Teal Linde, manager at Linde Equity Fund

FOCUS: North American mid, large-cap stocks 

MARKET OUTLOOK:

The threat of surging inflation and rapidly rising interest rates on the markets is largely behind us. However, other challenges remain. Economic growth is slowing as the three per cent gross domestic product (GDP) growth enjoyed last year is being pulled down by flat gross domestic income (GDI) growth. Consumers are feeling squeezed as they reduce their savings rate to historically low levels while racking up credit card debt to highest levels ever. The divergence between the “haves” and “have-nots” continues to widen with the top 10 per cent owning roughly 70 per cent of all wealth, and the bottom 50 per cent owning around two per cent of all wealth.

This concentration of wealth is also occurring in the corporate sector where the 10 largest companies (two per cent) of the S&P 500 Index generate one-third of all earnings for the index, and where the 10 largest companies have more cash than the bottom 400. Smaller companies are struggling which poses employment risks since employment is more broadly distributed across the economy and not narrowly concentrated like earnings or cash. 

Investors need to be increasingly selective in the companies and sectors they are exposed to in the current economic environment. In an economy where most families can no longer afford to buy a home, purchasing a new car has even become out of reach for the majority of U.S. households based on typical budgeting guidelines. Additionally, 66 per cent of U.S. adults worry that they wouldn’t have enough emergency savings to cover a month’s living expenses if they lost their primary source of income. With retail investors increasingly overpowering institutional investors in influencing share price movements, such as Costco being pushed up to 50 times earnings, attention to valuation is increasingly important.  

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TOP PICKS:

BROOKFIELD (BN TSX)

Brookfield Corporation is focused on compounding capital over the long term to earn attractive total returns for its shareholders. The company's capital is deployed across three businesses – asset management, its operating businesses, and insurance solutions, all of which is underpinned by a conservatively capitalized balance sheet. Over the last 10 years, Brookfield has delivered a 15 per cent total annualized return to its shareholders. Based on its investor day presentation from last fall, management believes it can increase its net asset value at a 17 per cent compound annualized return from 2023 to 2028. At the time of its presentation, it expressed its net asset value at US$74 per shares.  This is equivalent to $100, which puts its current share price of $56 at nearly a 44 per cent discount to net asset value, thereby providing a healthy margin of safety or additional share price upside upon a narrowing of the discount, further supported by planned accretive stock buybacks. 

KINSALE CAPITAL (KNSL NYSE)

Founded fifteen years, Kinsale Capital is a property and casualty (P&C) insurance provider in the US focusing exclusively on excess and surplus (E&S) insurance, which is specialty insurance.  Kinsale models itself after the two low-cost leaders in personal auto insurance: Progressive and Geico.  Over 25 years ago, Progressive and Geico each represented ~2% of the personal auto insurance market, but with winning low-cost strategies have taken market share from competitors and grown their shares to ~14% each as of 2022.  Kinsale wants to do the same with specialty insurance, where it currently has 2% market share.  Revenues and EPS are each expected to grow at least 18% this year and next.  Warren Buffett’s recent unveiling of his secret $7 billion purchase of Chubb insurance shares is also considered an endorsement of the attractiveness of P&C insurance market conditions today.

LINAMAR (LNR TSX)

Linamar, as a company, is doing well overall, largely because of its industrial segment which includes its Skyjack aerial lift business and its agriculture machinery business. The results of its industrial segment is actually masking its much weaker auto parts business which has been basically operating at trough margin levels. But here's the opportunity - its largest industrial business, Skyjack, is expected to continue to perform well this year because its entire industry is still enjoying high backlog levels. Linamar is optimistic about taking market share likely because its manufacturing is domiciled in Canada where they take advantage of the weaker Canadian dollar. Based on its quarterly results announced last month, where the company reported solid organic growth, strong growth from acquisitions, and attractive margin expansion, its auto parts business appears to have finally turned a corner. Analysts had expected overall margins to be lower than the actual result, and management has raised its margin outlook further.  

PAST PICKS: JUNE 19, 2023

TD BANK (TD TSX)

• Then: $80.87
• Now: $74.15
• Return: -8%
• Total Return: -4%

TC ENERGY (TRP TSX)

• Then: $53.45
• Now: $52.77
• Return: -1%
• Total Return: 6%

ARITZIA (ATZ TSX)

• Then: $36.23
• Now: $37.61
• Return: 4%
• Total Return: 4%

Total Return Average: 2%