Market Call: Michael Hakes' outlook on U.S. & Global Stocks

Here's a comprehensive summary of the YouTube video transcript:

Key Concepts

• Earnings Growth: The primary driver of market performance, especially in the coming years.
• Generative AI (Gen AI): A key technology expected to drive productivity gains and revenue growth across various sectors.
• Consumer Resilience: Crucial for market stability, but facing headwinds from recent economic events and weak manufacturing data.
• Inflation and Interest Rates: Expected to remain sticky due to deglobalization, but rates are projected to trend downwards in Canada and the US.
• Vertical Integration: A strategy where companies control multiple stages of their supply chain, seen as a significant advantage (e.g., Nutrien, UnitedHealth).
• Productivity Gains: Essential for companies to leverage Gen AI and drive efficiency.
• Deglobalization: A trend contributing to stickier inflation and business uncertainty.
• EBITDA: Earnings Before Interest, Taxes, Depreciation, and Amortization, a measure of a company's operating performance.
• Autonomous Driving (Robo-taxis): A developing technology with implications for companies like Uber and Waymo.
• Membership/Subscription Models: Strategies to increase customer loyalty and recurring revenue (e.g., Uber One).
• Pipeline Readouts (Pharma): The sharing of analyzed data from drug trials with investors, crucial for pharmaceutical company valuations.
• Data Centers: Infrastructure critical for AI and cloud computing, driving demand for related technologies and services.
• Disintermediation: The process where a company's product or service is bypassed by a new competitor or technology, impacting companies like Zoom.

Market Outlook and Economic Trends

1. North American Markets and Year-End Expectations:

• The North American markets started the week and month down.
• The focus is shifting towards 2025, with expectations of a "rare three-peat of double-digit earnings gains."
• This growth is primarily driven by stability, but the "easy money" from multiple expansion is likely over.
• Earnings execution will be paramount in 2025, with the ability to leverage business models through Generative AI (Gen AI) and drive revenue growth being key.

2. Sector Focus for Gen AI Leverage:

• While specific sectors haven't fully leveraged Gen AI yet, Financials and Healthcare are identified as having significant potential for productivity gains.

3. Consumer Resilience and Economic Indicators:

• Consumer resilience is identified as the "million-dollar question" for 2025.
• Recent US shutdowns and weak manufacturing numbers indicate a lack of traditional consumer exuberance.
• Unemployment remains at a good level in the US (4.4%).
• Inflation is expected to be "stickier" due to deglobalization, continued tariff threats, and uncertainty, leading to business uncertainty.
• Despite uncertainty, rates are expected to trend downward directionally in both Canada and the US, which will support the market.

4. Central Bank Actions and Market Pricing:

• Central bank expectations are "partially baked in" to the market.
• Estimates for the S&P 500 for next year range from $300 to $350, up from an expected $275 this year.
• This translates to potential earnings growth of 9% to 18% for next year.
• The higher end (18%) assumes faster-than-expected productivity gains and sustained consumer resilience.
• The lower end assumes less consumer resilience and fewer productivity gains.

Company-Specific Analysis and Investment Recommendations

1. Nutrien (NTR):

• Description: A global heavyweight in the agriculture space, dominating wholesale production of potash, nitrogen, and phosphate, coupled with a massive global retail network selling directly to farmers.
• Performance: Stock is up approximately 20-25% over the last year.
• Drivers: Tightening global potash market due to production cuts from competitors, and stabilized fertilizer prices after recent volatility.
• Strategy: Management is executing a "simplify and focus" strategy, including aggressive cost-cutting (aiming for $200 million in savings) and leveraging the retail network for proprietary products (special seed blends) which carry higher margins than generic fertilizers.
• Valuation: Trading at approximately 13 times earnings, in line with the average.
• Recommendation: Hold.

