Market Call: Brianne Gardner's outlook on Canadian & U.S. Large Caps

Key Concepts

• AI Growth Engine: Artificial Intelligence continues to be a primary driver of growth for technology companies.
• Execution over Hype: Investors are increasingly rewarding companies that demonstrate tangible results from their AI investments rather than just participating in the trend.
• Broadening Market Leadership: The rally is becoming more inclusive, with leadership expanding beyond a few dominant companies, suggesting a more sustainable market.
• Geopolitical Truce: A temporary resolution in trade tensions between the US and China has eased near-term tariff concerns, but underlying tensions remain.
• AI Bubble vs. Early Stages: Current AI valuations are not comparable to the dot-com bubble, and the market is seen as being in the early stages of AI adoption, with a focus shifting to profitability.
• Dividend Investing: Dividends are highlighted as a key component of total return, particularly for retirees seeking income.
• Diversification: Emphasized as crucial, especially in the current market environment and with varying valuations.
• Fundamental and Value Scores: A scoring system (out of 10) used to assess the financial health and attractiveness of a stock.
• Past Picks Review: Evaluation of previously recommended stocks to assess their performance and current outlook.
• New Top Picks: Identification of promising stocks for future investment.

AI and Tech Earnings: A Shift Towards Profitability

The latest earnings reports from tech giants indicate that Artificial Intelligence (AI) remains a significant growth engine. However, investors are now prioritizing companies that can translate substantial AI spending into tangible results. Companies like Amazon have shown strong quarters with returning cloud momentum, while Apple has demonstrated consumers' willingness to pay for premium technology. Microsoft, Alphabet, and Meta have underscored high market expectations, with the consumer continuing to spend. The market is now looking for profits to follow this spending. This shift is seen as healthy, leading to a broader market leadership and a more grounded and durable rally. While AI is central to discussions, the focus is moving from companies merely participating in the AI hype to those that can effectively execute and monetize AI. NVIDIA's upcoming earnings are highly anticipated as a key indicator of this trend.

Geopolitical Considerations

Geopolitical concerns persist, though a recent meeting between US and Chinese leaders resulted in a one-year trade truce, removing immediate tariff threats. While this is viewed as progress, underlying tensions are far from resolved, and markets are treating it as a positive step rather than a breakthrough.

AI Bubble Concerns Addressed

Concerns about an AI bubble are being addressed by the fact that major tech companies (the "Mag Seven") are consistently delivering and executing on their growth expectations, with double-digit growth projected for the next year. Unlike the dot-com bubble, where P/E ratios were exceptionally high (50-100 times), current valuations are not seen as indicative of a bubble. The market is still in the early stages of AI adoption, with a growing emphasis on making AI profitable and integrating it to benefit consumers and employees.

Stock Analysis and Recommendations

Baytex Energy (Hold)

• Company Profile: A Canadian oil and gas producer focused on heavy oil and shale assets.
• Performance: Q3 earnings beat estimates, but the stock is down approximately 17% over the last year, influenced by broader energy stock declines.
• Positives: Operational efficiency, strong free cash flow, disciplined debt reduction.
• Risks: Volatile oil prices, high debt levels, commodity swings, sector headwinds.
• Recommendation: Cautious. Analysts have a "Hold" consensus. Consider trimming for stability, but holding is reasonable for those comfortable with the risk. The stock is trading near $3 below analyst targets. It's considered a high beta, volatile name.

Couche-Tard (Buy)

• Company Profile: One of the largest convenience store networks globally (Circle K) with significant income from retail, fuel, and food services.
• Performance: Q1 results showed revenue of $98 billion and net income around $3.5 billion. The company raised its dividend for the 15th consecutive quarter.
• Strategic Interest: Actively seeking US store acquisitions.
• Analyst Consensus: "Buy" with an average price target of around $85 per share, suggesting about 20% upside.
• Strengths: Global scale, strong brand, disciplined cost controls, consistent dividend growth.
• Risks: Struggled over the past five years.
• Opportunity: US expansion and digital transformation.
• Recommendation: "Buy." The stock scores an 8 out of 10 fundamentally.

Telus (Fairly Valued, Strong Dividend)

• Company Profile: A top Canadian telecommunications provider.
• Performance: Maintains very low churn, indicating strong consumer loyalty. Telus Health is a growing bright spot. The company is actively managing its balance sheet by selling non-core assets to accelerate debt reduction.
• Dividend: Strong and stable, a key part of Telus's return profile, yielding approximately 8%.
• Risks: Wireless growth in Canada is slowing.
• Recommendation: Fairly valued. Scores 6 out of 10 fundamentally and 9 out of 10 for value. Diversification is advised, and not to put all investments in Telus. The idea of playing the spread with a line of credit is not explicitly endorsed but the dividend yield is highlighted.

