Market Call: Paul Harris' market outlook on North American & global stocks

Key Concepts

• Market Sentiment and Economic Indicators: Discussion on how market sentiment is influenced by economic data, particularly interest rate expectations and unemployment figures.
• Technology Sector Performance: Analysis of the rally in tech stocks, driven by strong earnings from major players like NVIDIA and the impact of AI.
• Monetary Policy: The market's anticipation of interest rate cuts by the Federal Reserve in December.
• Global Economy: The resilience of the US economy despite global impacts and the potential for recession.
• Tariffs and Consumer Impact: The effect of tariffs on consumers, with retailers' earnings expected to provide further insight.
• Company-Specific Analysis: Detailed reviews of various companies across different sectors, including space technology, payment processing, oil and gas, e-commerce, rail, telecommunications, banking, asset management, animal health, software, and index compilation.
• Investment Strategies: Emphasis on disciplined acquisitions, share buybacks, dividend increases, debt reduction, and focusing on core businesses.
• Artificial Intelligence (AI): Its growing influence on various industries, including asset management and software.
• Valuation and Entry Points: Identifying attractive entry points for stocks, considering current valuations and potential pullbacks.

Market Overview and Economic Outlook

The market is currently experiencing a rally, particularly in the technology sector, partly due to positive earnings reports from companies like NVIDIA. This has eased anxieties surrounding continued capital expenditure. A significant factor boosting market sentiment is the increased probability of the Federal Reserve cutting interest rates in December, with expectations shifting from a 40% chance to around 80%.

While the headline unemployment number appears positive, revisions to previous months suggest a more nuanced picture. However, overall economic statistics indicate that the US economy is not collapsing as some had predicted. The sheer size and diversity of the US economy have absorbed global impacts more effectively than anticipated, and US companies have demonstrated a greater ability to manage challenges. The expectation of a recession at the beginning of the year is diminishing.

Tariffs, with an average rate of 18%, have also played a role in supporting the economy and stock market. The stock market's performance is primarily driven by earnings, which have generally exceeded expectations. The upcoming earnings reports from retailers will be crucial in assessing the actual impact of tariffs on consumers.

Company-Specific Analysis and Investment Perspectives

MDA Space

• Performance: MDA reported strong numbers, exceeding market consensus for revenue and EBITDA.
• Outlook: The company has a strong backlog, which is a positive indicator, though potential delays need to be monitored. Global Star's satellite deployment is expected to proceed, contributing to growth.
• Valuation: Trades at 13 times next year's earnings with no yield.
• Key Argument: MDA is expected to benefit from increased global defense spending. While not currently owned by the firm, it's considered an attractive investment due to its reasonable valuation and potential upside from the defense sector. The company is executing well, and Global Star's success could drive top and bottom-line growth.

Visa

• Recent Developments: A recent agreement with processors and retailers could lead to more transactions shifting to debit.
• Impact of Debit: While debit transactions will have an impact, the agreement's specifics are complex and not fully clear.
• Visa's Business Model: Described as a "tollbooth," Visa does not take on credit risk, which is borne by the issuing bank. Visa earns a fee on each transaction.
• Key Argument: The impact of debit is expected to be less significant than anticipated due to the prevalence of credit card rewards programs (points for travel, etc.) that incentivize consumers to use credit cards. Debit cards deduct funds immediately, while credit cards offer a payment grace period.
• Global Growth Potential: Visa has opportunities for growth in emerging and underdeveloped markets where cash is still prevalent.
• Outlook: The stock is still favored due to its strong cash flow, high margins, and global growth potential. The point system's potential changes are seen as more of a bank issue than a Visa issue.

Canadian Natural Resources Limited (CNQ)

• Position: Considered one of the best oil companies in Canada.
• Performance: Despite a challenging oil market, CNQ has performed well, moving sideways.
• Key Strengths: The company is focused on cost of capital, share buybacks, dividend increases, and debt reduction. These strategies have been crucial for its resilience, especially after the 2020 oil price collapse.
• Outlook: Expected to benefit from any increase in oil prices. The valuation is considered attractive, with a good dividend yield.
• Key Argument: In an environment of overcapacity concerns in the oil sector, owning large-cap companies like CNQ or Suncor is preferred over smaller ones. CNQ is praised for its execution, management, and ability to bring projects online within cost targets. Mergers have been strategically timed when assets were cheap.
• Analyst View: Desjardins has a "hold" rating, citing the stock's run-up.

