It was a great week for our client base. Each of our portfolios is at all-time highs. But it is precisely "now" that I must remind everyone that this is exactly when we cannot let complacency set in. In my career, anytime we are celebrating performance - with fist pumps or logging in and sharing the good news with our spouses - can be an environment when we need to start considering protecting our hard-earned results and be more careful. I am not suggesting that this cannot continue for a many more months or even years. I am simply stating that we at The Newton Group will always challenge the popular market narrative and review our bullish thesis. First, as seen in the first chart below (prepared by BMO) we can see that the rest of the year is likely to remain positive.
Should you have any questions or concerns, please feel free to reach out.
Portfolio Notes
(+) indicates a positive development, (-) indicates negative, and (~) indicates neutral
(+) Alibaba (BABA-US) Shares of the Chinese e-commerce giant jumped after Alibaba launched more than 100 open-source artificial intelligence models, known as Qwen 2.5, and boosted the capabilities of its proprietary technology in an effort to increase competition with domestic rivals. The firm also announced a new text-to-video tool based on its AI models. Owned in Core, ESG+ and Opportunity Portfolios.
(new) Axon Enterprises (AXON-US) In 1993, Rick and Tom Smith founded TASER International in a garage in Tucson, Arizona. 30 years later, that company generates $1.6 billion in revenue and counts 95% of US law enforcement agencies as customers. It is the private cloud business and the body camera business that have exploded the company and stock. Axon buckets its products into 3 revenue segments: TASER (39% of revenue), Axon Cloud & Services (36% of revenue), Sensors (25% of revenue). Currently, 95% of revenue is earned through subscriptions. Even if not for public consumption the private cloud and body camera category for Axon will help police get better at their jobs which is a huge positive for society. New position in the Opportunity Portfolio.
(new) BCE Inc. (BCE-T) We view BCE’s sale of its 37.5% stake in MLSE to RCI.B as a step in the right direction. The stock had been in the penalty box for most of this year given its over-leveraged balance sheet and highly competitive telco environment. Well, we certainly got progress on one of these, and the $4.1B in proceeds (after tax) should help bring down leverage by 0.4x turns, to 3.4x by end of 2025 in RBCCM’s estimate. The asset sale demonstrates that BCE is willing to recalibrate as required, and we think further deleveraging might still be in the cards through potential minority sale of its towers asset. The lower leverage should also help reduce cash interest costs, which in turn should also help bring down dividend payout ratio on FCF to 99% and 93% for 2026 and 2027, respectively (RBCCM estimate). This should allay any investor concerns on the sustainability of the dividend. Valuation at 7.9x NTM EBITDA is not cheap in our view, and there needs a lot more work to be done in improving the underlying operations/profitability while managing ongoing competitive pressures. But we like the balance sheet deleveraging and are getting comfortable that the name can be owned here. The current yield is 8.42% but by no means would I be surprised to see a dividend cut. New position in the Cash Flow Portfolio.
(+) Cameco (CCO-T, CCJ-US) and other uranium related stocks, moved higher in sympathy with Constellation Energy. Constellation signed a 20-year power purchase agreement with Microsoft which will aid in the launch of Crane Clean Energy Center and the restart of Three Mile Island Unit 1, a nuclear power plant that shut down in 2019 due to economic reasons. Through the agreement, Microsoft will purchase energy from the restored plant as part of its plan to offset the power consumption of its data centers in PJM with carbon-free energy. PJM is an electrical grid that supplies energy to 13 states and Washington, D.C. The project is anticipated to add about 835 megawatts of carbon free energy to the grid and create 3,400 direct and indirect jobs. The Crane Clean Energy Center is anticipated to begin functioning by 2028, depending on approval from the U.S. Nuclear Regulatory Commission and receipt of other state and local permits. Owned in Core and Opportunity Portfolios.
