It’s down to the final stretch before the U.S. election on Nov. 5, and perhaps relief from campaign ads and debates over who called who garbage. A shocking finding from a recent Wall Street Journal poll is that 87% of voters think America will suffer permanent damage if their candidate loses. Whatever the outcome of the election, at least half the country will feel crushed. In this environment, it’s important for investors to prevent politics from derailing their long-term financial plans. Let me say this: let's not make things harder than they have to be. For all the attention around the presidential contest and congressional races, let’s remember that stocks ultimately trade on two foundations. First, expectations for corporate earnings growth and second, economic growth. Here are some facts. Earnings remain very good (+4% in Q3) and are expected to continue to climb over the coming quarters by as much as 10% as non-Tech companies start seeing easier comparatives to year-ago results. And as far as economic growth grows, the recent GDP report confirmed the US economy is still advancing at a steady clip (+2.8%), led by consumer spending (+3.7%). In addition, central banks have embarked on a rate cutting cycle that should continue into 2025. Lastly, there is an old saying on Wall Street: “Never sell new highs or buy new lows.” We’ve seen too many Wall Street careers end prematurely by ignoring that simple fact. A big fear is that we will not know the results this week. It is clear that the winner of the 2024 Presidential election will not be decided on Tuesday evening. This harkens back to 2000 when Gore-Bush decision was not made until Dec 12th. Ultimately a challenge could wind up in the House. And the Constitution stipulates that a new president must be sworn in by noon on January 20. And the largely conservative judiciary, largely installed by Trump and Mitch McConnell, will call the shots. The Supreme Court (6-3 conservative) may ultimately decide the outcome. One thing I do know is the end of the 2024 election cycle will allow investors to refocus on the fundamental issues that inform asset prices. This has to be bullish.

Should you have any questions or concerns, please feel free to reach out.

Portfolio Notes

(+) indicates a positive development, (-) indicates negative, and (~) indicates neutral

(+) Alphabet (GOOGL-US) kicked off earnings season for Big Tech, doubling down on AI development across its product lineup with strategic team reorganizations. And so far, the AI push is paying off. The Cloud division surged 35% year-over-year, surprising Wall Street analysts who had expected stable growth at 29%. CEO Sundar Pichai recently shared with employees: "AI moves faster than any technology before it. To keep increasing the pace of progress, we've been making shifts to simplify our structures along the way.” Following this shift, the Gemini app team is now joining DeepMind for faster deployment, while the Assistant teams are moving to Platforms and Devices to integrate AI more deeply into products. These changes come as Alphabet faces rising competition in Search and works to turn its substantial AI investments into revenue. With AI-powered features rolling out faster than ever, Alphabet is determined to lead in this Supercycle. But the regulatory challenges loom large. “The D.O.J. overhang doesn’t go away, and thus negative regulatory catalysts could still lie ahead,” Brad Erickson, an analyst at RBC Capital Markets, wrote in an investor note this morning. “But bigger picture, we believe the stock still has a wall of worry to climb.” RBC raised its price target on the stock to $210, and maintained its “outperform” rating. Owned in Core, ESG+ and US Portfolios.

(+) Amazon (AMZN-US) The e-commerce giant popped up after posting stronger-than-expected earnings and robust cloud and advertising growth. Revenues for its Amazon Web Services grew 19% on a year-over-year basis. Amazon may be widely known for online shopping, but its cloud business is also very profitable. Advertising is another fast-growing business with high margins. Management has been working to aggressively decrease delivery times and reduce overall costs. Prime leverages free shipping and video streaming with tons of other perks to keep users paying every month. Owned in Core, ESG+, US and Opportunity Portfolios.

(-) Apple (AAPL-US) Shares dipped even after the technology giant surpassed top-and-bottom line estimates for the recent quarter and showed 6% revenue growth. Net income declined as the company paid a one-time charge connected to a tax decision in Europe. Apple’s dominant hardware and growing services businesses provide a deep competitive moat and plenty of bundling opportunities. Management’s net cash neutral strategy provides confidence that free cash flow will continue to fund dividends and buybacks. Management noted that the installed base of active devices reached an all-time high across all products and geographic segments, due to very high levels of customer satisfaction and loyalty and a large number of customers who are new to their products. Exactly why we own the shares. Owned in Core, ESG+, Cash Flow and US Portfolios.

