Market Call: David Burrows' market outlook on North American large cap stocks

Key Concepts

Market Breadth: The extent to which stock price advances or declines are widespread across a market. Narrowing breadth (fewer stocks participating in uptrends) is a bearish signal.
Capital Light: A business model that requires minimal capital investment to grow cash flows.
AI Inference: The process of using a trained artificial intelligence model to make predictions or decisions.
Long-Term Rates: Interest rates on debt instruments with maturities of 10 years or more.
Short-Term Rates: Interest rates on debt instruments with maturities of one year or less.
Valuation: The process of determining the current worth of an asset or company.
Decline Rates (Oil): The rate at which oil production from a well or field decreases over time.
Commodity Bull Market: A sustained period of rising prices for commodities like oil, gold, or uranium.
Technical Analysis: The study of past market data, primarily price and volume, to forecast future price movements.
Fundamental Analysis: The study of a company's financial health, industry, and economic conditions to determine its intrinsic value.
Moving Average: A technical indicator that smooths out price data by creating a constantly updated average price.
ETF (Exchange-Traded Fund): A type of investment fund that holds a basket of assets, such as stocks or bonds, and trades on an exchange like a stock.
Dividend Growth: An increase in the amount of dividends paid out by a company over time.
Leverage: The use of borrowed money to increase the potential return of an investment.

Market Call with David Burrows: Investment Strategies and Market Outlook

This summary details the insights shared by David Burrows, CEO and CIO at Barometer Capital Management, on Market Call, focusing on his investment strategies, market analysis, and specific stock recommendations.

Technology Sector: Shifting Exposure and NVIDIA's Position

David Burrows has significantly reduced his technology sector exposure over the past year, now holding only about 8%. While acknowledging NVIDIA's strong demand and impressive results, he highlights investor concerns regarding the substantial investment required for data center build-outs. The key question for investors is whether the returns generated from AI inference will justify these massive capital expenditures. Burrows notes a "wobble in the market" concerning the profitability of these investments. He still holds NVIDIA and Google but has diversified into other performing market segments, both domestically and internationally.

International Market Diversification

Barometer Capital Management has increased its exposure to international markets, with US weighting at a five-year low. This shift is driven by different sector weights in international indices compared to the S&P 500. For instance, financials constitute 31% of the MSCI World Index, and large banks are performing well globally due to favorable interest rate environments (low short-term rates and sticky high long-term rates) that allow for good margin opportunities. Global banks are considered inexpensive, with Santander trading at a significantly lower valuation (9x earnings) compared to Morgan Stanley (16x earnings), while offering a strong balance sheet and good growth. The firm is investing in Japan, Latin America, and the EU, with approximately 20% of its average portfolio now allocated to international ex-US markets, which have outperformed the US stock market for the last 18 months. This strategic shift was anticipated about four years ago, with a dedicated international ex-US fund launched two years ago, comprising 40 growth and 40 value companies.

Gold and Precious Metals: Consolidation and Long-Term Outlook

Regarding gold, Burrows reduced his gold weighting about six to seven weeks prior to the interview, following a strong rally. He anticipates a period of consolidation for gold, though he believes the market is in the early stages of a long-term bull market. Historically, gold bull markets move in three legs, and after the initial surge, a few months of consolidation are typical. He sees significant opportunities for intermediate and smaller gold companies in the next upward leg. While not holding Equinox Gold, he acknowledges the potential for growers in the sector. He does hold Kinross and Agnico Eagle, considered "thousand-pound gorillas" due to their multi-mine operations and geopolitical diversification.

Software Sector: Challenges for Adobe and AI's Impact

Burrows expresses caution on Adobe, citing a narrowing breadth in the NASDAQ (down to 36% of companies in uptrends from 87%) and the software sector's underperformance over the past couple of months, trading below key support levels. He notes that Adobe's own usage has decreased within his firm due to the availability of generative AI for image creation. He advises against buying the weakest stocks in a weak sector, preferring to focus on strong sectors and leading stocks within them.

Energy Sector: Oil Producers and Natural Gas Outlook

The firm has a significant energy weighting, predominantly in oil. Burrows highlights the attractiveness of long-life reserve companies, which are gaining favor with international investors and are less affected by the decline rates seen in US shale oil companies. Canadian long-lived assets are seen as trading at a premium due to predictable long-term production. These companies offer dividend growth opportunities due to debt paydown and excess cash flow. While natural gas tends to follow seasonally, the focus has been on oil producers. He notes the interesting divergence where long-life producers are performing well despite oil prices being less positive, suggesting potential future upside for the commodity. He is not overly concerned about oil oversupply in 2026, taking cues from market performance, such as Imperial Oil's consistent rise.

Uranium and Nuclear Power: Cameco's Potential

The outlook for uranium and nuclear power is considered strong, especially with the anticipated build-out of data centers requiring significant power production. Cameco, described as the "granddaddy" of uranium, has seen a pullback from over $150 to $120. Despite trading slightly below its 50-day moving average, long-term moving averages are sloping higher, and earnings estimates are increasing. Cameco has outperformed 80% of S&P companies over the last 52 weeks, and Burrows believes the market is in the early stages of a commodity bull market, making it a buy.

