Brian Madden, chief investment officer, First Avenue Investment Counsel

FOCUS: North American equities

MARKET OUTLOOK:

Our team is actively monitoring incoming macroeconomic data and a multitude of indicators across stock, bond, currency, commodity and derivatives markets as well as measures of investor sentiment to gauge whether markets are ripe for a fresh bull market upturn. As of now, the hard and soft macroeconomic data and most of the cross-asset class indicators we track are not confirming recent stock market strength and accordingly we conclude that the mighty rally in Canadian and especially U.S. stocks since mid-June is merely a bear market rally. Bear market rallies are common in recessions, lasting on average 24 days and generating gains of 18 per cent on average. The 2000-01 recession saw eight bear market rallies of 10 per cent or more and the 2008-09 recession saw six such rallies.

For our part, we have taken advantage of recent strength to sell riskier securities and to bolster our three equity portfolios with high-quality, downturn-resilient names across a variety of sectors, emphasizing companies that cater to customers’ needs (not wants). This includes companies with strong balance sheets and companies with a history of market outperformance in bear markets.

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TOP PICKS:

Cameco (CCO TSX)

Latest purchase August 2022 at $31.63:

Cameco is one of the world’s largest producers of uranium and is among a very small number of public companies anywhere in the world that produces solely uranium. Seven of the 10 largest global producers, which collectively control 70 per cent of global output, are state-owned companies. With 450 million pounds of reserves across its two majority-owned and operated mines in Saskatchewan and a joint venture in Kazakhstan, Cameco is well positioned to benefit from renewed interest on the part of utilities for secure supplies of fissile material from safe jurisdictions (i.e. not Russia) and is resuming production at its McArthur Lake mine to boost output this year. India and China have been driving most of the growth in the global installed fleet of nuclear reactors, but other big countries, including Japan, are giving renewed consideration to the role of nuclear energy in powering its electrical grids in light of ESG commitments as well as security of supply concerns and skyrocketing prices for oil and natural gas-fired power. Cameco is poised for a breakout year in terms of earnings in 2023 as production ramps up to capitalize on rising uranium prices.   

TD Bank (TD TSX)

Latest purchase March 2022 at $101.13: 

TD is Canada’s second-largest bank and is on the verge of becoming America’s sixth-largest bank as well. TD earns a 16 per cent return on shareholder’s equity and has grown earnings per share at a nine per cent rate over the last decade, with a commensurate increase in its dividend. The strength of its balance sheet affords them the flexibility to pursue the recently announced $13.4 billion acquisition of U.S. southeastern regional bank, First Horizon in an all-cash deal expected to be 10 per cent accretive to earnings post realization of an anticipated US$610 million in synergies. Currently offering a 4.2 per cent yield, and with dividends likely to continue growing at a high single-digit pace, we see a logical and visible path to continued low double-digit total returns over a cycle, a pattern that has allowed TD and other Canadian banks to outperform the S&P TSX Composite in 18 of the last 25 years.

American Tower (AMT NYSE)

Latest purchase July 2022 at $267.49:

American Tower is among the largest global real estate investment trusts and is a leading owner, operator and developer of wireless communications and broadcast towers. Its business is very stable as customers are locked into long-term service contracts on “inflation +” terms. Moreover, the company is a rapid secular grower, partly due to international expansion, partly due to telecom carriers’ large-scale deployment of 5G cellular gear and in part due to its recent expansion in the data centre segment via the $10 billion acquisition of CoreSite Realty last year. The shares yield 2.2 per cent and have generated a total return of 350 per cent over the last decade, yet still trade at a reasonable 23x cash flow.

PAST PICKS: August 11, 2021

Parex Resources (PXT TSX)

• Then: $19.10
• Now: $20.96
• Return: 10%
• Total Return: 14%

Franco Nevada (FNV TSX)

• Then: $194.17
• Now: $161.16
• Return: -17%
• Total Return: -16%

Transcontinental (TCL.A TSX)

• Then: $25.39
• Now: $16.35
• Return: -36%
• Total Return: -32%

Total Return Average: -11%