(+) Booking Holdings (BKNG-US) reported a strong financial performance with a 9% year-over-year revenue growth to $8 billion and a 12% increase in adjusted EBITDA to $3.7 billion, surpassing expectations. The company experienced an 8% increase in room nights booked, driven by growth in Europe and Asia, and a significant 14% growth in alternative accommodations room nights. Notably, air tickets booked surged by 39% year over year, emphasizing the company's successful expansion into the flight vertical. Booking Holdings is also making strides in its Connected Trip vision and AI initiatives, aiming to enhance customer experience and operational efficiency. The company has raised its full-year outlook, expecting gross bookings to increase about 8% and revenue growth just below 10%, with adjusted EBITDA projected to grow between 13 and 14%. Owned in Opportunity Portfolio.

(~) Canadian Natural Resources (CNQ-T) This quarter emphasizes why CNQ is our top pick in the energy producer space. The company beat street expectations. Guidance was unchanged. As a reminder, upon closing of its $6.5bn acquisition of Chevron’s assets, CNQ will adjust its capital allocation strategy to 60% of free cash flow being allocated to shareholder returns (currently 100%) and the remainder be allocated to debt reduction until net debt reaches $15B. Bigger picture, the macro and geopolitical situation has driven quite a bit of volatility in the price of oil, with WTI currently trading US$69/bbl. Nevertheless, CNQ is still expected to generate a high single digit FCF yield at current oil price levels. The company remains a high-quality energy producer in our view, supported by its long-life, low-decline assets. We remain comfortable with our market-weight position. Owned in Core and Cash Flow Portfolios.

(-) Caterpillar (CAT-US) Shares fell after the industrial giant reported weaker-than-expected earnings for the third quarter. The company posted a profit of $5.17 per share, while analysts had forecast earnings of $5.34 per share. Revenue also fell 4% year over year to $16.11 billion. Owned in US Portfolio.

(-) Chipotle (CMG-US) headed lower following its Q3 earnings results. The burrito restaurant chain reported modest EPS upside while revenue rose 13% yr/yr to $2.79 bln, which was generally in-line, maybe a bit light. The company also announced a $900 mln share buyback authorization, which is in addition to previously announced repurchase authorizations. This quarterly report was notable in that it was the first since Brian Niccol stepped down. He had been CEO since 2018, but he moved on to become CEO of Starbucks. There were some positives in Q3, most notably that brisket is performing very well and CMG is not seeing any softness from any income cohorts. However, sales and comps were still a bit on the lighter side. Owned in US Portfolio.

(-) Coinbase (COIN-US) Shares dropped after muted crypto trading caused revenues and earnings to miss analyst estimates. Within its core business, retail trading revenue grew 98% YoY, while institutional revenue jumped 292% to $55.30 million. Total transaction revenue was up a staggering 98% YoY. Owned in Opportunity Portfolio.

(-) Eli Lilly (LLY-US) The shares tumbled as Mounjaro and Zepbound sales missed expectations by wide margins. Lilly swung to net income of $970.3 million, or $1.07 a share, from a loss of $57.4 million, or 6 cents a share, in the same period a year ago. Excluding nonrecurring items, adjusted earnings per share of $1.18 missed the FactSet consensus of $1.45. Total revenue climbed 20.4% to $11.44 billion but was well below the FactSet consensus of $12.09 billion. Sales of Mounjaro jumped 120.9% to $3.11 billion, but missed the FactSet consensus of $3.77 billion, while Zepbound sales of $1.26 billion — there were no sales a year ago — were below expectations of $1.73 billion. Looking ahead, Lilly cut its full-year guidance for adjusted EPS to $13.02 to $13.52 from $16.10 to $16.60 and for revenue to between $45.4 billion and $46 billion from $45.4 billion to $46.6 billion. The stock has rallied over 50% year to date. Owned in Core, ESG+, Cash Flow and US Portfolios.

(+) Enbridge (ENB-T) reported a decent set of financial results with in-line numbers and a slight beat on EPS. Mainline performed well in Q3 and the company has commented that demand continues to be strong. On the back of that, management has amended its guidance directionally to expect EBITDA to be near the top of the 2024 range and EPS will be around the midpoint. Multi-year guidance remains intact with 7-9% EBITDA CAGR and 4-6% EPS CAGR targets reaffirmed. Lastly, in addition to the pipeline project announced earlier in October, the company also announces a gas transmission project that would help provide more supply from the Permian basin to LNG export terminals, and 2 renewable solar projects both with long term agreements. Shares yield 6.51%. Owned in Cash Flow Portfolio.