Mind Medicine (On Watchlist, High Volatility)

• Company Profile: A biopharmaceutical company developing psychedelic-based therapy for mental health.
• Funding: Raised $225 million in October for R&D and potential acquisitions.
• Market Potential: Mental health is seen as a huge area for the next 10-20 years, with potential leadership in anxiety, depression, and addiction treatment.
• Risks: Still in clinical stages, considered too volatile for immediate investment by the speaker.
• Analyst Consensus: Significant price target upside (85%), but comes with high volatility and risk. The stock has surged approximately 58% in the last 60 days.
• Recommendation: On the speaker's watchlist but not currently owned. More security and safety are desired before investing.

UnitedHealth Group (Exited Position, Fundamentally Strong)

• Company Profile: One of the largest private health insurers in the US.
• Recent Performance: Q3 earnings beat adjusted EPS, and revenue was $113 billion. Full-year guidance was raised.
• Speaker's Action: Trimmed losses, sold half the position, and eventually exited the stock.
• Reasons for Exit: Noise around the stock, regulatory scrutiny, potential margin pressures in government-backed plans, and leadership turnover.
• Recommendation: While the speaker exited, the stock scores 8 out of 10 fundamentally and 7 out of 10 for value. The decision to exit was based on finding other opportunities (AbbVie, Merck, TMO, Eli Lilly) and managing tax loss selling.

AltaGas (Watchlist, Utility Space Opportunity)

• Company Profile: Operates in the utility space.
• Performance: Q3 normalized EPS and revenue missed forecasts. EBITDA is up 13% year-over-year.
• Positives: Several new organic growth projects, on track for full-year guidance despite a slight miss. Opportunities in new export projects and system upgrades. Capital recycling for margin expansion.
• Risks: Debt is not well covered by operating cash flow. The utility segment has underperformed this quarter.
• Recommendation: Not currently owned but watched closely. Scores an 8 out of 10 for value. Analysts see about 10-12% upside. Alternatives like Enbridge, Hydro One, and CPS are held. Trading near $42, neutral from a technical perspective.

Interfor Corporation (Lumber/Timber, Cyclical)

• Company Profile: One of the largest lumber producers globally.
• Market Impact: Affected by tariffs on the US and recent layoffs.
• Business Tied To: Home building, demand is sensitive to mortgage rates, affordability, and new builds.
• Current Environment: Higher interest rates have slowed down builders, leading lumber producers to manage output to protect pricing.
• Strengths: Strong footprint in Canada and the US allows for production flexibility. Long-term housing need is positive.
• Recommendation: The lumber cycle is still finding its footing. While not currently owned, it's being watched. The business is cyclical, and near-term demand is impacted by housing market stability issues.

Enbridge (Hold, Quality Infrastructure)

• Company Profile: A high-quality energy infrastructure company.
• Performance: Has been underperforming the market, along with the broader energy sector, due to oil price movements.
• Strengths: Transports about 25% of North American oil and 20% of US natural gas. 95% of its free cash flow is backed by long-term contracts.
• Dividend: Offers a decent dividend yield of about 5.7%.
• Recommendation: Hold. The stock scores an 8 out of 10 for value, with about 6% upside potential. The company's diverse operations (liquid pipelines, gas distribution and storage, renewable power) are expected to perform well.

Past Picks Review

Thermo Fisher Scientific (TMO) (Add to Position, Strong Fundamentals)

• Initial Pick: November 5th of last year at $560.79. Current price around $561.30 (under 1% return).
• Recent Performance: Has been an underperformer but is showing signs of a turnaround.
• Speaker's Action: Owns and likes the stock. Added in March and June, trimmed in October, up about 14% on the position.
• Strengths: Leader in scientific instruments and lab solutions. Demand is strengthening as pharma and biotech spending picks up, especially in cell and gene therapy.
• Key Development: Partnership with OpenAI for generative AI in drug discovery and faster analysis of complex results.
• Financials: Healthy cash flow, funding innovation, share buybacks, and a dependable dividend.
• Recommendation: Add to the position. Ranks 8 out of 10 fundamentally, with double-digit upside expected.

Coca-Cola (KO) (Hold, Strong Brand and Pricing Power)

• Initial Pick: November 5th of last year at $65.37 US. Current price around $68.23 US (4% return, 6% total return).
• Growth Drivers: Unmatched global reach with 1.9 billion servings daily. Steady business growth driving strong demand.
• Pricing Power: Ability to raise prices by 5-6% while maintaining customer loyalty is a significant advantage.
• Portfolio Evolution: Includes billion-dollar brands like Fairlife (high-protein dairy drink).
• Dividend: Over 60 years of consecutive dividend increases, making it a strong dividend grower.
• Recommendation: Hold. Ranks 9 out of 10 fundamentally, with about 15% upside potential. The impact of obesity drugs on consumer health choices is acknowledged but not seen as a significant detractor from Coca-Cola's growth.

