Brian Madden, chief investment officer, First Avenue Investment Counsel

FOCUS: North American equities 

MARKET OUTLOOK:

After a short and shallow drawdown in early April, Canadian stocks resumed their uptrend and closed at an all-time high yesterday. U.S. stocks are following suit, although have yet to eclipse their late March highs – in a rare recent example of Canadian stocks leading U.S. stocks.  Three weeks certainly doesn’t define a new paradigm. However plausible root causes for the stirrings of leadership in Canadian stocks include gold and oil, with both sectors having performed well quarter to date, on both sides of the border but bearing a greater impact on the Canadian stock market given its much heavier exposure to these sectors. 

We hold a constructive outlook on both commodities and increased our exposure to them in March and April. In general, a theme we’ve seen during the first quarter earnings release season is companies reporting good results for the most part, but the really high growth, high multiple, high expectations stocks are frequently selling off on the news.  Sometimes this is in response to very fine micro tweaks to guidance on various key performance indicators – signalling perhaps some investor fatigue with the long-entrenched leadership themes - and yet the market grinds higher as money rotates into new and emerging leadership names and themes.  This is a very healthy and welcome process in our view that deepens our conviction that the ongoing cyclical bull market is sound and sustainable.

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TOP PICKS:

TC Energy (TRP TSX)

TC Energy is one of North America’s largest energy infrastructure companies, moving 25 per cent of the continent’s natural gas flows across Canada, the U.S. and Mexico. The company is a high-quality, predictable cash flow and dividend grower with 90 per cent of the business operating under a regulated return framework or under long-term toll contracts. With the commissioning of the LNG Canada export terminal next year, the business should start to reap the rewards from its stake in the Coastal Gas Link pipeline, and similarly next year should benefit from the commissioning of its Southeast Gateway offshore gas pipeline in Mexico. The shares trade at a meagre 12.5 times earnings and offer a generous yield of 7.4 per cent with a dividend that we expect will grow three to five per cent per year. The major transformational catalyst ahead is the spin-off of South Bow next month, which will separate the oil pipelines segment from the remaining business units, likely unlocking value as shares of the two separate companies finally migrate into the hands of their natural owners. The retained gas and nuclear/renewable energy segments within TC Energy will be purged of the ESG-unfriendly oil pipelines, with attendant upward re-rating potential and South Bow will freed from the larger entity and purely focused on maximizing cash flows from its mature and irreplaceable oil pipelines – a potentially compelling appeal to ESG-agnostic investors.

 Agnico Eagle Mines (AEM TSX)

 Agnico-Eagle is Canada’s largest gold miner, since completing its transformational merger with Kirkland Lake Gold in 2022. The shares are almost a pure play on gold, unlike some of the other polymetallic producers, with 2024 planned production of 3.45 million ounces and revenues comprised 99 per cent of gold and one per cent silver. The company has paid a dividend every year since 1983 and has increased its dividend by 17 per cent per annum on average over the past decade, such that the shares now yield 2.4 per cent, which is well above the ten-year average dividend yield of 1.7 per cent the shares have historically offered. With 12 producing mines in Canada, Finland, Mexico and Australia, single mine concentration risk is low, and political risk is negligible in these mining-friendly jurisdictions. The company has a well-deserved reputation among investors for credibility and execution against strategy, as its history of exceeding production guidance in nine of the last ten years and its record of exceeding consensus earnings forecasts in 18 of the last 20 quarters demonstrates.

Microsoft (MSFT NASD)

Microsoft is the world’s largest company and is by far the largest global software company. Operating across personal computing, productivity and business process and intelligent cloud segments, the company is a scale-advantaged, defensive growth company with excellent exposure to several long-term secular infotech themes, including digital transformation/cloud computing, business intelligence/analytics/AI, security and collaboration. With nearly 70 per cent of revenues recurring, and much of its product offering “mission critical” whether to a corporate entity or to a personal user, the company has a strong incumbency advantage over rivals and a wide competitive moat to defend its market share and margins. With earnings expected to grow at a 17 per cent compound rate over the coming three years and the shares trading at 31 times earnings, we see a good combination of value and growth in the stock.