(new) Leonardo DRS (DRS-US) provides defense electronic products and systems, and military support services. Despite the threat of multipolar competition and a rearmament in Europe, military budgets are far from their 1980s highs. If defense stocks are any judge, the world is a dangerous place but still far less so than in the 1980s. With fighting in the Middle East escalating and the world entering a phase of heightened geopolitical conflict, will these companies permanently trade at higher valuations? For the gains to be sustained, there needs to be a significant increase in the U.S. defense investment budget, which comprises both the research and testing of new technologies and the procurement of existing weapons. But the crux of the matter is that rising conflicts around the world haven’t yet translated into an expansion of the Pentagon’s investment budget, which was already at a record high following the Trump administration’s attempts to retire the last Cold War hardware and invest in next-generation areas. Defense stocks had a great run after 2016, but the rise in relative valuations was brief, as budgets started forecasting a plateau in future spending. Ahead of the Nov. 5 elections, both Kamala Harris and Donald Trump have pledged more support for geopolitical allies. New position in Opportunity Portfolio.

(+) McDonald's (MCD-US) After back-to-back EPS misses in Q1-Q2, it was good to see MCD get back to reporting EPS upside in Q3, albeit modest upside. Also, after MCD reported its first yr/yr revenue decline last quarter since 4Q22, it was good to see MCD post top line growth in Q3. Revenue rose 2.7% yr/yr to $6.87 bln, slightly better than expected. The E. coli issue was going to be front, and center and it was. The good news is that MCD said the situation appears to be contained. It was able to quickly link the cases to onions from one facility and it has stopped sourcing from this facility indefinitely. We think MCD deserves credit for pivoting more to value in recent quarters after being caught flat-footed and a bit late as peers turned to value more quickly. MCD has committed to extending the $5 meal deal into December and it plans to introduce more value options in 1Q25 as value has been at the forefront of conversations. Owned in US Portfolio.

(-) Meta Platforms (META-US) reported a 19% increase in Q3 revenue, reaching $46 billion, alongside the launch of its new mixed reality headset, Quest 3 S, which has been met with positive reviews and high expectations for the holiday season. However, the company also faced a significant operating loss of $4.4 billion in its Reality Labs segment and an overall increase in Q3 expenses by 14% year over year, primarily due to higher infrastructure costs and R&D expenses. Despite these challenges, Meta highlighted its efforts in improving monetization efficiency, with a 2-4% increase in conversions, and its investment in generative AI and Meta AI expansion, which continues to scale with new features. The company also provided a Q4 revenue forecast in the range of $45-$48 billion and updated its full year 2024 expense outlook to be between $96-98 billion, indicating ongoing investments in infrastructure and development initiatives. I was quite surprised to see in the latest EssilorLuxottica results that the Ray-Ban Meta glasses were their best-selling Ray-Bans around the world. In the EMEA region, which includes Europe, the Middle East and Africa, 60% of all sales from Ray-Ban stores were the Ray-Ban Meta glasses. These glasses start at $300, whereas the average pair of Ray-Bans cost around $200. To get all those extra smart features for an extra $100 explains why the sales have been so good. I bought a pair and love them. Owned in Core and ESG+ Portfolios.

(-) Microsoft (MSFT-US) Cloud services have significantly driven revenue, with the cloud segment surpassing $38.9 billion. The AI business is expected to exceed an annual revenue run rate of $10 billion, marking rapid growth. Azure's customer base has grown to over 39,000, indicating strong demand for cloud infrastructure services. The company announced new investments in cloud and AI infrastructure across Brazil, Italy, Mexico, and Sweden. Despite these successes, the scaling of AI infrastructure has led to a decrease in Microsoft Cloud's gross margin percentage to 71%. Owned in Core, ESG+, Cash Flow and US Portfolios.

(~) MicroStrategy (MSTR-US) an enterprise-software company that holds more than 1% of the supply of bitcoin on its balance sheet and calls itself the largest corporate holder of the cryptocurrency, said it plans to raise $42 billion over the next three years to buy more bitcoin. The plan is to use the additional capital “to buy more bitcoin as a treasury reserve asset,” the company said. Shares of MicroStrategy are up nearly 300% so far this year, eclipsing market darlings like Nvidia and Palantir. MicroStrategy posted third-quarter results as well, unveiling a net loss of $340.2 million, or $1.72 a share, compared with a net loss of $143.4 million, or $1.01 a share, in the third quarter of 2023. Owned in Opportunity Portfolio.