Shopify

• Performance: Shopify has performed exceptionally well.
• Business Model: A strong business expected to generate significant free cash flow. The company has divested non-core assets and is focused on its core business.
• Growth Profile: Strong growth potential, particularly among small businesses.
• Key Argument: Shopify benefits from the broader tech infrastructure, including AI. It's a well-run Canadian business with strong execution.
• Investment Strategy: The ideal time to buy is during a market downturn.

Canadian National Railway (CNR)

• Current Situation: The stock is trading near a 4-5 year low, significantly impacted by trade issues with the United States, particularly concerning the automotive industry.
• Business Model: Highly consolidated with limited pricing pressure. Focus on safety and understanding its business model for better returns.
• Key Argument: CNR has divested non-core assets. The stock is expected to perform well as trade concerns with the US diminish. It's also highlighted as a more environmentally friendly transportation option compared to road transport.
• Outlook: Despite a tough year, improvement is expected in the stock price.

Telecommunications Stocks (Bell, Rogers, Telus)

• Challenges: The expected benefits of 5G have not fully materialized. High capital expenditure is a significant factor. Bell and Rogers have media assets, which are seen as a distraction from a pure telecom play.
• Regulatory Environment: The CRTC's approach to increasing competition is viewed as difficult for the industry, especially given the cost of providing services in less populated areas.
• Bell: The dividend cut was a necessary but delayed action. The stock is moving sideways.
• Telus: Has experienced a difficult period, hitting a year-long low. Concerns exist about its long-term ability to cover its dividend.
• Key Argument: The management of these companies is criticized for being slow to make necessary decisions, such as dividend cuts.
• Alternative Investments: Financials, healthcare in the US are considered better investment areas than telecommunications currently.

Banco Santander

• Business: A Spanish bank with significant operations in the UK, US (Southern states with large Hispanic populations), Latin America, and South America.
• Key Argument: It's a good play on emerging markets with a strong European base. While investment banking ventures have faced challenges, the bank is expected to perform well due to ongoing deregulation in the US and Europe, which will free up capital.
• Outlook: A strong retail bank with upside from emerging markets and a solid European franchise.

Alphabet (Google)

• AI Transformation: Google has shifted from being perceived as an AI "loser" to a "winner."
• Valuation: Trades at one of its lowest valuations.
• Performance: Reported strong numbers. Gemini 3 has been positively received.
• Key Strengths:
  • Cloud Business: A significant and often overlooked asset.
  • Search: While not growing aggressively, search is not being displaced by ChatGPT as feared.
  • YouTube: Continues to perform well and is monetized effectively through advertising.
  • Waymo: The driverless car service is operational in several US cities and expanding, with positive user feedback.
• Key Argument: Google is a "hyperscaler" with a strong cloud business that can leverage its capacity. The stock is recommended for ownership.

Novo Nordisk

• Recent Setback: The stock experienced a significant drop (around 8%) due to issues with an Alzheimer's drug trial, which was considered a "lottery ticket."
• Valuation: Now trading at 13 times earnings, a considerable decrease from previous levels. Offers a 3.4% dividend yield.
• Key Strengths:
  • Weight Loss Drug (Ozempic): Strong brand recognition. Expected to see increased volume next year due to lower prices and insurance coverage.
  • Broader Health Benefits: The drug has multiple benefits beyond weight loss, including addressing diabetes, heart disease, stroke, fatty liver, sleep apnea, and reducing alcohol/drug use.
• Outlook: Recommended to buy at current levels, considering the drug's wide-ranging health benefits and potential for increased volume.

MSCI

• Business: Creates indexes, risk management products, and analytics for asset managers in both public and private markets.
• Key Strengths: High gross margins (around 75%), operates in an oligopoly (with FTSE and S&P 500).
• Outlook: Expected to perform well as more assets move into private markets. Its products are essential for benchmarking and portfolio analytics in the asset management industry.

Gold and Agnico Eagle Mines

• Gold Outlook: Gold is not expected to remain at current levels a year from now. A pullback is anticipated due to too many investors already being in the market.
• Agnico Eagle: Considered one of the better names in the gold mining sector.
• Key Argument: Gold mining is a difficult commodity to extract. Lower gold prices are expected into next year, and holding significant gold positions might not be advisable going into 2026.
• Recommendation: If holding gold for diversification or as a hedge against political turmoil, an ETF holding bullion is preferred over gold stocks. Existing gold positions should be reduced.

Uber

• Performance: The company has shown better returns recently, driven by the CEO's focus on the core business and divestment of non-core assets.
• Key Strengths:
  • Core Business Focus: Divested assets in other parts of the world and the Uber Eats business.
  • Robo-Taxi Potential: Expected to be a positive factor.
  • Service Quality: Praised for its reliability and convenience, even for elderly users.
• Outlook: Expected to become more profitable and deliver strong returns over the next several years.

