Gordon Reid, president and CEO, Goodreid Investment Counsel
FOCUS: U.S. equities
Top Picks: Blue Bird, RTX, Toll Brothers
MARKET OUTLOOK:
Elections invariably provide surprises, and a Republican sweep requires a recalibration of expectations. First, equity markets love certainty regardless of perceived risks. Secondly, the Republican platform is pro business and pro growth. Lower tax expectations lead to an adjustment of expected market returns. For now, the market is seeing this as a distinct positive, choosing to turn a blind eye to the possibility of higher inflation and even bigger government deficits down the road.
Sectors and industries that climb out from under regulatory weight are poised to benefit. The financial sector is reasonably priced and, at least in the early reaction to the election, benefitting the most. As a group they are exceptionally well capitalized, trade below their historical valuation averages and are expected to provide growth rates that will impress. In addition, small capitalization stocks, given their domestic bias should do well in this environment.
The post election reality makes it easier to justify the premium valuations of major U.S. markets. Sell side analysts are predicting a strong earnings result in 2025. Given that, we expect a constructive, although more subdued performance result next year, after back-to-back outstanding years in 2023 and 2024.
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TOP PICKS:
Blue Bird (BLBD NASD)
Blue Bird is a maker of specialty school buses, powered by alternate fuel sources. Earnings growth is accelerating, and it is expected that profits will reach $3.22 per share in 2024, yielding a price to earnings ratio of a modest 12 times. Shares have slumped because of the recent Trump/Republican win, but we believe the market is overreacting to a technology that has bipartisan support. What is not widely appreciated is that electric bus sales today represent only nine per cent of BLBD’s total revenue.
RTX Corp (RTX NYSE)
After digging out of a major production issue, the discovery of contaminants in engine parts, RTX has its mojo back. Although it resulted in a multi-billion dollar hit, the strength of the business on both the commercial and defense side has overcome these charges. Meanwhile the stock price has responded, although valuations remain below market averages.
Toll Brothers (TOL NYSE)
The trends are all in favour of continued success for this high-end homebuilder. Although mortgage rates have backed up post election in fear of inflationary policies, we believe the longer-term trend is for lower interest rates. Lower taxes and positive demographics will also aid this company, which is trading at an inexpensive 10 times earnings.
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| BLBD NASD | N | Y | Y |
| RTX NYSE | Y | N | Y |
| TOL NYSE | N | Y | Y |
PAST PICKS: NOVEMBER 24, 2023
Eaton (ETN NYSE)
- Then: US$228.72
- Now: US$361.13
- Return: 58%
- Total Return: 60%
Fluor (FLR NYSE)
- Then: US$37.90
- Now: US$52.17
- Return: 38%
- Total Return: 38%
Wesco Int’l (WCC NYSE)
- Then: US$154.35
- Now: US$202.93
- Return: 31%
- Total Return: 33%
Total Return Average: 44%
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| ETN NYSE | N | Y | N |
| FLR NYSE | N | Y | Y |
| WCC NYSE | N | Y | Y |