CES Energy Solutions (HSE) (Hold, Resilient Energy Play)

• Initial Pick: November 5th of last year at $8.17. Current price around $9.58 (17% upside, 19% total return).
• Company Profile: Supplies specialized chemicals to oil and gas wells for efficient operation.
• Revenue Model: Recurring revenue tied to production, not volatile drilling spikes, as products are used throughout a well's life.
• Performance: Activity has stabilized, and CES has been able to pass through pricing, supporting healthy margins.
• Positioning: Partner for producers focusing on efficiency and maximizing existing assets.
• Recommendation: Hold. Ranks 8 out of 10 fundamentally, with almost 20% upside potential. Seen as a resilient cash-generating name in the energy space.

New Top Picks

1. RB Global (RBA) (Buy)

• Company Profile: Evolved beyond traditional auctions to a full marketplace for buying, selling, and moving equipment and vehicles. Operates a large auto salvage marketplace.
• Growth Drivers: Improving profitability through added services (transportation, paperwork support). Volumes are recovering as confidence improves. New services and acquisitions are on the radar.
• Recommendation: Buy. Ranks 8 out of 10, with 24% upside potential. The company has a long-term growth runway.

2. TMX Group (X) (Buy)

• Company Profile: Operates the Toronto Stock Exchange and other trading platforms.
• Revenue Diversification: Data and analytics now constitute 42% of total revenue and are growing double digits, smoothing out revenue swings.
• Performance: Derivatives trading is accelerating (27% year-over-year growth). Healthy balance sheet and reliable dividend.
• Recent Pullback: Attributed to a slowdown in new listings, but strength in data and derivatives is expected to stabilize earnings.
• Recommendation: Buy. Ranks 9 out of 10, with just over 25% upside potential. The recent pullback is seen as a good entry point.

3. Meta Platforms (META) (Buy)

• Company Profile: A leader in social media and digital advertising.
• Recent Performance: Q3 revenue up 26% year-over-year. Advertising spend is increasing, reaching a massive audience (3.5 billion daily users across Meta platforms). Reels have an annual run rate of over $50 billion with improving monetization.
• AI Investment: Going all-in on AI (Meta AI) for users and business tools, aiming for smarter ads, deeper engagement, and leadership in the consumer AI shift.
• Recent Dip: Primarily due to a one-time tax payment impacting cash flow, not a change in the long-term story.
• Recommendation: Buy. The recent dip is seen as an opportunity. Ranks 9 out of 10 fundamentally, with about 27% upside potential. The speaker is adding to Meta on the sell-off.

Other Stock Discussions

• Freehold Royalties (Hold): Acquires and manages royalties. Steady production up 10% year-over-year. Raised dividend yielding about 7.7%. Focused on strategic US acquisitions. Analysts have a moderate "Buy" with limited upside. Defensive royalty model is good for income, but limited growth and past dividend cuts are considerations. Best suited for defensive investors.
• Tourmaline Oil Corp. (Attractive for Value Buyers): Involved in crude oil and natural gas. Strong free cash flow, low debt. Announced a $200 million secondary offering of Topaz Energy shares. Forward PE around 11 times suggests undervaluation. Potential infrastructure expansion could drive future growth. Stock trades below its 50-day and 200-day averages, with insider accumulation and institutional buying pressure. Not currently owned by the speaker but attractive for value buyers.
• Celestica (Wait for Pullback): Building the hardware backbone of AI. Revenue up 25% year-over-year due to hyper-scaling and data center expansion. Profitability is surprising with record high margins. Guidance was raised. The speaker would wait for a healthy pullback before buying.
• Element Fleet Management (Watchlist, Reliable Grower): Not a flashy stock but a reliable grower. Shift towards higher-margin services (42% of revenue tied to vehicle uptime and productivity) is working. Healthy cash flow allows for share buybacks and reinvestment. Expanding into smaller fleets and new solutions. A steady compounder with visibility in earnings.
• Constellation Software (Potential Value Entry): Decentralized management, strong free cash flow, disciplined M&A, global reach, proven long-term compounding. Shares are down 29% from their peak, reflecting concerns about AI native competitors and a recent CEO departure. Still seen as having more upside. A dip could add value for patient investors.
• MEG Energy (Hold): Has delivered impressive long-term returns. Focused on a takeover battle with Cenovus ($30 per share offer). Leader in Canadian oil production. Shares are up 24% year-to-date. Deal vote has been delayed. A "Hold" until clarity on the situation.
• Palantir (Hold or Take Profits): Becoming a core player in AI decision-making. New AI platform driving over 40% revenue growth. US government reliance for defense and intelligence software is strong (government sales up over 50%). Commercial adoption is accelerating. High P/E ratio suggests most growth is priced in. A healthy pullback would be an opportunity to add, but for now, it's a hold or take profits.