Constellation Software

• Challenges:
  • CEO Retirement: The retirement of the key figure who built the company and executed deals.
  • AI Impact: Uncertainty about how AI will affect its business.
• Business Model: Acquires vertical software companies (e.g., for golf clubs) and optimizes pricing.
• Key Argument: The company remains disciplined with its acquisition hurdle rates. It's an allocator of capital rather than a traditional software company. The risk of losing the instrumental CEO is mitigated by the placement of capable successors. The focus remains on small, consistent acquisitions.
• Investment Strategy: The stock is considered a buy at current levels, especially if the company continues its historical execution.

Global Banks (Barclays vs. US Banks)

• Barclays: Not considered a truly global bank in the same vein as major US banks.
• US Banks (Bank of America, JPMorgan): Considered more global due to their investment banking, retail, credit card, and asset management businesses.
• US Banking Outlook: Deregulation under the Trump administration is expected to benefit US banks, leading to consolidation and increased capital availability for buybacks, dividends, or expansion.
• Risks: Potential for overleveraging, similar to the pre-2008 period.
• Recommendation: US banking industry offers more opportunity than many other sectors.

Celestica

• Performance: Has experienced a massive run, benefiting from the AI trade.
• Valuation: Likely trading at a premium.
• Recommendation: Wait for a pullback before buying. The company has executed well during this period.

TD Bank

• Recent Issues: Faced problems last year.
• Management Change: New CEO and management team in place.
• US Operations: Unable to make acquisitions in the US due to regulatory restrictions, which is seen as a benefit, allowing focus on risk management and its US franchise. The US franchise's Return on Equity (ROE) is relatively low, presenting an opportunity.
• Canadian Operations: Remains strong.
• Outlook: The stock has seen a bounce due to the CEO's plans. A pullback is expected next year, presenting a buying opportunity. TD will also benefit from US regulatory changes regarding capital.
• Recommendation: If not already owned, a pullback is the time to buy. Current price levels are considered high.

Fiera Capital

• Business: An asset management company with diversification into real estate and other areas.
• Challenges: Relatively small scale in the broader asset management industry. Margins are declining.
• Recommendation: Not recommended to own at current levels, even with an attractive dividend. Larger-scale asset managers with better growth and margin management capabilities are preferred.

Power Corporation

• Ownership: Owned by the firm.
• Key Strengths: Large scale in asset management (Mackenzie side), allowing better management of declining fees.
• Outlook: Possesses a great yield.

Top Picks

1. FirstService:

   • Business: Residential property management and services (e.g., California Closets, Paul Davis).
   • Growth Strategy: Disciplined acquisitions and organic growth. The fragmented nature of the business (many "mom and pop" operations) provides acquisition opportunities.
   • Valuation: Trades around 24 times earnings with a low dividend yield.
   • Recommendation: A great business with continued growth potential through acquisition and organic expansion. Management is disciplined. Considered a good time to buy.

2. Zoetis:

   • Business: The world's largest animal care company, spun off from Pfizer.
   • Pet Care Growth: Significant growth in the pet care sector, though slower than during COVID.
   • Valuation: Trading at one of its lowest valuations.
   • Key Strengths:
     • High Out-of-Pocket Costs: Pet owners often spend significantly on care, with limited insurance uptake.
     • Drug Development: Shorter trials and adaptation of existing human drugs, with limited generics.
     • Livestock Business: Steady growth, expected to improve as developing countries consume more protein.
   • Competition: Operates in an oligopoly with few competitors.
   • Recommendation: A great company with few competitors, offering an opportunity to buy at current levels. Pet owners treat their animals as family and will spend on their care.

3. Adobe:

   • Market Perception: Wall Street believes AI will negatively impact Adobe.
   • Financials: Strong revenue growth (from $3.4 billion in 2020 to $6 billion this year). Consistent share buybacks (around 10% per quarter).
   • Key Argument: A solid growth company with fewer shares outstanding creates a strong compounding machine. Revenue growth is around 10-12%.
   • Valuation: Trading at one of its lowest valuations.
   • Recommendation: Worth buying at current levels due to its low valuation, consistent share buybacks, and solid growth. The impact of AI is not yet fully realized but is expected to materialize.

Conclusion

The market is showing resilience, driven by positive economic indicators and a shift in interest rate expectations. While certain sectors face headwinds, opportunities exist in companies with strong fundamentals, disciplined management, and clear growth strategies. The increasing influence of AI is a significant theme that will continue to shape industries and investment landscapes. Investors are advised to look for attractive valuations and consider buying during market pullbacks.