Michael Decter, CEO & Chief Investment Officer, LDIC Inc.
Focus: North American large caps
Top picks: TD Bank, Descartes Systems, JPMorgan
MARKET OUTLOOK:
Although we are expecting lower positive returns in 2025 and more volatility, we remain constructive on equity markets. We need a stronger economy, strong employment and decent wage growth to counter the higher levels of inflation.
We enter 2025 with higher valuations that we don’t think can go higher. Gains will have to come from earnings, which have gotten off to a good start. Tensions have increased amongst central bankers and expectations for further U.S. cuts have fallen to only one or two cuts in 2025. This could be good news. They don’t expect the economy to roll over. In contrast, Canada is anticipated to see more rate cuts due to its weaker economic outlook. Given our positive outlook on the U.S. economy, which remains the strongest in the world, we have assigned it a historically higher weighting in our clients than we have in the past.
U.S. President Donald Trump’s vision involves promoting faster growth through reduced regulation, tariffs, lower oil prices, and tax cuts. The vision also emphasizes more economic independence, including resilient supply chains and increased local energy production. Many argue that tariffs and stronger growth will be inflationary. Trump argues that inflation will be muted because increased tariffs will be offset by a strong U.S. dollar.
In 2025, we see higher inflation and higher interest rates as the biggest risks. Growth stocks, which typically have the highest multiples, are most at risk. When we screen for new ideas at LDIC, we typically prefer lower-multiple and high earnings predictability. Therefore, LDIC is relatively sheltered from higher-than-expected interest rates.
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TOP PICKS:
TD Bank (TD TSX)
TD Bank was the subject of a public anti-money laundering violation investigation launched by the former U.S. Attorney General, Merrick Garland. In October 2024, the bank plead guilty, accepted a US$3.1B penalty, and as part of the resolution, agreed to the terms of a detailed consent order to build appropriate guard-rails to reduce the likelihood of a repeat occurrence. It’s clear that TD was the example to thousands of US regionals and other international banks to enhance governance and ensure AML practices are current and working properly.
As a result of this negative news flow, TD currently trades at a discount to the Canadian banks – at about 1.4x price/book, versus the group average of 1.6x, and Royal Bank of Canada (RY) at the top end at 2x. I believe the announcement of the new CEO, Ray Chun, and board turnover is a positive development. The company announced on Feb. 10th that they will sell their 10.1 per cent stake in Schwab and use 40 per cent of the proceeds to buy back stock (the share price was up 3.6 per cent on the news).
Although the asset cap currently restricts TD from buying a U.S. bank, this does not restrict them from growing U.S. deposits, and in fact the business fundamentals have not changed materially for TD since the start of the investigation. TD remains amongst the best positioned for growth in the U.S. market as Trump deregulation policy benefits its significant U.S. retail presence. TD remains at the top of the pack from a growth and market share perspective in many of their business verticals.
We owned this stock when it was trading inline with RY at a substantial premium to the group because of it’s strong fundamentals. Now investors can own TD bank at a discount and collect a sustainable five per cent dividend yield as the headline noise slowly disappears.
Descartes Systems (DSG TSX)
A logistics tech leader specializing in supply chain software and cloud-based services, serving 26K+ customers across 160 countries and processing 24B+ transactions annually. Despite being headquartered in Canada, 94 per cent of revenue is global (70 per cent U.S.).
Clients include major carriers (UPS, FedEx, American Airlines), shippers/retailers (Home Depot, Wayfair, Coca-Cola), governments, and freight intermediaries (DHL, customs brokers).
Strong growth & financials
- Stock up +41% YoY, outperforming S&P 500 (+28%) & TSX Composite (+24%)
- Revenue mix: 70% U.S., 23% Europe/Middle East/Africa, 6% Canada, 3% Asia
- Cash: $180M | Debt: Virtually nil ($7M) | Credit Line: $350M (+$500M potential) - undrawn
- Free cash flow: +$203M/year, minimal capex (-$5.4M) - outside M&A
- EBITDA Margin: +40%
- Growth trends: Revenue: +16% CAGR (last 5 years), EPS: +30% CAGR (last 5 years), FCF Growth: +60% in 5 years
Tariff impact: More upside than risk
- Customs & compliance complexity benefits DSG (Global Trade Division = 25% of revenue)
- Long-term contracts keep revenue stable—even during COVID, DSG grew from 2019 to 2022
- Proven ability to offset volume declines with price increases
- CEO confirmed last quarter that customers were pulling forward volumes in anticipation of tariffs
Valuation & market sentiment
- Trading at 25x EV/EBITDA (below 5-year average, peers at 35x, has traded as high as 30x)
- Lower-quality competitor recently acquired at the same multiple
- Bank analysts have outperform ratings, target prices rising
- Recent selling pressure likely institutional trimming, but several large institutions increased positions in recent quarters
Next catalyst
- Q4 & year-end financials on March 5th
JPMorgan (JPM NYSE)
We believe JPMorgan is well positioned in 2025. Most U.S. banks got a Trump-bump on their multiple for many reasons, including:
- potentially better GDP growth (higher loan growth)
- less regulation (allowing for more buybacks)
- higher rates (better net interest margin)
- higher deal activity (increase M&A and trading revenues)
- bank tax rates could move a little lower in 2025 and 2026.
Within U.S. banks, we favour JPM. JPM invests more than any North American bank on A.I. and consequently, will get the biggest bump on productivity improvements.
We like JPM’s strong balance sheet. It is sitting on historically high levels of excess capital in anticipation of the Basel 3 Endgame. With the Basel 3 Endgame nearing completion in 2025, and potentially favourable changes under a new Republican administration, JPM stands to benefit from greater capital flexibility and accelerated buybacks.
Since the Trump-bump, JPM’s credit portfolio is holding in well, as per data from credit card companies. Deposit growth is good. Trading and investment banking is robust. What’s needed to bump JPM’s multiple further, at this point, is loan growth (it’s the one missing piece). We believe Trump can accelerate economic growth and get more loan growth in 2025.
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| TD TSX | Y | Y | Y |
| DSG TSX | Y | Y | Y |
| JPM NYSE | Y | Y | Y |
PAST PICKS: October 3, 2023
Sun Life Financial (SLF TSX)
Then: $64.39
Now: $78.06
Return: 21%
Total Return: 28%
Surge Energy (SGY TSX)
Then: $8.69
Now: $5.53
Return: -36%
Total Return: -29%
Berkshire Hathaway (BRK.B NYSE)
Then: US$343.04
Now: US$482.42
Return: 41%
Total Return: 41%
Total Return Average: 13%
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| SLF TSX | Y | Y | Y |
| SGY TSX | N | N | N |
| BRK.B NYSE | Y | Y | Y |
