Chris Blumas’ top picks for December 18, 2024

Chris Blumas, Portfolio Manager, Raymond James Investment Counsel
FOCUS: North American large caps

Top picks: Honeywell, CPKC, TD

MARKET OUTLOOK:

In the words of Bank of Canada CEO Tiff Macklem: “The world is looking more exposed to shocks,” as rising protectionism, the spread of artificial intelligence (AI) and adverse demographics create some major uncertainties for the world at large. In light of this uncertainty, investors are pricing in a lot of optimism for US President Donald Trump’s administration, expecting higher corporate profits and less government regulation to create a virtuous cycle that will continue to boost profits and push markets higher in the near term.

Last month, the US Federal Reserve continued to signal a slightly faster and slightly shallower easing cycle as it tries to steer the US economy towards a “soft landing.” North American economies are struggling under the weight of higher interest rates, and there are a host of data points that highlight how quickly economic growth is stagnating across the continent.

Looking at the stock market valuations for larger-cap, high-growth companies, it’s clear that stock markets have already priced in a bearish interest rate cycle and the likelihood of a soft landing. But when you look at the valuations of lower growth companies in defensive sectors that tend to be more interest rate sensitive, the valuations are much more reasonable and the dividend yield more robust.

Overall, I think it’s important for investors to remain disciplined and well-diversified and avoid the temptation to chase returns without regard for valuation. Ultimately, the price you pay determines your return, and indiscriminate buying can often lead to increased valuation risk and greater odds of a weaker return.

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TOP CHOICES:

Honeywell International Inc. (HON. NASD)

Last purchase for $228.83 on December 13th

Honeywell is an industrial conglomerate with a global presence. The company has a broad portfolio of market-leading companies that include aerospace and defense, industrial automation, building automation and energy solutions. During the last five years, growth in earnings per per share (EPS) and total shareholder return were at the low end of the range compared to peers. Going forward, management and some influential shareholders are looking for the company to simplify its operations by spinning off assets and/or separating business units to unlock value and improve long-term capital allocation. There have been several precedent-setting separations within the sector in recent years, and the magnitude of the value creation is hard to ignore. The shares are currently trading around 21 times forward earnings and have a trailing free cash flow yield of nearly four percent.

Canadian Pacific Kansas City Ltd. (CP TSX)

Last purchase for $106.55 on December 13th

CPKC is a railway holding company with a strong management team and a unique operational footprint. The company operates in Canada, the United States and Mexico and is the only railway company that directly connects all three countries. CPKC’s shares have fallen about 15 percent from their highs over the past year as uncertainty over North American trade has spooked investors and created an attractive entry point for long-term investors. The shares currently trade around 21 times forward earnings and have a trailing free cash flow yield of around two percent.

TD Bank (TD TSX)

Last purchase for $75.69 on December 11th

TD is a retail-focused North American bank. The bank recently announced a decision on its anti-money laundering investigations and some changes to its senior management team. It’s been a tough year for TD, and its shares are trading at a significant discount to its peers. Going forward, the bank has a strong capital position and the flexibility to direct excess capital towards a number of shareholder-friendly actions. The shares are currently trading around 10 times forward earnings and have a dividend yield of 5.4 per cent.

DISCLOSURE	PERSONAL	FAMILY	PORTFOLIO/FUND
HON NASD	Y	Y	Y
CP TSX	N	N	Y
TD TSX	Y	Y	Y

PREVIOUS ELECTION: December 13, 202

CGI Group (GIB.A TSX)

• After that: $143.32
• Now: $156.60
• Return: 9%
• Total return: 9%

Enbridge (ENB TSX)

• Then: $47.95
• Now: $59.05
• Return: 23%
• Total return: 31%

YUM China Holdings (YUMC NASD)

• After that: $39.75
• Now: $49.32
• Return: 24%
• Total return: 26%

Total return average: 22%

DISCLOSURE	PERSONAL	FAMILY	PORTFOLIO/FUND
GIB.A TSX	Y	Y	Y
ENB TSX	Y	N	Y
YUMC NASD	Y	Y	Y