Brendan Caldwell, President and CEO, Caldwell Investment Management
FOCUS: North American Large Cap Equities
As 2022 approached, a concoction of headwinds created the perfect storm for equity markets and the ensuing selloff sent most benchmark equity indices down 20% or more from recent highs. Russia continues its assault on Ukraine, which has impacted global flows of key commodities. China’s zero COVID policy has forced port closures, exacerbating existing supply chain issues. Finally, the persistence of high inflation means that the Federal Reserve (and other central banks) may have to act much more aggressively to raise rates than investors expected just a few months ago.
We think the market is grappling with the fact that interest rates could stay high if inflation stays high. And after 12 years of near-zero interest rates, more pandemic stimulus and growing risks of recession, the outlook is very uncertain. One thing we are reasonably sure of is that the markets are likely to experience high levels of volatility for the foreseeable future. We will continue to focus our efforts on finding high quality, well managed companies with a proven track record in challenging environments and believe that professional investment advice is extremely valuable at times like these.
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Quanta Services (PWR NYSE)
Quanta Services is no longer a fund holding company but remains at the top of our watch list
- It is a well-managed engineering and construction company with a lower risk profile than its peers
- End markets benefit from strong secular tailwinds
- Utilities are investing to strengthen the grid and expand to prepare for things like electric vehicle charging
- Telecoms build 5G infrastructure over several years
- Majority of revenue comes from small maintenance type contracts which are unit price/cost plus, meaning they represent higher input costs compared to fixed price contracts
- These contracts also contribute to greater revenue and profit stability over time compared to other engineering and construction peers (PWR has done a great job of minimizing exposure to fixed-price contracts more important over time)
- Finally, the industry is highly fragmented and PWR has demonstrated a strong history of growth through acquisitions; so we think there is still a long avenue of growth there
- More recently: we don’t believe the solar industry disruption is a significant headwind
- Biden admin seeks to temporarily eliminate Trump-era tariffs
- Solar power is crucial to US carbon reduction goals, investments cannot be avoided, and domestic supply is likely to become a bigger focal point in the years to come.
- PWR management said it can shift work to other areas to catch up with delayed solar projects in 2022
Capital Power (CPX TSX)
Holding the CVM; most recent purchase: May 18, 2022, at $44.92
- Capital Power is an independent power producer with approximately 6,600 megawatts of generating capacity at 27 facilities in North America
- They are operating in a strong pricing environment that we view as sustainable in the short to medium term given the favorable supply and demand dynamics for electricity pricing in Alberta. Specifically:
- Oil and gas demand returns
- The industry’s aging thermal power generation assets are retired without major replacements through 2024-25
- Marginal costs of production are higher than before the pandemic
- They are in an envious position relative to their peers, having sold forward about 60% of 2023 baseload power generation while locking in more than 90% of its natural gas feedstock requirements at far lower prices. at the market.
- Finally, they have pledged to spend $0.5 billion in capital per year to grow its revolving platform both organically and inorganically.
- Noted a strong pipeline of acquisitions on the inorganic side
Murphy United States (MUSA NYSE)
Last purchase: June 21, 2022, at $223.78
- Murphy USA is a leading supplier of refined petroleum products to the United States
- It serves its customers through a network of approximately 1,700 retail gasoline stores and through non-branded sales to wholesale customers.
- It’s a story of strong organic growth that still has legs. Historically, early results have been driven by a combination of building new stores and renovating and expanding existing stores with management, aiming for store growth of 2-4% per year
- Recent mergers and acquisitions expected to accelerate growth by strengthening the company’s convenience store offering
- Similar to Couche-Tard, MUSA hopes to apply lessons learned from the acquisition of QuickChek, which has industry-leading gross margins in merchandising and was historically strong in food and convenience products, relative to the rest. chain.
- This should increase the company’s margins over time
- MUSA’s core businesses have an industry-leading cost structure, partially funded by its owned real estate portfolio, and lower-than-industry retail fuel profitability levels, helping to generate market share gains while increasing fuel margins
- In the current inflationary environment, the price gap at MUSA is widening against smaller competitors who must pass on higher costs to survive; MUSA reinvests part of the margin expansion to gain market share (so we see this as a trade down game for consumers)
- Q1 2022 Gallons Sold Surpassed Q1 2019 Levels; management. Seeing smaller ticket sizes but more frequent rides helps merchandise attachment rates (i.e. buying something inside with your gas purchase) to recover
PAST CHOICES: May 3, 2021
Martin Marietta (MLM NYSE)
- So: $354.56
- Now: $302.79
- Return: -15%
- Total return: -14%
Watsco (WSO NYSE)
- So: $295.46
- Now: $235.18
- Return: -20%
- Total return: -18%
Fastenal (FAST NASD)
- Then: $53.00
- Now: $50.97
- Yield: -4%
- Total return: -2%
Average total return: -11%