(~) Stack Capital Group (STCK-T) As at September 30, 2024, Book Value per Share (BVpS) of the Company was $11.05, compared with $11.24 as at June 30, 2024. The decrease in BVpS during the quarter was primarily related to a weakening US dollar compared to the Canadian dollar during the quarter. On October 30, 2024, Stack Capital announced additional financing. The transaction provides the Company with additional growth capital to pursue attractive opportunities currently available in growth and late-stage private businesses. SpaceX successfully completed its fifth Starship test flight on October 13, 2024, when, for the first time ever, it was able to ‘catch’ its Super Heavy Booster rocket, safely returning it back to the Starbase launch pad. This represents a significant leap forward in decreasing the cost to bring payload to space and accelerating the pace of growth and quality of the Starlink satellite constellation. Starlink continues to aggressively expand its global reach, having now crossed over 4 million subscribers. With over 6,400 satellites now in operation, Starlink has made impressive progress in signing airlines to its satellite service – United being the most recent, joining other carriers such as Qatar Airways, Air France, Hawaiian Airlines, Air New Zealand and WestJet, to name a few. Canva announced the acquisition of Leonardo.ai, a generative AI content and research startup. Leonardo's technology will integrate into Canva's Magic Studio generative AI Suite, supercharging its capabilities. Owned in Opportunity Portfolio.

(new) StandardAero (SARO-US) is the world’s largest independent, pure-play provider of aerospace engine aftermarket services for fixed and rotary wing aircraft, serving the commercial, military and business aviation end-markets. The company provides a comprehensive suite of critical, value-added aftermarket solutions, including scheduled and unscheduled engine maintenance, repair and overhaul, engine component repair, on-wing and field service support, asset management, and engineering solutions. SARO employs 7,300 people across 50 facilities, with 54 test cells around the globe. It also benefits from a number of competitive moats that create high barriers to entry, including those related to government regulations, OEM authorizations, and its own network reach and service offering. Regulatory certifications from government and intergovernmental bodies globally are essential for companies within the aerospace aftermarket industry. That certification process, however, can be costly and time consuming. SARO has a long history of obtaining and retaining these certifications and has engineered a playbook to help ensure it receives these certifications in a timely manner. We believe it is the early innings of an aerospace aftermarket Supercycle, and we expect SARO to be a beneficiary given it is the world’s largest independent provider of aerospace engine aftermarket services. On the commercial front, there remains pent-up demand, stemming from the effects of the pandemic, for maintenance, repair, and operations (MRO) services. As commercial airlines seek to keep pace with travel demand, which has surpassed pre-pandemic levels, they are burning green time (i.e., the time before a service is required) and increasing fleet utilization. This situation is being exacerbated by delays in new aircraft deliveries. Increased utilization and aging fleets will result in more frequent and more significant shop visits. Global military fleet defense spending continues to grow as a direct result of rising geopolitical tensions. Additionally, mission readiness is trending near recent lows, with the U.S. military aircraft fleet sitting at just 40% versus a target mission-readiness rate of 80%. New position in Opportunity Portfolio.

(-) Starbucks (SBUX-US) faced significant challenges in Q4 with a notable 24% decline in EPS and a modest 1% increase in FY2024 net revenues, alongside a 2% decline in comparable store sales. The company has suspended its FY2025 guidance due to a CEO transition and current business challenges. However, Starbucks is making strides in operational efficiency, achieving approximately $1 billion in cost reductions, and is focusing on menu simplification and core coffee offerings to improve customer experience. Investments in siren equipment and mobile order and pay improvements are part of the strategy to enhance service speed and satisfaction. Leadership development and the reinstatement of the stage gate innovation process are also key focuses to ensure strategic alignment and execution. Owned in Core, ESG+, and US Portfolios.

(+) Stryker Corporation (SYK) reported a solid EPS beat in Q3. The beat was driven by stronger than consensus growth in both the Medsurg and Neurotechnology segment as well as the Ortho and Spine segment, combined with a slight beat on margins. The company also raised its full year 2024 organic revenue growth guidance to a range of 9.5%-10%, up from its prior outlook for 9%-10% growth which we view positively. SYK sits at the intersection of a “super cycle” of innovation across its portfolio and a trade up market. We believe SYK can continue to grow revenues above the industry average driven by healthy utilization trends due to aging demographics, and strong execution which could drive further margin expansion and support its premium valuation. Owned in US Portfolio.

(-) Uber (UBER-US) At first glance, Uber'sQ3 earnings report looks quite solid as the rideshare and food delivery company drove past EPS and revenue expectations. However, the sizable GAAP EPS beat was partly due to a $1.70 bln benefit from net unrealized gains on equity investments, making the upside performance mostly irrelevant from an operational standpoint. Furthermore, while revenue of $11.19 bln came in slightly ahead of estimates, the key demand metric that most investors and analysts' home in on - Gross Bookings - fell a bit short at $41.0 bln, putting demand and growth concerns back under the spotlight. The main takeaway is that growth expectations are getting reset a bit lower after UBER missed Gross Bookings expectations and guided for a further slowdown in Q4. Although UBER's rideshare business has displayed impressive resiliency, the Q3 earnings report showed that it's not completely immune to macroeconomic headwinds. Owned in Core, ESG+, US and Opportunity Portfolios.

