Teal Linde’s Top Picks for September 9, 2024
September 09, 2024 at 1:55PM EDT
Teal Linde, manager, Linde Equity Fund
FOCUS: North American, mid, large-cap stocks
Top Picks: Alphabet, Delta, Ensign
MARKET OUTLOOK:
September is historically the worst month of the year for the stock market. Since 1950, September has been down roughly 60 per cent of the time with average returns of close to minus one per cent. In recent years, the September declines of the S&P 500 Index have been much worse: 2023 down five per cent; 2022 down nine per cent; 2021 down five per cent; 2020 down four per cent, for an average decline of nearly six per cent. What will happen this year?
The leading argument for a better September this year is central bank rate cuts. After expectations of rate cuts continuously being pushed back, a rate cut finally seems certain on Sept. 18 based on recent comments from U.S. Federal Reserve Chairman Jerome Powell. But many suggest that expectations of a rate cut are already priced into the market. This is most likely true. However, in terms of avoiding another drop of six per cent, rate cuts actually beginning to come down, after many false starts, does introduce a bullish dynamic that has not existed during the prior four Septembers – unless of course, the market starts fearing the rate cuts imply a looming recession.
Rate cuts will also put downward pressure on the U.S. dollar, which will benefit the S&P 500 which receives 30 per cent of its revenues from overseas. Additionally, third-quarter earnings expectations are strong with S&P 500 earnings expected to grow 17 per cent year-over-year.
A number of factors exist to help thwart a fifth consecutive ugly month of September for the market. But we’re not looking good with the S&P 500 already down four per cent in the first week of the month (although not as bad as August’s six per cent drop in week one, which still ended as an up month). Much will still depend on Powell’s outlook to be shared on Sept. 18. The market will be listening carefully to his words.
TOP PICKS:
ALPHABET (GOOGL NASD)
The mega cap tech stocks have been largely responsible for driving up the S&P 500 over the last two years. While concerns about their increasing dominance creating a riskier concentrated market are justified, we can not knock the superior revenue and earnings growth these companies have been achieving. Among the mega-cap tech stocks, Alphabet currently looks the most attractive from a growth/valuation/consistency perspective. Partly due to a larger pullback, Alphabet trades at the cheapest price-to-earnings (P/E) multiple of the Magnificent Seven at 18 times next year’s expected earnings. Apple, Microsoft and Amazon are trading around 30 times earnings.
Delta is the dominant carrier in Atlanta, the world’s busiest airport by passengers. It has 73 per cent share in that airport, which is a level in a very busy airport that is beneficial to margins. Delta is also the least unionized airline in the world. Roughly 20 per cent of employees are unionized, compared to typically closer to 80 per cent at others. Its low unionization rate was achieved years ago by creating a profit-sharing program that pays out 10-20 per cent of operating income to employees in return for more flexibility on work rules and pay. In a high fixed cost business such as airlines, this flexibility provides Delta a real advantage over its peers. Delta also owns a fuel refinery in Pennsylvania which further saves them money on fuel costs. This leading and competitively advantaged airline can be bought today at only six times next year’s expected earnings.
The latest playbook in the oil patch has been to pay down debt and then return capital to shareholders. Ensign is now halfway through its three-year goal of paying down $600 million of debt, or roughly $200 million per year. A key question becomes, what will the company do once the $600 million is paid? If we assume the current market cap of $450 million, and sustainability of $200 million in annual free cash flow, Ensign will have considerable optionality. Theoretically, at today’s share price, a return of $100 million in capital to shareholders via a dividend would result in a dividend yield of 22 per cent. The other $100 million could be used for buybacks to reduce the share count by 22 per cent. As Ensign approaches the final stages of its $600 million debt paydown, we suspect the market will start to price in this significant potential optionality by next year.
PAST PICKS: JUNE 19, 2023
TD BANK (TD TSX)
Then: $80.87 Now: $83.31 Return:3% Total Return: 10% TC ENERGY (TRP TSX)
Then: $53.45 Now: $64.19 Return:20% Total Return: 31% ARITZIA (ATZ TSX)
Then: $36.23 Now: $45.51 Return:26% Total Return: 26% Total Return Average: 22%
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Source
https://www.bnnbloomberg.ca/markets/2024/09/09/teal-lindes-top-picks-for-september-9-2024/
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