Brian Madden's Strategic Stock Picks for June 2024

Brian Madden, the chief investment officer of First Avenue Investment Counsel, is renowned for his keen insights and disciplined approach to investing. As of June 21, 2024, he shares his latest market outlook and top stock picks for North American equities, offering a balanced perspective on the opportunities and challenges faced by investors today.

Market Dynamics

The equally weighted S&P 500 Index has seen a respectable rise of five percent this year. However, it trails behind the traditional market capitalization-weighted index, which has surged nearly 16 percent. This impressive growth is largely driven by heavyweight technology and communications companies. The recent dovish comments from U.S. Federal Reserve officials have further propelled U.S. stocks to new highs, underpinning this robust market performance.

In contrast, Canadian stocks have diverged from their U.S. counterparts. The S&P TSX Composite Index currently trades four percent below its mid-May all-time high. Despite a Bank of Canada interest rate cut on June 5 aimed at stimulating the market, sectors heavily weighted by interest rate-sensitive stocks like banks, telecoms, utilities, and real estate have not seen the expected revival. The excitement and momentum prevalent in the U.S. market are conspicuously absent in Canada, with momentum and money flows overshadowing fundamentals and economic theory in the short term.

Valuation Disparities

The valuation gap between the U.S. and Canadian markets has reached a 25-year extreme. The S&P 500 trades at 21.3 times expected earnings, while the S&P TSX Composite remains undervalued at 13.9 times. This disparity extends beyond stock markets to currency speculation, with the latest commitment of traders report revealing a 30-year bearish extreme in net speculative positions against the Canadian dollar, totaling a notional value of $13.2 billion.

Investment Strategy

Madden advises investors to avoid chasing the crowd or getting swept up in market hype. Instead, he emphasizes the importance of investing with discipline and adhering to a sound investment process. By staying true to these principles, investors can uncover compelling opportunities on both sides of the border.

Brian Madden's Top Picks

Bombardier (BBD.B TSX)

Bombardier has undergone significant changes, including a new management team and a streamlined focus on private aviation. The company now boasts a market-leading product portfolio and a high visibility path to growing free cash flows and balance sheet de-leveraging. With a $15 billion order backlog, Bombardier is several years ahead of key aerospace rivals in innovation and demand fulfillment. Additionally, the expanding market for aftermarket parts and services, along with strategic service center expansions, positions Bombardier for continued growth. Despite a past marred by a 99 percent drawdown from 2000-2020, Bombardier's shares have risen 1,200 percent off the 2020 lows and remain undervalued at 12 times expected earnings.

Broadcom (AVGO NASD)

Broadcom is a leading designer and supplier of semiconductor devices, with a focus on radio frequency and optoelectronic applications. The $70 billion acquisition of VMWare has significantly increased its exposure to high-margin infrastructure software. Broadcom is also emerging as a competitor in AI chips, with its networking chips gaining traction among hyper-scalers. The company has consistently grown its dividend at a 35 percent compound rate since 2016, a pace expected to remain robust with projected earnings growth of 17 percent annually over the next three years.

Lennox International (LII NYSE)

Lennox International manufactures and distributes HVAC systems, catering to residential, commercial, and industrial markets. Climate change is driving increased demand for more powerful air conditioning units, a trend further bolstered by the Inflation Reduction Act’s subsidies and incentives for innovative and efficient solutions like heat pumps. Lennox’s extensive distribution network, new manufacturing facilities, and focused plan to improve operating margins position the company for low double-digit earnings growth over the next few years, sustaining its 14 percent compound dividend growth rate.

Conclusion

Brian Madden’s market outlook and top picks reflect a disciplined approach to investing, emphasizing the importance of avoiding market hype and focusing on sound investment processes. With strategic investments in Bombardier, Broadcom, and Lennox International, Madden showcases the potential for growth and value across North American markets.