Market Call: Tim Regan's market outlook on North American large caps

Key Concepts

• Market Sentiment: Investor concerns, nervousness, and expectations influencing stock performance.
• Valuation: The concept of companies being "priced to perfection" or overvalued, particularly in the tech sector.
• Two-Tiered Market: A market where some stocks are overvalued while others are undervalued or correctly valued.
• Earnings Season: The period when companies report their financial results and how the market reacts to them.
• Speculative Assets: Investments driven by speculation rather than underlying business fundamentals.
• Dividend Yield: The annual dividend payment as a percentage of a stock's price.
• Capital Spending: Investments made by companies in their operations and growth.
• Commodities: Raw materials like oil and gold, and their price volatility.
• AI Build-out: The infrastructure and technology development related to Artificial Intelligence.
• Infrastructure Spending: Government and private investment in public works and facilities.
• Asset Management: The business of managing investments for clients.
• Private Equity: Investment in companies not listed on public exchanges.
• ETFs (Exchange Traded Funds): Funds that track an index, sector, or commodity, traded on stock exchanges.
• Multiple Expansion: An increase in the price-to-earnings (P/E) ratio of a stock.
• Vendor Financing: A form of seller financing where a seller provides a loan to a buyer to facilitate a sale.

Market Overview and Investor Concerns

The market has been in a "doldrums" for the past week, which is unusual given historical year-end strength. Tim Regan of King West and Company attributes this to several factors. While markets have seen a great run, the underlying businesses need to catch up. AI and gold have been speculative elements driving market movement, while other sectors have been "flatlining" for months. Regan believes the market is in the very early stages of money balancing out into other sectors, but it needs to "wring out the excess speculative speculation." He notes that many companies and assets are currently "very pricey."

Earnings Season Performance

This earnings season has been characterized by high expectations. Companies that have disappointed the street, even if they surpassed estimates, have been "severely punished." Conversely, some companies that have well surpassed analyst expectations have only seen modest gains. This indicates a high level of nervousness and elevated expectations among investors. Regan likens this market dynamic to 1999-2000, where even after the tech bubble crash, a significant portion of stocks continued to rise for two years, highlighting a "two-tiered market" between overvalued and correctly or undervalued assets.

End-of-Year and 2026 Outlook

As the year draws to a close, investors are looking for more clarity on tariffs and key economic indicators in Canada. The US economic indicators are also being watched now that the "sabbatical is over." A significant event investors are focused on is NVIDIA's earnings, which Regan identifies as a "bellwether" for companies that have driven the market this year. He expresses uncertainty about NVIDIA's ability to meet expectations and the potential market reaction if they stumble, stating, "if NVIDIA stumbles and does not meet expectations, it could be a bad tomorrow for NVIDIA."

Company-Specific Analysis and Investment Recommendations

Molson Coors (TAP)

• Business Trend: Beer consumption, especially in North America, has been declining over the last number of years. Molson Coors is struggling to fight this macro trend despite efforts to introduce other beverages like mixed drinks.
• Valuation: The stock may appear "cheap," but the underlying business is declining.
• Recommendation: Investors should wait for a macro environment shift where people return to beer drinking, which statistics suggest is unlikely in the near future. Younger generations are drinking less alcohol overall but opting for higher-quality brands and cocktails over traditional beer.

Telus (T)

• Current Situation: The stock has been "hard-pressed" and experienced recent downgrades, with J.P. Morgan questioning the sustainability of its dividend.
• Dividend Concerns: While there's concern about a potential dividend cut, Regan notes that Telus's capital spending is expected to decrease significantly in the next couple of years (from 17% to 12%), which should allow them to more than cover their dividend.
• Valuation: The market has "punished" Telus, leading to a very high dividend yield, currently around 8.95%.
• Recommendation: Regan's firm owns Telus and is "sitting and waiting." He suggests investors might consider doing the same, acknowledging that the underlying business is not a high-growth one but still has "some legs to it."

Canadian Natural Resources (CNQ)

• Performance: The stock has been moving up "very nicely" over the last three months.
• Oil Market: Oil prices have been stuck around $60 a barrel. Enthusiasm for data build-out has not yet extended to oil or natural gas.
• Company Management: CNQ is described as a "superb" and "superbly managed" oil company.
• Pipeline Impact: The construction of new pipelines in Canada is narrowing the spread between Canadian oil and West Texas Intermediate (WTI) and Brent crude, which is positive for the future.
• AI Connection: The AI build-out requires energy from various sources, including oil and natural gas, until more renewable energy infrastructure is in place.
• Recommendation: Regan's firm owns CNQ and "doubled down" on their position about a month ago. He recommends CNQ as a place to be if one wants to own oil, even though forecasting oil prices is difficult.

