Brendan Caldwell, President and CEO, Caldwell Investment Management
FOCUS: North American stocks with large capitalization
MARKET PERSPECTIVE:
Heading for 2022, a mixture of headwinds created the perfect storm for stock markets, and the subsequent sell-off led to a decline in most benchmark stock indices by 20% or more from the last peaks. Russia continues its attack on Ukraine, which has affected global flows of key goods. China’s zero-COVID-19 policy has forced port closures, exacerbating existing supply chain problems. Finally, persistently high inflation means that the Federal Reserve (and other central banks) may have to act much more aggressively in raising interest rates than investors expected just a few months ago.
We believe that the market is struggling with the fact that interest rates may remain high if inflation remains high. And after 12 years of almost zero interest rates, with no more pandemic stimuli and increasing chances of recession, the outlook is very uncertain. One thing we are pretty sure of is that markets are likely to experience increased levels of volatility in the foreseeable future. We will continue to focus our efforts on finding high-quality, well-managed companies with a proven history of navigating difficult environments, and we believe that professional investment advice is extremely valuable in times like these.
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TOP CHOICE:
Brendan Caldwell’s best choice
Brendan Caldwell, president and CEO of Caldwell Investment Management, discusses his best choices: Quanta Services, Capital Power and Murphy USA Inc.
Quanta Services (PWR NYSE)
Quanta Services is no longer a fund, but remains high on our watch list
- It is a well-managed engineering and construction company with a lower risk profile than its counterparts
- End markets benefit from strong secular winds
- Utilities are investing to strengthen the network as well as to expand to prepare for things like EV charging
- Telecommunications have been building a 5G infrastructure for many years
- Most of the revenue comes from smaller maintenance contracts, which are a unit price / cost plus, which means that they represent higher input costs compared to fixed price contracts.
- These contracts also contribute to greater revenue and revenue stability over time from other engineering and construction partners (PWR did a great job of minimizing exposure to larger fixed-price contracts over time)
- Finally, the industry is highly fragmented and PWR demonstrates a strong history of growth through acquisitions; so we think there is still a long runway for growth
- Most recently: we do not consider the disruption of the solar industry to be a significant headwind
- The Biden administrator wants to temporarily remove tariffs from the Trump era
- Solar energy is crucial to US carbon reduction goals, investment cannot be avoided and domestic supplies are likely to become a bigger focus in the coming years
- PWR management said they could transfer work to other areas to make up for delayed solar projects in 2022.
Capital Power (CPX TSX)
Held in CVM; most recent purchase: May 18, 2022 at $ 44.92
- Capital Power is an independent power producer with ~ 6600 megawatts of production capacity at 27 facilities in North America
- They operate in a strong pricing environment, which we consider sustainable in the short to medium term, given the favorable dynamics of supply and demand for electricity pricing in Alberta. in particular:
- The demand for oil and gas is returning
- The aging assets for heat production in industry are retired without significant replacements until 2024-2025.
- Marginal production costs are higher than before the pandemic
- They are in an envious position compared to their counterparts, selling approximately 60% of basic electricity production in 2023, while concluding more than 90% of their natural gas feedstock needs at well below market prices.
- Finally, they are committed to spending $ 0.5 billion a year on capital to build their renewables platform both organically and inorganically.
- A strong acquisition pipeline on the inorganic side is noted
Murphy United States (MUSA NYSE)
Last purchase: June 21, 2022 at $ 223.78
- Murphy USA is a leading supplier of refined fuel products in the United States
- It serves customers through a network of ~ 1700 retail gas stores and through unbranded sales to wholesale customers
- This is a strong story of organic growth that still has legs. Historically, the results of the top line have been driven by a combination of building new stores and renovating and enlarging existing stores with management, aiming for 2-4% growth in stores per year.
- Recent mergers and acquisitions should accelerate growth by boosting the company’s store supply
- Like the Couche-Tard, MUSA hopes to apply what it has learned from the acquisition of QuickChek, which has industry-leading gross profit in merchandising and is historically strong in food and convenience goods compared to the rest of the chain.
- This should lead to higher company margins over time
- MUSA’s core operations have an industry-leading cost structure, partly provided by its real estate portfolio, and lower levels of retail fuel profitability compared to the industry, which helps increase market share while increasing market share. fuel margins
- In the current inflationary environment, the price gap in MUSA is widening compared to smaller competitors who have to go through higher costs to survive; MUSA reinvests some margin expansion to capture market share (so we look at this as a consumer game at a discount)
- Gallons sold for Q1 2022 exceeded Q1 2019 levels; management. Seeing tickets with smaller but more frequent trips helps to recover the tariffs on the goods (ie buying something inside with the purchase of gas)
PREVIOUS ELECTED: 3 May 2021
Brendan Caldwell’s election
Brendan Caldwell, president and CEO of Caldwell Investment Management, discusses his previous choices: Martin Marietta Materials, Inc., Watsco and Fastenal Company.
Martin Marietta (MLM NYSE)
- Then: $ 354.56
- Now: $ 302.79
- Return: -15%
- Total return: -14%
Watsco (WSO NYSE)
- Then: $ 295.46
- Now: $ 235.18
- Return: -20%
- Total return: -18%
Fastening (FAST NASD)
- Then: $ 53.00
- Now: $ 50.97
- Return: -4%
- Total return: -2%
Total average return: -11%
MLM NYSE NNN WSO NYSE NNN FAST NASD NN
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