Brian Madden, chief investment officer at First Avenue Investment Counsel, shares his outlook on North American Equities.
Brian Madden, Chief Investment Officer, First Avenue Investment Counsel
Focus: North American Equities
Top Picks: MDA Space, Home Depot, TMX Group
MARKET OUTLOOK:
Video killed the radio star. The internet killed the newspaper. Netflix killed Blockbuster. What will AI kill?
Candidly we don’t know for sure, but investors sure are fixated on figuring this out.
We welcome the return of two-way risk to markets – this is a good environment for stock pickers.
It always seemed implausible to us that a purportedly disruptive technology like artificial intelligence could be the panacea many believe it to be if no one and nothing is really disrupted.
But as ever, markets cycle between greed (i.e. euphoria and monolithic enthusiasm for all things “AI” prevalent through 2023-25) and fear (i.e. alarm in recent months over AI as the demolisher of software businesses and the eradicator of white-collar work).
We are neither AI cheerleaders, nor Luddite skeptics.
Rather, we search for the nuanced truth on a company-by-company basis.
To that end, we have taken profits in semiconductor designers in recent months, added to “old economy” businesses that are ambivalent to the AI opportunity (or threat) in manufacturing, chemicals, pipelines and housing and more recently have bought dips in “new economy” businesses where we believe the baby has been thrown out with the bathwater amidst recent AI disruption concerns.
Leadership broadening and rotation can prolong a market cycle.
Moreover, as it relates to AI, this pattern conforms to past instances of disruptive technologies whose benefits over time trickle down and become broadly dispersed rather than narrowly captured. We believe this is occurring.
TOP PICKS:
Brian Madden’s Top Picks: MDA Space, Home Depot & TMX Group Brian Madden, chief investment officer at First Avenue Investment Counsel, shares his top stock picks to watch in the market.
MDA Space (MDA TSX)
MDA Space is a leading Canadian space technology company positioned to capitalize on the rapidly expanding +$1.5 trillion global space economy that is supported by secular growth from national defense modernization and next-gen telecom satellite constellations. The company’s new Aurora digital satellite provides a competitive edge in cost-efficient high-volume production and as a result, MDA has an impressive book-to-bill of approximately 2.7 times with an order backlog of $4.4 billion, which has compounded at approximately 54 per cent annually since 2020, driven by the conversion of its $20 billion pipeline from longstanding corporate and government relationships. The termination of its contract with EchoStar and rumors that its contract with Globalstar could also be at risk cut the share price in half last fall, affording us an excellent initial entry point. Investor confidence has been shored up since then via a series of smaller contract announcements and the release of strong third quarter results. We expect similarly strong fourth quarter results next week, and more importantly, given how “newsy” this stock is, we also expect ongoing new contract announcements given the large addressable market and the incumbency advantage MDA Space enjoys in the market.
Home Depot (HD NYSE)
Home Depot is America’s dominant home improvement retailer, serving the “PRO” and do-it-yourself markets. An aggressive pursuit of “PRO” clientele via their “one-stop shopping” proposition for complex multi-trade projects is enabling them to take share from their primary rival, as well as from lumber yards, millwork distributors, paint speciality retailers, electrical/plumbing/HVAC supply stores and other specialty suppliers. Recent acquisitions of SRS Building Products and GMS Inc. further broaden their product assortment and enhance their capabilities to serve “pro” trades and general contractors. The company has also expanded into adjacent and less cyclical end markets addressing the repair/maintenance/operations needs of multi-family residential landlords, the hospitality industry, healthcare centres, government/institutional markets, prisons, etc.
All told, the company sizes up an addressable market of $1.1 trillion annually, underpinned by the $50 trillion stock of residential housing in the U.S., which wear and tear depreciates like clockwork, requiring repairs and renovation.
Stepped up e-commerce and omnichannel capabilities are enablers of growth for Home Depot, complementing their knowledgeable expert sales floor staff in stores.
The result has been a 13 per cent compound growth rate in dividends over the past decade and episodic share buybacks, which we expect to resume later this year.
We expect the lagged effect of interest rate cuts will stimulate housing this year and next, benefitting Home Depot and driving an acceleration in earnings growth.
TMX Group (X TSX)
Best known as the owner/operator of the Toronto Stock Exchange, TMX Group, via a string of acquisitions over the last twenty years has evolved into a multi-segment business operating equities and fixed income trading and clearing markets, derivatives trading and clearing markets and a growing collection of global solutions insights and analytics businesses that earn recurring subscription and license fees.
This strategic evolution of the business has enabled higher margins and higher returns on invested capital, while also reducing its historical reliance on cyclical Canadian equity capital markets and expanding into the larger and more stable addressable markets for global insights and analytics where they earn “sticky” recurring revenues for mission critical platforms and data feeds.
Dividends have grown at an 11 per cent compound rate over the past decade and shareholder total returns have compounded at a 23 per cent pace over the same time frame.
The 23 per cent drawdown since last summer – driven in part by fears of AI-led disruption to their data and analytics businesses – we believe is unwarranted and sets the stage for a robust recovery in the share price.
DISCLOSUREPERSONALFAMILYPORTFOLIO/FUNDMDA TSXNNYHD NYSENNYX TSX NNY
PAST PICKS: FEB. 28, 2025
Brian Madden’s Past Picks: TFI International, Alamos Gold & Nutrien Brian Madden, chief investment officer at First Avenue Investment Counsel, discusses his past stock picks and how they’re doing in the market today.
TFI International (TFII TSX)
Then: $131.20
Now: $161.46
Return: 23%
Total Return: 25%
Alamos Gold (AGI TSX)
Then: $33.06
Now: $72.97
Return: 121%
Total Return: 121%
Nutrien (NTR TSX)
Then: $75.82
Now: $99.90
Return: 32%
Total Return: 36%
Total Return Average: 61%
DISCLOSUREPERSONALFAMILYPORTFOLIO/FUNDTFII TSXNNYAGI TSXNNYNTR TSX NNY