(new) Meta (META-US) I have resisted owning Facebook and related Mark Zuckerberg entities for many years. I was pleased however to see that Instagram announced some security updates to accounts for teenagers (under 18) which gives parents more control over messaging and content. I am not a fan of governments interfering in people's lives, because clumsily designed regulations usually have unintended consequences. However, this change was initiated by Meta themselves, who believe that account protections for their 100 million plus teen accounts will improve user experience, prevent harm, and keep them on the platform. Instagram head Adam Mosseri said, "I think over the long run, it's going to be in our interest as a business to earn more trust from parents. Parents, at the end of the day, they get to make the decisions". I agree. After trading sideways for almost 6 months, I find the shares interesting here. New Position in Core, ESG+ and Opportunity Portfolios.
(new) On (ONON-US) I couldn't stand it anymore. Every time I travel, board a plane, go out to eat or get on an elevator I look down and see people wearing the shoes. Demand has consistently remained robust, leading to consolidated net sales growth of 30% this year alone. Despite the warehouse woes, On's Americas wholesale and DTC net sales growth stayed buoyant, expanding by 27.6% and 28.1%, respectively. In the EMEA, net sales jumped by 21.8% yr/yr, bolstered by exceptional momentum across the U.K. Meanwhile, in the APAC region, net sales exploded, surging by 73.7%, underpinned by sustained momentum in China. With the company already taking the necessary moves to overcome its warehouse issues, its future remains bright. New position in Opportunity Portfolio.
(new) WSP Global (WSP-T) WSP has become the largest player in the high-growth U.S. power and energy markets through its recent acquisition of POWER Engineers. This Canadian company is well positioned to benefit from the numerous fiscal spending bills in the U.S. that promote infrastructure spending. With 69,300 employees around the world, and 12,000 in Canada, they have over 150,000 active projects on all continents with almost $15 billion in revenues. New position in Core and ESG+ Portfolios.
Company of the Week: O Realty "The Monthly Dividend Company"
Weekend Reading
Falling inflation, rising unemployment usher in easing cycles in Canada and abroad The Canadian economy has continued to underperform global peers. Declines in per-capita output in seven of the last eight quarters have left average income per person back at decade-ago levels and the unemployment rate rising more than in other advanced economies. RBC ECONOMICS
Goldman Sachs US Daily: September FOMC Recap: Rate Cuts Begin with a 50 (Mericle) GOLDMAN SACHS
Toronto Subway vs Chengdu Metro 2010 – 2024 A map above showing just how successful Chengdu, China has been at growing their metro system over the past 14 years, compared to Toronto, Canada’s woeful performance during the same period. BRILLIANT MAPS
RBC Electric Car Cost Calculator Estimate the cost to buy and own an electric vehicle in Canada, compared to a gas model. ROYAL BANK
A Civil War in America? Two Experts Sound the Alarm on Trump's Second Term 'Authoritarians specialize in doing the unthinkable,' and people are misguided if they think it cannot happen in the US, leading scholars of fascism tell Mehdi. ZETEO
My Conversation with the excellent Tobi Lütke TYLER COWAN
Shall We Repeal the Laws of Economics? In his latest memo, Howard Marks discusses the economic facts of life, as he examines the workings of free markets and what happens when they’re tampered with. He considers what “price-gouging” actually means and how rents should be set. He ultimately argues that the laws of economics shouldn’t be overridden – even when it’s politically advantageous to do so – because of the loss to society. HOWARD MARKS
The TransDigm Phenomenon Ever wondered which market has the highest margins in the industrial world? It’s the aerospace aftermarket—and there’s no company that’s capitalised on this opportunity quite as well as TransDigm. COMMONCOG
"Capitalism is an organized system to guarantee that greed becomes the primary force of our economic system and allows the few at the top to get very wealthy and has the rest of us riding around thinking we can be that way, too - if we just work hard enough, sell enough Tupperware and Amway products, we can get a pink Cadillac."
- Michael Moore