2. DoorDash (DASH):

• Description: Morphing from a delivery app into local logistics.
• Performance: Stock has been choppy, moving from $280 down to $200, but up $8 on the day of the discussion ($206.39).
• Strategy: Attempted acquisition of Deliveroo in October to expand into the UK, Europe, and the Middle East.
• Valuation: Expensive, with limited earnings but some EBITDA. Moving from unprofitable to more profitable.
• Outlook: Potential to compete with Uber in the long term if successful in the delivery business.
• Recommendation: Not currently owned, and not on the "focus list" for future investment.

3. NVIDIA (NVDA):

• Description: Leader in offering chips for AI applications to major tech companies (Meta, Google, Microsoft).
• Performance: Hovering around $179-180, significantly off its highs over $200.
• Demand: Insatiable demand for its chips.
• Recent Earnings: Q3 numbers were excellent, exceeding high expectations. The stock initially rose on the announcement but ended the day down, indicating high expectations are priced in.
• Valuation: Trades at approximately 39 times earnings for this year and 23-24 times earnings for next year.
• Growth: Still experiencing dramatic growth, with 55% revenue growth and 61% EPS growth projected for next year. Benefits from strong pricing.
• Competition: Broadcom and Google have announced customers are buying their chips, potentially as alternatives to NVIDIA, though this is still uncertain due to NVIDIA's high pricing.
• Key for Next Year: Demand for chips must continue, and companies buying these chips need to see their own revenues increase from AI applications (e.g., monthly subscriptions to large language models, corporate utilization).
• Recommendation: Cautious. The firm owns NVIDIA and Broadcom.

4. Uber (UBER):

• Description: A long-term holding for the firm, previously owned when it was not profitable.
• Performance: Weak over the last few months, pulling back about 10%.
• Outlook: Potentially hitting $10 billion in EBITDA next year, up 25% from this year, indicating strong growth.
• Overhang: News about robo-taxis (Tesla, Waymo) and Waymo launching independently in some markets. Waymo and Uber are partners in Austin, Atlanta, and Phoenix, but Waymo's independent ventures create uncertainty about future reliance on Uber.
• Strategy: Successfully launched a driverless fleet with "We Ride" in Abu Dhabi. Strong performance in their "Uber One" membership model, which offers food and mobility with high customer stickiness, reducing the likelihood of using competitors like DoorDash or Lyft.
• Recommendation: Positive on Uber.

5. Netflix (NFLX):

• Description: The leader in streaming services, with strong audience engagement.
• Performance: Stock has been trending down since late summer, currently at $155, up slightly on the day.
• Drivers: Crackdown on password sharing forcing users to pay, and the rollout of an ad-supported tier for price-sensitive customers.
• New Strategies: Expanding into live events (WWE, NFL Christmas games).
• Valuation: Not cheap, trading at 40-45 times earnings on 15% revenue growth.
• Competition: Best-in-class player, having effectively won the streaming wars against Disney+ and Warner.
• Recommendation: Would become more interested at $90 or below. The recent slide is attributed to overall market weakness, not specific Netflix news.

6. Bank of Nova Scotia (BNS):

• Description: A major Canadian bank.
• Performance: Stock has had a good move this year, from the mid-$60s to $96.
• Strategy: Considered a "turnaround" in Canada, rationalizing South American operations. New CEO's initiatives are showing results.
• Valuation: Trades at roughly 13 times earnings.
• Yield: Offers a nice 4.5% yield, potentially higher than other banks.
• Recommendation: Positive on Scotia, the firm owns it in both Global Growth and Income Growth portfolios.

7. Power Generation Space (Natural Gas, Nuclear):

• Hammond Power Systems: Owned in the Global Growth Fund, leveraging its position in dry-type transformers for data center build-outs. Crucial for ensuring power quality for data centers.
• Natural Gas Consumption: Companies like Enbridge, Northland Power, and Capital Power have potential exposure to increased demand driven by generative AI and data centers.
• Oil: A debate within Murray Wealth Group. The speaker is semi-bearish, but colleagues are more positive. BP and Whitecap are owned. Oil is considered a long-term portfolio component, especially if Canada increases production and exports.

