Martin Cobb, senior vice president and equities at Lorne Steinberg Wealth Management, shares his outlook on Global & North American Equities.
Martin Cobb, Senior Vice President, Equities, Lorne Steinberg Wealth Management
Focus: Global & North American equities
Top picks: Automatic Data Processing, Linde, Open Text
MARKET OUTLOOK:
Investors appear to be craving the “Goldilocks” (not too hot / not too cold) economy that will lead to interest rate cuts but not any sustained economic weakness. The market typically rises when the U.S. Federal Reserve resumes cutting as long as the economy avoids a recession within the following year. A surprisingly large degree of economic growth is now dependent on tech capex. So not only does the performance of the U.S. stock market increasingly depend on the performance of just a handful of businesses but the outlook for the overall economy does too. That’s worrisome.
Closer to home, odds have now risen to over 80 per cent that the Bank of Canada will cut next week with the employment picture (not to mention a moribund housing market) making the strongest argument for one. And unlike a year or so ago, the Canadian bourse no longer trades at such a sizeable discount to its southern neighbour.
History tells us that periods of major technological innovation are often accompanied by speculative bubbles. Indeed, a 2018 study entitled “Two Centuries of Innovations and Stock Market Bubbles” examined 51 innovations between 1825 and 2000 and found that almost 3/4 of them involved bubbles. Why should we expect AI to escape the norm? But if its narrative continues to inspire, market participants may well ignore the absence of any return on such huge expenditures, allowing the party to continue… at least for a while.
TOP PICKS:
Martin Cobb’s Top Picks: Automatic Data Processing, Linde & OpenText Martin Cobb, senior vice president and equities at Lorne Steinberg Wealth Management, shares his top stock picks to watch in the market.
Automatic Data Processing (ADP NASD)
- Global market leader in HR management software & services, including payroll processing, benefits administration, talent management, and workforce analytics
- While they serve over 1 million clients in some 140 countries, North America is still 90% of revenues where they process paychecks for about one in six American workers
- Outsourcing as well as ever-changing legal, compliance and regulatory requirements drives 5-6% annual industry growth and business enjoys 90%+ customer retention rate
- Consistently hold more of their own cash than they do debt – when you move US$2½ trillion of client money around every year, your finances had better be rock solid
- Possible margin and share buyback uplifts on top of the secular growth in the top line drive the forecasted EPS and CAGR to around 10%
- Never an optically cheap stock (one wouldn’t expect so for a business that hasn’t had a down year in organic revenues this century) but should be able to hold the upper 20s PE multiple while delivering the sort of continued growth which has underpinned uninterrupted dividend increases each year for several decades now
Linde (LIN NASD)
- World’s leading industrial gases company supplying oxygen, nitrogen, hydrogen, and specialty gases to a wide range of industries
- A stable, high margin industry with an oligopolistic structure, highly defensive in nature with consistent growth and strong pricing power
- Barriers to entry are significant due to capital intensity, regulatory requirements, long term take-or-pay contracts, high switching costs and embedded infrastructure for what are often low cost but mission critical gases in their customers’ operations
- Hydrogen and carbon capture markets offer new legs of growth
- Linde boasts a strong balance sheet, best-in-class margins and returns on capital
- Anticipate low double-digit EPS growth expansion via strong top line, expanding margins and 2–3% net share count reduction
- Multiple in the mid to upper 20s doesn’t seem out of place for such an entity
Open Text (OTEX TSX)
- A software company, they provide tools for clients to make sense of the data that their organisation generates (anything that has a measurable output really)
- This not a high growth entity but they still spend close to 15% of sales each year on R&D so as to keep their products relevant to their clients and, as a result, have a loyal customer bases and something akin to 80% annually recurring revenues
- Artificial intelligence doesn’t change that but arguably will only enhance it, albeit that they may well not have 20,000 employees 10 years hence
- This an entity that consistently generates close to US$1 billion in FCF each year, enough to buy back over 10% of their share count
- Lots of debate about (the lack of) organic growth rather misses the point. It’s much more about capital allocation (William Thorndike’s ‘The Outsiders’ book should be required reading for all CEOs / CFOs)
- At this valuation (10%+ free cashflow yield) just ‘eat yourself’ would be my advice to whoever becomes the new CEO
PAST PICKS: May 27, 2025
Techtronic Industries (669 HK)
Then: hk$88.85
Now: hk$98.45
Return: 11%
Total Return: 12%
Alphabet (GOOGL NASD)
Then: US$172.90
Now: US$238.15
Return: 38%
Total Return: 38%
Canadian Natural Resources (CNQ TSX)
Then: $43.05
Now: $43.47
Return: 1%
Total Return: 2%
Total Return Average: 17%