter of 2022 has year-over-year earnings growth been this strong. With over 80 per cent of S&P 500 companies having now reported, earnings are up five per cent while revenues have grown 4.1 per cent. Furthermore, 77 per cent of the companies that have reported results so far have beat consensus expectations.

It is this earnings outperformance that has powered the recent rebound in the markets. With U.S. inflation numbers remaining stubbornly high, markets have been pricing in fewer rate cuts from the Federal Reserve this year. In turn, this has been putting downward pressure on equity valuations. The next U.S. consumer price index (CPI ) reading on May 15 should help inform whether this downward pressure will continue. With earnings growth continuing to look strong, a lower CPI number could be cause for a prolonged rebound in equities.

Looking back over the past 12 months, investors's concerns have evolved considerably. In 2023, a hard landing was top of mind for investors; now, concerns revolve around the cost of capital. In both situations we have been most comfortable holding the same types of companies: those that are of high quality with strong balance sheets. 

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TOP PICKS:

Dollar Tree (DLTR NASD)

The discount retailer is in the midst of a multi-year turnaround being driven by a new management team. The biggest focus of the turnaround has been to implement a multi-price point strategy, in a manner like what Dollarama implemented in 2009. While the progress has been uneven, most recently because of low-income consumers coming under pressure, we believe the strategy will ultimately reward patient shareholders. 16 times earnings.

Zoetis (ZTS NYSE)

The animal health company generates two-thirds of revenue from pet products and one-third from livestock products. Drug development for animals is shorter and less expensive than in humans, plus there is much less competition from generics. ZTS is the market leader in most of its end-market categories. While there have been some negative headlines recently about adverse events for animals prescribed the company’s pain medication, we believe these reports to be overly anecdotal in nature, not supported by available data. Twenty eight times earnings.

TE Connectivity (TEL NYSE)

Manufacturer of electrical connectors with a specialization in automotive – it currently has 35 per cent share of the automotive interconnects market. It provides exposure to the shift from internal combustion engines to hybrids and electric vehicles, without requiring us to choose an OEM winner. The content-per-vehicle for TEL is roughly two times in electric cars and 1.3 times in hybrids versus internal combustion engines. Additionally, the company has growing AI exposure as it supplies specialized connectivity equipment to data centres. 18 times earnings.

PAST PICKS: OCTOBER 30, 2023

RTX (RTX NYSE)

• Then: US$78.57
• Now: US$103.44
• Return: 32%
• Total Return: 30%

Alphabet (GOOGL NASD)

• Then: US$124.46
• Now: US$169.85
• Return: 36%
• Total Return: 36%

Mondelez International (MDLZ NASD)

• Then: US$65.98
• Now: US$70.57
• Return: 7%
• Total Return: 8%

Total Return Average: 25%