Quarterly commentary - Mackenzie Cundill Team

Written by the Mackenzie Cundill Team

CVF: Cundill Value Fund
CCS: Cundill Canadian Security Fund
CCB: Cundill Canadian Balanced Fund

Recent developments

Trump’s win has introduced new opportunities and risks to the market. We are now seeing more divergence amongst equity returns as the market tries to assess the size and sequence of tax cuts, deregulation and higher US energy production, against the threat of new tariffs and immigration reforms which would impact labour supply. This has resulted in strong USD and treasury yields, as sticky inflation risk resurfaces in 2025. Sticky but moderate inflation and higher interest rates vs. the previous decade are both tailwinds to our value strategy.

Security contributors

CVF,CCS,CCB: Celestica (CLS) is a major winner in AI and management continues to execute flawlessly on the opportunity. The company has become the leading supplier of AI servers to a hyperscale customer. Celestica has also been gaining market share in 400G and 800G networking switches with significant support from Broadcom.

CVF,CCS,CCB: AtkinsRealis (ATRLCN) continues to deliver strong organic growth and margin expansion in its engineering service segment. We believe AtkinsRealis continues to be undervalued and has several upcoming catalysts, including selling the remaining interest in Highway 407, delivering the final construction projects in 2025 including Eglinton LRT, and continuing to build up its nuclear backlog.

CVF,CCS,CCB: Salesforce (CRMUS) delivered strong quarterly results driven by an inflection point in Agentforce, a new product in the digital labour market where Salesforce is the leading global player. Salesforce signed 200 Agentforce deals in just one week and the pipeline is in the thousands, leading to Salesforce plans to hire 1,000 - 2,000 more salespeople focused on Agentforce.

Security detractors

CVF,CCS,CCB: Teck Resources (TECK.B) underperformed inline with other copper producers following poor economic data from China. Teck is uniquely positioned as a pure play copper producer with several development opportunities. Teck’s flagship asset, QB2, continues to ramp up production. Longer term Teck is expected to benefit from copper being an energy transition metal, and any acceleration in Chinese economic activities.

CVF,CCS,CCB: DR Horton (DHI), the largest listed US developer, had a rough 4Q24 with weak results and a cautious guide for 2025. DR Horton order book remains held back by higher rates while margins are impacted by continued high incentives. While housing is still structurally constrained in the US; continued high borrowing rates, limited visibility on rate cut cycle and unsupportive macro data are near term headwinds. Longer term, as lower rates lead to improved demand and millennials family formation grows, we believe DR Horton will outperform given its national scale and focus on first time home buyers with a relatively lower entry price point.

Portfolio activity

CVF: We initiated a position in Goldman Sachs (GS) as the investment bank is returning to its roots of mergers and acquisitions advisory, equity and fixed income capital raising, trading and wealth management.  Its foray into Main Street credit and banking is largely over. As interest rates come down or normalize, and a new, more business-friendly administration comes into power in the U.S., we believe the strong pipeline of pending M&A and fund-raising deals will be unleashed, and Goldman is a leader in that space. Shares offer compelling valuation.

CCS,CCB: We initiated a new position in Spin Master (TOYCN), one of the largest toy companies globally. There are several catalysts that drive our thesis: new product launches such as Ms. Rachel and Blockables will drive organic growth, Melissa & Doug cost synergies will become more evident in 2025, and management will continue to drive sales synergies between the toy, entertainment and games franchises. At P/E of less than 10X, we view this as an opportunity with significant upside.

CVF,CCS,CCB: In Q4, we exited CVS Health Corp (CVS). The company has failed to deliver its own earnings targets a number of times over the last year. In addition, the company is facing growing regulatory challenges. CVS is a healthcare conglomerate that operates retail pharmacies, health insurance, and pharmacy benefit manager (PBM). The company derives its strength from its integrated operations. However, the US government intends to pass legislation to force CVS to spin out its PBM and retail pharmacy. We believe this could structurally reduce the profitability of the company due to dis-synergies. We do not see catalysts for the stock to improve valuation currently.

Outlook and positioning

We believe we are in the midst of a largely global synchronized interest rate cut cycle (notable exception being Japan). However, despite lower rates, the terminal rate will likely be much higher than that of the prior decade. We believe near term lower interest rates will support an extension of the current economic cycle. We are fully invested and continue to balance our exposures in deep value, cyclical value and quality value. We feel confident that the investment catalysts we identified in our holdings will drive valuation re-rating and portfolio performance.

The Canadian economy is in a weaker state compared to its neighbour to the south. If the threatened tariffs against Canada actually take effect, it’s likely to be a setback of sorts for the country. However, that is a big “if”. Regardless of how the economy is going to evolve, our selection of Canadian holdings have catalysts that go well beyond the state of the economy and are well supported by their valuation.

CVF:

The portfolio is overweight US banks as we believe they will benefit from a deregulation cycle, continued strong consumers and corporates and a steepening yield curve. We also continue to find opportunities in information technology and our weight is inline with the benchmark. Our IT names trade at 14x P/E vs. the IT benchmark’s 28x P/E.

CCS & CCB:

The portfolio is overweight consumer discretionary sector due to the continued strength of US consumer spending. We are also overweight IT sector and banks, where we also own US banks as we believe they will benefit from a deregulation cycle, continued strong consumers and corporates, and steepening yield curve.

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This document may contain forward-looking information which reflect our or third-party current expectations or forecasts of future events. Forward-looking information is inherently subject to, among other things, risks, uncertainties and assumptions that could cause actual results to differ materially from those expressed herein. These risks, uncertainties and assumptions include, without limitation, general economic, political and market factors, interest and foreign exchange rates, the volatility of equity and capital markets, business competition, technological change, changes in government regulations, changes in tax laws, unexpected judicial or regulatory proceedings and catastrophic events. Please consider these and other factors carefully and not place undue reliance on forward-looking information. The forward-looking information contained herein is current only as of December 31, 2024. There should be no expectation that such information will in all circumstances be updated, supplemented or revised whether as a result of new information, changing circumstances, future events or otherwise.