Constellation Software (CSU)

• Concerns: The company faces concerns regarding the software business in general due to the emergence of AI and the departure of its founder, Mark Leonard, for health reasons. This has led to a significant drop in its stock price since the summer.
• Valuation: Even at its current level, Constellation Software is considered "priced very highly."
• Business Model: The company excels at acquiring other software companies, particularly those with monopolistic characteristics.
• Recommendation: Regan's firm does not own CSU but has looked at it. They would likely need the stock to "go down a little bit more" before considering a purchase. The primary concern is the price, not the business model itself, which is described as "wonderful" and "great."

GFL Environmental (GFL)

• Business: A waste management company.
• Performance: Regan's firm owns GFL and "quite likes it," considering it a "wonderful long-term company."
• Valuation: While headline earnings might appear expensive, GFL generates significant cash flow due to its accounting and business roll-ups.
• Growth Potential: The waste management business has a "very long runway," especially in the US, where they acquire smaller operators and add incremental value.
• Market Structure: The waste management space is described as more "oligopolistic" than competitive, with GFL being one of the larger players.
• Recommendation: GFL has been in their portfolio for five years, and they would be "active buyers" if they didn't have enough.

Royal Bank of Canada (RY)

• Management: Considered the "best managed bank in Canada" and potentially one of the best globally.
• Business Segments: Strong performance in Canadian retail, wealth management, commercial banking, and capital markets.
• Recommendation: For long-term holders with significant capital gains, Regan advises holding onto the stock, taking income from the dividend, and expecting Royal Bank to perform well over the next 12-16 quarters. The market will dictate short-term movements, but the bank is unlikely to disappoint.
• Dividend Yield: Approximately 3%.

Cameco (CCO)

• Commodity: Uranium.
• Market Trend: The price of uranium has been skyrocketing.
• AI and Nuclear Power: The AI build-out is driving forecasts for more nuclear power plants, which supports uranium demand. Small nuclear reactors are also being considered for applications like oil sands extraction.
• Forecasting Difficulty: Uranium, like oil, is a commodity where forecasting prices is challenging.
• Recommendation: Regan admits he doesn't know enough about Cameco specifically to give detailed advice but notes that uranium appears to be a commodity with "a lot of underlying strength" due to future expectations. Nuclear energy is expected to play a larger role in the future.

CP Rail (CP)

• Market Position: CP Rail is considered the "best in the space" within the rail industry.
• Network: It has an interconnected railway network across the US, Mexico, and Canada, which has been strong since the Kansas City Southern acquisition.
• Stock Performance: The stock price has been lagging, partly due to the threat of tariffs.
• Underlying Business: The underlying business is performing "fairly okay."
• Recommendation: Regan's firm owns CP Rail and has held it for about three years. They haven't bought more during dips due to macro uncertainties. They believe holding CP Rail now is not a bad idea, but certainty on the trade front is needed to push the stock price up.

Énergir (formerly Gaz Métro) - Mentioned in relation to Amyris

• Amyris (AMRS): A cement manufacturer, a spin-off of Holcim (Swiss cement maker). It's also known as Lafarge North America.
• Infrastructure Play: Amyris is expected to benefit from anticipated infrastructure spending in the US.
• Valuation: While metrics might not look cheap, the company has room to run due to its spin-off structure.
• Management: The CEO of Holcim is now the CEO of Amyris and has invested his own money, indicating strong management commitment.
• Recommendation: Amyris is considered a good company to ride the infrastructure wave and is currently "fairly cheap."

GFL Environmental (GFL) - Reiteration

• Recommendation: Regan's firm owns GFL and "quite likes it." They would be active buyers if they didn't have enough.
• Cash Flow: GFL generates substantial cash flow.
• Growth Runway: The waste management business has a long runway, particularly in the US, through acquisitions of smaller operators.
• Market Structure: The space is more oligopolistic, and GFL benefits from scale.

Brookfield Asset Management (BAM)

• Recommendation: Regan's firm owns the parent corporation, Brookfield, but not Brookfield Asset Management directly. However, they "quite like" BAM.
• Dividend: BAM offers a more direct dividend compared to the parent.
• Growth Potential: They project BAM could "double" in five years, with a potential upside of 140%.
• Market Tailwinds: Benefits from infrastructure trends and strong fundraising.
• Management: Brookfield is a "giant" in the industry, and "everything they touch seems to turn to gold."
• Suitability: Considered a good investment for registered savings accounts like RESPs for grandchildren.

TD Bank (TD)

• Recent Issues: Experienced problems in the US related to money laundering penalties, which impacted its stock.
• Recovery: The stock has been climbing back steadily since the end of last year and the dip in April.
• Valuation: Still trades at a "little bit of a gap" to other banks due to US constraints.
• US Business: The US business had a lower return on equity (8-10%).
• Future Strategy: TD is looking at buybacks and other value-creating initiatives, as they are "overcapitalized."
• Recommendation: Regan's firm likes TD, it's one of their largest positions, and they "still like it." They believe TD is redefining its business and reinvesting in areas with higher returns on capital. The US constraints might not be a bad thing as they focus on originating and syndicating loans.

