Denis Taillefer, portfolio manager at Caldwell Investment Management Ltd.The Globe and Mail
President-elect Donald Trump’s return to the White House next year may lead to lower costs for companies and consumers and boost economic growth, but inflation will be a going concern, says money manager Denis Taillefer.
The portfolio manager at Caldwell Investment Management Ltd. in Toronto says investors should brace for interest rates to stop falling – and maybe even rise again – once the Republicans are back in power in the U.S.
Still, Mr. Taillefer favours the U.S. over international markets, prioritizing cyclical and smaller-cap stocks that he believes will have more growth potential.
“We prioritize company-specific value drivers or catalysts over broader macroeconomic or political factors,” says Mr. Taillefer, who oversees about $275-million of his firm’s $825-million in assets under management (AUM).
Mr. Taillefer uses a combination of quantitative and fundamental analysis to pick stocks in each of his U.S. and Canadian equity portfolios. In the U.S., he focuses on high-quality, dividend-growing companies. In Canada, he looks for companies with “robust earnings growth prospects and trading at compelling valuations.”
“The greater the strength of the catalysts – or the more catalysts there are – in a company’s story, the higher our conviction in that investment and the bigger the position we will take,” he says.
Mr. Taillefer oversees Caldwell Canadian Value Momentum Fund and Caldwell U.S. Dividend Advantage Fund, with a combined $225-million in AUM. Each fund includes about 15 to 25 stocks.
As of Oct. 31, Caldwell Value Momentum Fund, Series F, has returned 13.5 per cent year to date , 14.4 per cent over the past 12 months and has a five-year annualized return of 9 per cent. Its top three holdings include Fairfax Financial Holdings Ltd. FFH-T, at 5.8 per cent, Agnico Eagle Mines Ltd. AEM-T, at 5.6 per cent, and Element Fleet Management Corp. EFN-T, at 5.5 per cent.
Caldwell U.S. Dividend Advantage Fund, Series F, has returned 27.6 per cent year to date, 32.4 per cent over the past 12 months and has a five-year annualized return of 11.3 per cent. Its top three holdings are Tetra Tech Inc. TTEK-Q, at 6.7 per cent, Houlihan Lokey Inc. HLI-N, at 6.4 per cent, and Costco Wholesale Corp. COST-Q, at 6.2 per cent.
The Globe spoke with Mr. Taillefer recently about what he’s been buying and selling.
Name three stocks you own and would recommend for new clients.
AtkinsRéalis Group Inc. ATRL-T, formerly SNC-Lavalin Group Inc., is a stock we’ve owned since late March, 2023. We bought it for $32.94 a shre. The global engineering and construction firm was burdened by unprofitable fixed-cost projects, which impacted its profitability and ability to generate free cash flow.
The company has been repositioning itself as a pure-play engineering firm. We like that because pure-play engineering firms have a much lower risk profile and generate better margins and free cash flow. They also trade at a much higher multiple. The company is exiting its fixed-cost contracted business and divesting some of its non-core assets, which should help drive balance sheet improvements. That, in turn, should enable it to re-engage in merger and acquisition activity and restart growth.
We also like the overall industrial sector in North America and think this company is well-positioned to take advantage of trends such as the transition to renewable energy, reshoring manufacturing in the semiconductor industry, data centre growth and the resurgence of nuclear energy.
We recently trimmed [our exposure to] the stock in August because it became a big part of our portfolio, at about 8 per cent, but we still own a fairly big position at about 4.4 per cent. The company is trading at a discount to its peer group, so we think there’s still room for it to grow.
Chartwell Retirement Residences CSH-UN-T is a stock we bought a year ago, in early November, 2023, for $10.62 a share. It’s Canada’s largest owner and operator of seniors’ residences. Most investors know the industry went through a rough period during the pandemic. Now, we’re in the recovery phase.
The company has a few strong catalysts. The first one is strong demand, given the aging baby boomer population. We’re seeing steady improvements month over month in terms of occupancy rates. They’re still well below pre-pandemic levels, so there should be more potential for occupancy growth.
There’s also a slowdown in the new construction of seniors’ residences because of higher financing and construction costs. That creates a favourable demand-supply dynamic in the near and medium terms, which we think will help increase occupancy rates. The company has also improved efficiencies, which is driving better margins.
Tetra Tech Inc. TTEK-Q is our largest position in the portfolio. We bought it for US$159.90 a share a year ago. Adjusting for a five-for-one stock split in September, that price is US$32.85.
Tetra Tech is a leading global engineering and construction firm focusing primarily on water infrastructure and renewable energy. Water is one of the areas we like the most. The sector is growing rapidly, and there’s a significant increase in public and private spending, particularly in improving aging infrastructure. We also like this management team. It has done a good job improving its margins, and we think there’s still room to keep driving better margins. The company also has a strong balance sheet to grow through acquisitions.
Name a stock you’ve sold recently.
Entegris Inc. ENTG-Q is a stock we bought in July, 2023 and then exited in two stages: in April and July of this year. Entegris is a leader in advanced filters, chemicals and materials used in the semiconductor manufacturing process and the high-end electronics market. Its products help to drive better yields in the manufacturing process.
The industry was going through a soft patch when we purchased the stock. We bought it expecting to start to see a recovery in the company’s end markets that would clear up its excess inventory. That didn’t pan out. The recovery will take longer. Our performance was flat. We still like the company and would consider getting back in under the right conditions.
This interview has been edited and condensed.