Chris Blumas, portfolio manager at Raymond James Investment Counsel, shares his outlook on North American Large Caps.
Chris Blumas, Portfolio Manager, Raymond James Investment Counsel
Focus: North American Large Caps
Top picks: Constellation Software, Mainstreet Equity, Honeywell
MARKET OUTLOOK:
Earlier this year, U.S. President Trump’s One Big Beautiful Bill Act (OBBBA) was signed into law. This legislation is poised to increase government budget deficits with huge spending increases slated for security and defense.
In 2024, U.S. government spending was more than 50 per cent higher than the pre-COVID level of spending in 2019. This huge increase in government spending has been a major factor driving economic growth in the United States. Going forward, government spending in most developed economies is expected to play a key role supporting economic growth.
In Canada, U.S. tariffs have started to bite. In August, our trade deficit increased by 65 per cent over the previous month to US$6.3 billion. This is the second-highest deficit level on record and highlights the magnitude of the impact on trade. While economists estimate that 80 to 85 per cent of Canadian exports to the U.S. remain tariff free under current trade rules, a few important sectors have been battered with punitive tariffs and are dependent on government support to remain viable.
In the U.S., risks to the job market appear to be high enough to warrant a reduction in interest rates and cuts to interest rates are expected to occur at the October and December Federal Open Market Committee (FOMC) meetings. The Federal Reserve has a dual mandate to balance inflation and employment and right now officials seem most concerned with protecting the labour market. Looking ahead into next year, the timing and pace of interest rate moves has divided the FOMC and is more uncertain.
Given the uncertain global economic backdrop, financial market volatility is likely to remain elevated as investors react to economic data and geopolitical events. While it is difficult to know when this volatility will subside, history has proven that it pays to stay invested and remain mindful of company valuations. Over the long term, financial markets have rewarded patient investors and investors that have stayed invested and taken advantage of market volatility have achieved significantly better results than investors that have come in and out of the markets.
TOP PICKS:
Chris Blumas’ Top Picks: Constellation Software, Mainstreet Equity & Honeywell Chris Blumas, portfolio manager at Raymond James Investment Counsel, shares his top stock picks to watch in the market.
Constellation Software (CSU TSX)
Constellation Software is an enterprise software consolidator with a global presence. The company generated almost 90 per cent of its revenues outside of Canada in 2024.
Constellation has six operating subsidiaries that function as independent businesses with a common capital allocation framework. This decentralized operating model has allowed the company to complete hundreds of acquisitions since its initial public offering (IPO) in 2006. Constellation typically targets smaller companies that are too small to attract the interest of other IT conglomerates or private equity firms.
Over the years, the company has expanded its operating infrastructure so that it can continue targeting smaller acquisitions and continue compounding cash flows at an above average rate. Over the last three years, the compound annual growth rate for cash flow per share is 19 per cent. The shares currently trade around twenty-four times trailing cash flows and have a trailing free cash flow yield of 2.6 per cent.
Mainstreet Equity (MEQ TSX)
Mainstreet is a real estate corporation the owns mid-market multi-family apartment buildings. The company is focused on the Western Canadian market and has more than 75 per cent of its total units in Alberta (~55 per cent) and British Columbia (~20 per cent). Mainstreet’s unique business model (structure, market focus, and operating capabilities) has allowed it to generate tremendous value for shareholders over the long-term.
Going forward, the company has the capabilities and balance sheet required to continue growing and to take advantage of opportunities to increase densification across its portfolio. Over the last three years, the compound annual growth rate for funds from operations (FFO) per share was 21 per cent. The shares currently trade at around fifteen times forward funds from operations and in line with their IFRS book value per share.
Note: Mainstreet is a smaller market capitalization company with high insider ownership and investors should consider using limit orders when buying and/or selling shares.
Honeywell (HON NASD)
Honeywell is an industrial conglomerate with a global presence. The company has a broad portfolio of market leading businesses that include aerospace and defence, industrial automation, building automation, and energy solutions.
Over the last five years, earnings per share (EPS) growth and total shareholders returns have been at the low end of the range relative to peers. Going forward, the company is looking to simplify its operations by spinning off assets and/or separating business units to unlock value and improve long-term capital allocation. There have been several successful precedent separations within the sector in recent years, and the magnitude of value creation is difficult to ignore.
DISCLOSUREPERSONALFAMILYPORTFOLIO/FUNDCSU TSXYYYMEQ TSXYYYHON NASDYYY
PAST PICKS: OCTOBER 16, 2024
Chris Blumas’ Past Picks: Nike, Alphabet & Brookfield Infrastructure Chris Blumas, portfolio manager at Raymond James Investment Counsel, discusses his past stock picks and how they’re doing in the market today.
Nike (NKE NYSE)
Then: US$83.94
Now: US$69.30
Return: -17%
Total Return: -15%
Alphabet (GOOGL NASD)
Then: US$165.16
Now: US$247.02
Return: 50%
Total Return: 50%
Brookfield Infrastructure (BIP-U TSX)
Then: $49.19
Now: $49.49
Return: 0.6%
Total Return: 5%
Total Return Average: 13%
DISCLOSUREPERSONALFAMILYPORTFOLIO/FUNDNKE NYSENNNGOOGL NASDYYYBIP-U TSXNNY