BlackRock (BLK)

• Business: The world's largest asset manager.
• Performance: Has done "tremendously well over time," though it was negative over one year at the time of the discussion.
• Recommendation: Considered a "great long-term hold," though not owned by Regan's firm.
• Investment Scope: Investing in BlackRock means buying into a broad range of assets, including private equity, ETFs, debt, and credit markets.
• Volatility: Asset managers' share prices tend to be higher beta and can be volatile, requiring investors to have "the stomach for that."

Mag Seven Stocks (Alphabet (GOOGL), Meta (META))

• Value Management Approach: Regan's firm, as value managers, only bought Mag Seven stocks in March 2020 when they were on sale.
• Specific Picks: Alphabet and Meta.
• Performance: Both have performed well since 2020, with Alphabet showing a strong recent run.
• Valuation: Described as "reasonably priced," between 20-25 times earnings, with significant cash flow generation.
• AI Investment: A substantial portion of their capital expenditure is on AI, but they continue to generate cash from other businesses regardless of AI's success.
• Trimming: The firm trimmed both positions about a year ago.
• Future Outlook: They project cash flow to continue ramping up in the next few years.

Apple (AAPL)

• Market Dominance: Apple "kind of owns that infrastructure," with widespread use of its products.
• Growth Concerns: Top-line growth has been around 5% over the last 5-6 years. The stock price increase has been driven by multiple expansion (from 20 to 35), which is not a sustainable bet.
• Maturity: Apple is considered a mature company.
• Future Growth Challenge: Doubling its market cap (currently around $3-4 trillion) in the next ten years is "very, very hard" given its current dominance.
• Innovation: The company hasn't introduced a truly new product category recently, and a significant AI play would be needed for a major move.
• Price Increases: Much of the growth has come from price increases on existing products.
• Recommendation: While Apple might be able to achieve significant growth, it would require "pulling a rabbit out of a hat."

Vanguard ETF (VFV) - Canadian High Dividend ETF

• Underlying Holdings: An ETF that invests in high dividend-yielding companies.
• Key Consideration: The sustainability of the dividend is crucial. High dividend yields can sometimes result from stock price collapses.
• Performance: Up 20% in one year.
• Recommendation: While not a bad place to be for dividend income, investors need to be cautious about dividend sustainability. For taxable accounts, these ETFs can be good vehicles for dividend income.

Gold Stocks and Gold

• Historical Performance: Gold stocks, like Barrick, have historically shown poor long-term performance, with share prices not significantly increasing over 25-30 year periods.
• Recent Performance: The gold index has seen a significant increase (50% this year), with some rational and some irrational reasons.
• Recommendation: At current levels, Regan's firm would "not want to touch them with a ten foot pole." They are comfortable missing out if gold stocks continue to rise, having seen this pattern before. The long-term chart of the gold index over 20-30 years is described as "pretty ugly."

Top Picks

1. Strathcona Resources (SCR) - TSX

• Business: Resource company.
• Management: Adam Waterous and his energy fund have done a "tremendous job" rolling up businesses.
• MEG Deal: They made significant money as a large shareholder in the MEG deal.
• Dividend: Can produce a "fairly large dividend" (potentially $10 a share).
• Valuation: Considered "still cheap" because the float is mainly held by the Walters family and their entities. As they plan to sell more, liquidity should improve.
• Recommendation: A well-run oil and gas pick, expected to move with the price of oil.

2. Quebecor (QBR.B) - TSX

• Business: The only growing telecom company, essentially Videotron with a mobile license.
• Growth Driver: Freedom Mobile is gaining significant market share.
• Dividend Yield: Approximately 3%.
• Target Price: $70 in the next few years.
• Performance: The only telecom company that has been rising this year.
• Recommendation: A growing telecom company with a solid dividend.

3. Blackstone (BX) - NYSE

• Assets Under Management: Manages over $1.2 trillion in assets.
• Investment Areas: Private equity, real estate, private credit.
• Management Team: "Great management team."
• Capital Structure: Nearly half of assets are perpetual capital.
• Fundraising: Raised approximately $200 billion in the last 12 months.
• Market Opportunity: Private equity firms are buying companies at attractive prices as debt costs decrease.
• Target Price: $200 in the next 2-3 years.
• Dividend: Chunky, variable dividend, typically around 4% over the last 5-6 years, but can be very small if earnings are not realized.
• Underlying Returns: Internal Rate of Returns (IRRs) for their limited partnerships (LPs) are around 12-14%.
• Recommendation: A very good buying opportunity as the stock is down about 20% year-to-date.

Conclusion

The market is currently characterized by high valuations, particularly in the tech sector, and investor nervousness. While AI is a significant theme, the focus is shifting towards the underlying business fundamentals and the price at which these companies are trading. Regan emphasizes a value-oriented approach, seeking great businesses at the right price. He highlights the importance of understanding macro trends, commodity cycles, and the specific business models of companies. The top picks reflect a blend of established companies with strong management and growth potential, as well as companies benefiting from specific market tailwinds like infrastructure and energy.