Consumer Sector: Weakness and Caution

Burrows maintains a virtually 0% weighting in the consumer sector, citing poor performance across homebuilders, retailers, restaurants, and leisure travel. While Walmart is a standout in retail, Costco is not. Barometer Capital Management exited its Costco position earlier in the year and also sold its Dollarama position, though Dollarama has since performed better than expected. Costco is trading below all moving averages, and Burrows would not invest until there is better breadth in the consumer sector. He points to weak employment data and a softening housing market as factors impacting consumer spending.

Canadian Equities: Strength in Energy and Banks

Canadian energy stocks, including CNQ (Cenovus Energy), Imperial Oil, and Suncor, are performing well, with the Canadian energy ETF (XEG) breaking out of a large range. Burrows sees CNQ as attractive with a 4% dividend yield, projected 20%+ annual growth for the next five years, and acting as a good inflation hedge. He believes the energy sector is in the early stages of a bull market.

Canadian banks are also viewed positively. With inflation expected to surprise to the upside, sectors benefiting from this environment are favored. The shift in power from borrowers to lenders since 2020, with higher long-term interest rates, is improving bank spreads. Canadian banks are considered high-quality, with a history of dividend growth. Mortgage delinquencies remain low, and TD is trading very well. The firm has over 20% exposure to banks, a significant allocation, and recommends buying Canadian banks for a rising stream of income.

For broad Canadian market exposure, Burrows suggests the iShares Core S&P/TSX Capped Composite Index ETF (XIC), noting that the Canadian market has outperformed the US market for 18 months. He also recommends the BMO Equal Weight Banks Index ETF (ZEB) for its rising relative strength and the iShares S&P/TSX Energy Sector Index ETF (XEG) for its breakout to new highs, anticipating a multi-year bull market in energy.

Infrastructure and Engineering: Atkins Realities Group

Infrastructure engineering companies are seen as being in a strong position, particularly those involved in power generation, such as Atkins Realities Group, which has a significant nuclear business. Mining engineering is also considered a good area. Burrows would buy Atkins Realities Group at its current price.

Pipeline Companies: Enbridge vs. Pembina

Both Enbridge and Pembina are considered interesting. Enbridge is noted for its capital allocation and growth opportunities, especially with evolving political views on pipelines. Pembina is more specific. For a main portfolio holding in transmission, Enbridge would be the preferred choice.

Vermilion Energy: Volatility and Weakness

Vermilion Energy is described as volatile and one of the weaker performing stocks in the energy group. While it has benefited from the general upturn in energy, many investors who bought it between August 2022 and recently are underwater, creating built-in selling pressure. Burrows prefers to own higher-quality securities with strong fundamentals and technicals, such as Imperial Oil, which is trading at all-time highs.

NextGen Energy: Uranium Development Opportunity

NextGen Energy is considered a high-quality development opportunity in uranium, located in a geopolitically friendly region (Saskatchewan). The key question is who will acquire the company. It has shown a nice breakout and pulled back to test that breakout point, making it a potentially good entry point. The risk is the broader market, but Burrows believes the Canadian market will continue to outperform.

Celestica: Data Center Exposure and Tech Caution

Celestica is a long-term holding for Barometer Capital Management, benefiting from its proximity to big data centers as a contract manufacturer. However, Burrows expresses caution regarding the tech sector, noting the NASDAQ's reversal from early gains. While Celestica is trading above its 50-day moving average, he advises keeping it on a tight leash due to concerns about tech's current behavior. He would not buy any tech stocks on the day of the interview but would consider Celestica if tech finds a way to reverse higher.

TMX Group: Long-Term Data Play with Short-Term Caution

Barometer Capital Management owns TMX Group and has previously highlighted it as a top pick. They exited the position in August due to technical weakness, with the stock now trading around its 200-day moving average. While TMX is a long-term data play with potential for higher volumes and financings in energy and materials, Burrows advises caution due to the current "trickier market backdrop" and prefers to focus on the strength in large banks within the financials sector.

New Top Picks

Tamarack Valley Energy (TVE): Focused on the Clearwater oil formation in Western Canada, characterized by low decline and high return heavy oil. The company is aggressively shifting to waterflood technology earlier in the well lifecycle, improving pressure support and oil recovery. Tamarack Valley is paying down debt and increasing shareholder returns, with projected production growth of 5-10% annually, financed by cash flow. Approximately 60% of free cash flow is used for debt reduction, with the remainder paid out in dividends, expected to grow around 20% annually. The company is nearing debt-free status and is considered shareholder-friendly with visible growth and falling leverage.
GE Aerospace (GE): Dominates the jet engine business, holding over 60% of the wide-body plane engine market, a growing segment. New generation engines are seeing frequent airline announcements and major orders. Services, representing 55% of revenue, account for 85% of profit, secured through long-term service contracts. GE Aerospace is the primary player in this market due to competitor Rolls-Royce's difficulties. The company offers good visibility on future cash flow, making it attractive in an uncertain market.
Cash: Burrows advocates for holding cash when market breadth weakens, as this is often a precursor to bear markets. Cash provides a buffer against market downturns and presents opportunities to deploy capital when breadth improves and stronger companies are exposed after a correction. He emphasizes that while cash is a poor long-term holding, it is a crucial tool for managing client exposure and risk. He currently holds 15-25% cash in portfolios.