8. Nu Holdings (NU):

• Description: A digital bank primarily serving the underserved market in Latin America, with over 100 million customers.
• Strategy: Taking advantage of large banks not serving this consumer segment due to perceived risk. Recently obtained a banking license in the US to leverage its platform.
• Growth: Revenues growing between 20-30% for the next 2-3 years.
• Execution: Strong track record of execution.
• Recommendation: Positive on Nu, a favored holding over the next 3-5 years.

9. Aritzia (ATZ.TO):

• Description: A Canadian apparel company expanding in the US.
• Performance: Significant growth over the past year (143% upside total return), from $45.60 to $110.69.
• Strategy: US expansion story with a long runway ahead (US market is 10x larger than Canada, with only 70 stores in the US). Margins have recovered after fixing supply chain and inventory issues. Strong e-commerce presence. Successful real estate strategy with flagship stores acting as brand billboards.
• Valuation: Has become more expensive.
• Outlook: Bullish estimates see it in the $121-125 range. Flawless execution is needed for continued stock appreciation.
• Competition: While competition exists in the US, Aritzia is relatively unknown there, and same-store sales remain strong as customers trial the brand.
• Recommendation: Still owned, but trimmed due to increased valuation.

10. Airbus (EASY.US):

• Description: A long-term hold due to the attractive industry sector.
• Performance: Up 46% in the US, with a 48% total return over the past year.
• Recent Issues: Software glitch requiring updates to A320s and a production/quality issue in the fuselage of a limited number of A320s.
• Market Concern: Street is concerned about meeting 2025 production targets.
• Demand: Sold out through the 2030s.
• Supply Chain: Improving over the last 2-3 years.
• Recommendation: Will be buying Airbus here. The current issues are seen as minor hiccups.

11. AstraZeneca (AZN):

• Description: A pharmaceutical company focusing on oncology, cardiovascular, and rare diseases.
• Performance: Up 28% in the US, with a 31% total return over the past year.
• Strategy: "Ambition 2030" aims for $80 billion in revenue by 2030 (from $60 billion today), implying a 7% growth rate.
• Drivers: Successful drug pipeline readouts have increased investor confidence in achieving 2030 goals. More readouts are expected through 2026.
• Previous Issues: Experienced headline risk in China in the previous year.
• Recommendation: Continue to like AstraZeneca at current levels. The firm added to its investment earlier in the year.

12. Data Centers and AI Ecosystem:

• Investment Approach: Bottom-up company selection, but a thematic approach can be framed around digital AI and data center growth.
• Buckets:
  • Semiconductors, AI, and Infrastructure: NVIDIA, Qualcomm, Broadcom, Hammond Power. These companies supply chips and power infrastructure.
  • Data Center Build-out: Companies like Meta, Google, and Microsoft are building data centers as part of their business. They are not pure-play data center companies but are driven by this growth.
• Key Difference from Internet Boom: Today's companies (Meta, Google, Microsoft) are highly profitable, unlike many unprofitable companies during the internet boom. While they are investing billions, they are not at risk of going out of business due to these investments.

13. Zoom Technologies (ZM):

• Description: A video conferencing platform.
• Performance: Up only 3.5% over the year, with an up-and-down ride since its April low. Currently at $85.56.
• Competition: Robust competitive environment from Microsoft Teams and other integrated offerings.
• Growth: Not great over the last 2-3 years (4%, 3% revenue growth). Bottom line growth is barely better due to pricing pressure.
• Disintermediation: Zoom is being disintermediated by larger, more robust competitors that can package more services around their offerings.
• Recommendation: Cautious. Not on the radar unless a significant new product is introduced. The street target is around $94. Management's short-term strategy to turn the company around is seen as very difficult.