(+) Visa (V-US) reported Q4F24 results beat consensus on both revenues and profitability. We were encouraged that payment volume in Q4 and MTD October demonstrated stabilization compared to Q3. Management commentary on the conference call also suggested that there was no change in consumer behavior during the quarter. We continue to like card networks given they operate in an effectively duopolistic market (V and MA control 90% of all credit card transaction volumes globally), possess robust balance sheets, strong FCF generation and benefit from the ongoing secular shift towards digital payments. With the shares trading at a NTM P/E of 25x, below its 10-year average of 27.0x. Additionally, the company raised its quarterly dividend by 13% to 59 cents. Owned in Core,ESG+, Cash Flow and US Portfolios.

(+) VitalHub (VHI-T) announced its largest acquisition to date in Strata Health. Strata is a highly attractive acquisition as it adds another core growth pillar to the portfolio in a large greenfield market with limited competition. Strata Health is a Calgary-based provider of patient flow solutions in the eReferral space. Founded in 2002, it has grown to service 81 health systems partners and 510 hospitals, processing 800k patient transitions. Approximately 50% of the business is in Canada and 25% in the UK, with smaller revenue in the US and New Zealand. We also view the price paid as highly attractive given the quality and growth expectations. Shares reacted positively and we expect other M&A announcements in the coming months. Owned in Opportunity Portfolio.

(-) Xylem (XYL-US) reported a mixed quarter with EPS in-line with consensus and a miss on revenues. Organic revenues grew less than expected, which management attributed largely to project timing. XYL’s products allow for the transport and delivery of drinking water to the collection, testing, treatment and analysis of wastewater before its return to the environment. Water usage is growing driven by population growth and socioeconomic development. The combination of rising water uses in emerging markets and a crumbling infrastructure in developed markets have resulted in a greater need for investment in water projects, which is a benefit for XYL. XYL’s stock price is up 14% year-to-date, underperforming the S&P 500. We would continue to own the stock. Owned in ESG+ Portfolio.

Company of the Week: Cheniere

Q3 Presentation

 

Weekend Reading

RBC MacroMemo - October 29 – November 18, 2024 U.S. election countdown / U.S. activity holds up / High savings rate / Deteriorating demographics / Canadian immigration reversal / Quick hits RBC GAM

The hard truth: Americans don’t trust the news media Jeff Bezos defends his decision to end presidential endorsements at The Washington Post. WASHINGTON POST

In Defense of ‘Surveillance Capitalism’ Critics of Big Tech often describe ‘surveillance capitalism’ in grim terms, blaming it for all kinds of political and social ills. This article counters this pessimistic narrative, offering a more favorable take on companies like Google, YouTube, and X. It argues that the downsides of surveillance capitalism are overstated, while the benefits are largely overlooked. SPRINGER

Ranked: Real Estate Bubbles by Change in Home Prices (2014-2024) See where Toronto and Vancouver sit. VISUAL CAPITALIST

A Message From the Past (Thoughts on Nostalgia) There’s a Russian saying about nostalgia: “The past is more unpredictable than the future.” It’s so common for people’s memories about a time to become disconnected from how they actually felt at the time. MORGAN HOUSEL

Ruminating on Asset Allocation In his latest memo, Howard Marks outlines the need to base asset allocation decisions around an established risk target. He describes the fundamental differences between ownership and debt, as well as the importance of finding the combination of the two that gets an investor’s portfolio to the desired position on the risk/return continuum. Finally, he expands on the increased utility of debt investments in today’s portfolios. OAKTREE

Reflections on Palantir I left last year, but never wrote publicly about what I learned there. There’s also just a lot about the company people don’t understand. So this is my effort to explain some of that, as someone who worked there for eight years. NABEEL

When planning for the future, don't neglect the present There are a million books and blogs out there that will tell you how to top up your retirement account, build balanced portfolios, and sacrifice that daily latte for future riches. That’s the easy part. The hard part is asking ourselves what we are saving all this money for in the first place. What kind of life do we want to build for ourselves and for the people we love? Nothing brings that into greater focus than considering our own mortality. LOW RISK RULES

Night Lights in North Dakota The discovery of the Parshall Oil Field in 2006 set off a multi-billion dollar energy boom in North Dakota's Bakken Oil Patch. Daytime imagery from Earth-observing satellites has documented explosive urban growth in places like Williston and Watford City. But proof of the oil industry's rapid expansion is clearest when the sun goes down. USGS