Brian Madden, chief investment officer, First Avenue Investment Counsel

FOCUS: North American equities 


The equally weighted S&P 500 Index is up a respectable five per cent this year but has been left in the dust by the traditional market capitalization-weighted index which has risen nearly 16 per cent, led by the heavyweight technology and communications companies. Some seemingly dovish cooing by U.S. Federal Reserve officials last week underpins the latest thrust to new highs for U.S. stocks. 

Canadian stocks have decoupled from U.S. markets in recent weeks, with the S&P TSX Composite Index trading four per cent below the all-time high it reached in mid-May. With its heavy weighting in interest rate-sensitive sectors like banks, telecoms, utilities and real estate, the June 5 Bank of Canada interest rate cut should have rekindled interest in the S&P TSX Composite, but really has not. The simple, albeit intellectually unsatisfying, reality is that the Canadian market lacks the excitement and momentum of the U.S. market right now, and momentum and money flows trump fundamentals, economic theory and nearly everything else in the short term. 

The valuation disparity between the two markets is at a 25-year extreme and is still widening, with the S&P 500 trading at 21.3 times expected earnings while the S&P TSX Composite languishes in the bargain basement at 13.9 times. Apathy towards Canada extends beyond the stock market too – the latest weekly commitment of traders report shows net speculative options and futures positioning in the Canadian dollar at a 30-year bearish extreme, with a notional value of $13.2 billion in bearish wagers against the loonie. With Canada Day just around the corner, what’s a patriotic investor to do? Don’t chase the crowd. Don’t fight the crowd. Fade the noise and hype. Invest with discipline and remain true to a sound process and you’ll uncover compelling opportunities on both sides of the border, just as we are doing.

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Brian Madden's Top Picks

Brian Madden, chief investment officer of First Avenue Investment Counsel, discusses his top picks: Bombardier, Broadcom, and Lennox International.

Bombardier (BBD.B TSX)

With a new management team, a slimmed-down single segment focus on private aviation and a market-leading product portfolio, Bombardier now has a high visibility path to growing free cash flows and balance sheet de-leveraging after two lost decades of blundering. The company has a $15 billion order backlog and is several years ahead of key aerospace rivals in driving innovation in medium and long-range aircraft and in fulfilling robust demand. Moreover, with an increasing installed base of Challenger and Global Express aircraft in service the addressable market opportunity for aftermarket parts and service continues to expand.

Additionally, Bombardier is strategically opening new service centers globally to capture market share gains in this less discretionary aspect of its business. Further upside opportunity exists in the small, but high-margin, military command/control and reconnaissance planes it furnishes to NATO allies as geopolitical risks loom large in a number of conflict theatres. This is a “long memory” stock, having burned a whole generation of investors with a 99 per cent drawdown from 2000-20. As such, many investors have yet to refresh their research and still consider the company un-investable – which it no longer is. Despite having risen a mighty 1,200 per cent off the 2020 lows, the shares remain undervalued at a mere 12 times expected earnings and we foresee blue skies ahead.

Broadcom (AVGO NASD)

Broadcom is a leading designer, developer, and global supplier of a range of semiconductor devices, with a focus on radio frequency (RF) and optoelectronic applications. The $70 billion acquisition late last year of VMWare significantly increased its exposure to infrastructure software (i.e. “workload-balancing” for mainframes, distributed computing, cloud infrastructure, etc.), which we expect will attract further re-rating as the software business carries high-margin recurring revenue. Broadcom is also an emerging competitor in AI chips, with increasing numbers of networking chips sold into hyper-scalers and others in the AI arms race. Other applications it sells include cell phones and PCs, servers, enterprise storage equipment, telecom backhaul gear and various industrial applications. Broadcom has grown its dividend at a 35 per cent compound pace since 2016 – a pace that might moderate but nevertheless remain robust as we expect earnings to grow at a 17 per cent compound pace over the coming three years.

Lennox International (LII NYSE)

Lennox is a manufacturer and distributor of HVAC systems to residential homeowners and commercial and industrial markets. Approximately 75 per cent of its revenues stem from replacement units, with the remainder linked to new construction and to maintenance and repair parts on its existing units in service. Climate change is driving a secular increase in demand for bigger and more powerful air conditioning units as once-temperate regions become uncomfortably hot for longer periods of time. Moreover, the Inflation Reduction Act, via subsidies and incentives for innovative and efficient solutions like heat pumps further stoke demand for Lennox products. It has a ubiquitous distribution footprint, a new state-of-the-art Mexican manufacturing facility coming online later this year and a focused plan to improve operating margins by five to seven per cent by 2026. We conservatively foresee low double-digit earnings growth over that time frame, which should enable the company to extend the 14 per cent compound pace of dividend growth it has delivered over the past decade.




PAST PICKS: June 23, 2023

Brian Madden's Past Picks

Brian Madden, chief investment officer of First Avenue Investment Counsel, discusses his past picks: Alimentation Couche-Tard, Constellation software, and UnitedHealth.

Alimentation Couche-Tard (ATD TSX) 

  • Then: $63.48
  • Now: $78.76
  • Return: 24%
  • Total Return 25%

Constellation software (CSU TSX)

  • Then: $2,649.60
  • Now: $3,768.35
  • Return: 42%
  • Total Return 42%

UnitedHealth (UNH NYSE)

  • Then: US$477.00
  • Now: US$489.57
  • Return: 2%
  • Total Return 4%

Total Return Average: 24%