Brendan Caldwell, president, CEO and CIO, Caldwell Investment Management

FOCUS: North American large-cap stocks 

MARKET OUTLOOK:

Macroeconomic statistics paint a mixed picture of the overall health of the economy but consumer spending is resilient and inflation is trending in the right direction. The market is betting that the current interest rate hike cycle is nearly complete and if there is a recession, it could be relatively mild. As a result, investor positioning continues to move away from defensive sectors toward more cyclical and growth-oriented sectors. Initially led by the technology sector, other sectors are gradually playing catch up as investors bake in a “soft landing” scenario.

Looking forward, we are still cautious. The effect of rising rates tends to happen with a 12-18 month lag and tighter credit conditions in the banking sector essentially supercharge the U.S. Federal Reserve’s efforts to restrict economic activity. Activity in the manufacturing sector is slowing as companies brace for an eventual period of softer demand. Therefore, we are mindful to not overlook the possibility of a more severe recession and expect elevated volatility to continue, especially in areas that have run very far, very fast. We continue to focus on identifying high-quality, well-managed companies with proven track records of navigating through tough environments and believe professional investment advice can be extremely valuable in times such as these.

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TOP PICKS:

Entegris (ENTG NASD)

Entegris is a leading provider of specialty chemicals and materials, primarily in the semiconductor industry.

Why we like them?

• Over the long term, it benefits from secular growth in the semiconductor industry driven by IoT, electrification of everything, and advances in consumer electronics and automotive safety among other things.
• The semi-cycle is expected to turn later this year which should drive volume acceleration.
• High barriers to entry - increased complexity in the semi-manufacturing process and the need for higher quality chemicals, should push weaker players out of the market while driving customers to higher margin products.
• Lastly, leverage reduction and synergies from a recent acquisition should support further multiple re-rating.

ESAB Corp. (ESAB NYSE)

ESAB is a global fabrication technology (i.e. welding) company that focuses on developing, manufacturing and supplying consumable products and equipment for use in cutting, joining and automated welding.It also offers software and digital solutions that help increase productivity, remotely monitor welding operations and digitize documentation. It serves industrial, infrastructure, renewable energy, medical and life sciences, transportation, construction and energy end markets.

Why we like them?

• Small but well-recognized player in a large and growing market.
• Poised to benefit from on-shoring and supply chain resiliency investments in the U.S. over the next three to five years.  
• High mix of recurring consumable product revenues supports baseline growth while accelerating growth in newer/higher-margin automated welding and cutting tools improves the overall growth and margin profile.
• A welder shortage should drive healthy adoption of automated welding solutions as companies build new manufacturing facilities in the U.S.
• Internal product and footprint reduction campaign provide additional support to margins in the near term.
• Overall, ESAB should re-rate higher as growth accelerates and it closes the margin gap versus its peers.

Vulcan Materials (VMC NYSE)

It is a leading U.S. provider of aggregates, concrete and asphalt. It has 400 aggregate operations in 22 states; 236 million tons of aggregate shipped in 2022; 15.6 billion tons of aggregate reserves.

Why we like them?

• Attractive exposure to markets benefiting from positive population migration trends.
• Fragmented market allows VMC to continue rolling up the industry, and support LT growth.
• Budgets in key states are in good shape and infrastructure stimulus is starting to flow through.
• Multiyear volume tailwinds from mega infrastructure and non-residential construction projects.
• Should also benefit from rebounding housing starts later in 2023/early 2024. 

PAST PICKS: August 5, 2022

Costco Wholesale (COST NASD)

• Then: US$540.67
• Now: US$549.18
• Return: 2%
• Total Return: 2%

LKQ Corp. (LKQ NASD)

• Then: US$55.08
• Now: US$58.43
• Return: 6%
• Total Return: 8%

Electronic Arts (EA NASD)

• Then: US$132.56
• Now: US$138.22
• Return: 4%
• Total Return: 5%

Total Return Average: 5%