14. Ford (F):

• Description: A traditional OEM with three distinct businesses: traditional gas/hybrid, new EV start-up, and Ford Pro (commercial van/fleet business).
• Performance: Stock is quite cheap, with slow top-line growth (flat).
• EV Investment: Significant investment in EVs, but the market has slowed down in the US, impacting profitability. This is an overhang.
• Tariffs: Still a flux in terms of impact on pricing.
• Market: A very tough, mature market with increasing competitors.
• Recommendation: Not on the radar right now. The firm owns Linamar (a part supplier) but no exposure to well-known OEMs.

15. UnitedHealth (UNH):

• Description: The "central nervous system" for the US healthcare system, vertically integrated with United Healthcare (insurance) and Optum (hospitals, data, pharmacy benefits, payment systems).
• Performance: Stock has been significantly beaten down over the last 12 months, trading at $325.67 (down from a high of $610.79 a year ago).
• Headwinds:
  • Government tightening purse strings on Medicare Advantage, putting reimbursement rates under pressure and hurting margins.
  • Utilization is going up, meaning more people are using services at lower prices than expected, squeezing margins.
  • Department of Justice antitrust investigations have scared off investors.
• New Leadership: New CEO Stephen Helmsley (former CEO) has set clear targets for 2026 and 2027.
• Valuation: Company is "under-earning." If the stock can return to close to $25 in earnings (as in 2023), there could be significant upside over the next 18-24 months. Street expects $20.27.
• Recommendation: Top pick.

16. Lululemon (LULU):

• Description: A vertically integrated retail model selling exclusively through retail stores and online.
• Performance: Stock has been under pressure due to a mature US market with negative same-store sales for about 24 months.
• Drivers: Doing very well internationally.
• Outlook: Stock needs stabilization or growth in the US and continued international expansion.
• Valuation: Trades at about 14 times earnings, historically traded at 30 times. This valuation discounts it to almost a zero-growth company.
• Recommendation: Expects the stock to be closer to $300 in two years, believing the company will stabilize the US market and continue international growth.

17. Neat.com (KCI.TO):

• Description: A Canadian technology company in the life sciences sector, providing a cloud platform for digital validation and digitization of drug factories, replacing paper-based systems for FDA compliance.
• Performance: Strong performer up until March, peaking around $7. Has been weaker recently due to two quarters of slightly weaker-than-expected revenue.
• Recommendation: Very positive on Neat over the next 18-24 months, expecting continued execution.

Past Picks Review

1. Aritzia (ATZ.TO):

• Recommendation: Still owned, but trimmed due to increased valuation.
• Performance: 143% upside total return over the past year.
• Key Points: US expansion, store openings, strong online delivery, fixing supply chain issues, profitable e-commerce, successful flagship store strategy.

2. Airbus (EASY.US):

• Recommendation: Will be buying Airbus here.
• Performance: 46% upside, 48% total return over the past year.
• Key Points: Long-term hold, attractive industry, demand sold out through 2030s, improving supply chains. Recent production issues are seen as minor hiccups.

3. AstraZeneca (AZN):

• Recommendation: Continue to like AstraZeneca at these levels.
• Performance: 28% upside, 31% total return over the past year.
• Key Points: Added to investment earlier in the year, focus on oncology, cardiovascular, and rare diseases, strong pipeline readouts, "Ambition 2030" revenue goals.

Conclusion/Synthesis

The market outlook for the coming years is cautiously optimistic, with a strong emphasis on earnings execution and the transformative potential of Generative AI. While consumer resilience remains a key variable, expected interest rate declines are seen as a supportive factor. The discussion highlights a shift from broad market gains driven by multiple expansion to a focus on companies that can demonstrate tangible productivity improvements and revenue growth through technological adoption and strategic execution. Several companies across different sectors, from agriculture and healthcare to technology and industrials, are identified as having strong potential, with specific recommendations ranging from holds to buys, often contingent on valuation and continued execution. The analysis also underscores the importance of understanding a company's underlying business model, competitive landscape, and long-term strategic direction in navigating the evolving economic environment.