Second Quarter 2024 Commentary | Caldwell North American Fund Annual Commentary

Market Commentary

For the second quarter of 2024, the Caldwell North American Fund (“CNA” or “Fund”) gained +2.2% versus a gain of +2.5% for the Fund’s benchmark, which comprises an equal blend of the S&P 500 Total Return Index and the S&P/TSX Composite Total Return Index. From a sector standpoint Information Technology, Communication Services, and Materials were relative outperformers, whereas, Real Estate, Industrials, and Financials underperformed.

Portfolio Commentary

Top contributors to the Fund’s performance in the second quarter of 2024 were Boston Scientific (“BSX”), Cargojet (“CJT”), and Microsoft (“MSFT”). BSX performed well as the company reported strong quarterly revenue and an earnings beat, along with raising its full-year guidance. The U.S. launch of Farapulse is off to a strong start, with adoption exceeding expectations, and traction in Europe has improved along with easing supply chain constraints. The company remains on track toward its annual margin expansion targets, aided by a solid pipeline of higher-margin product launches over the next 1-3 years. In addition to strong organic growth, BSX supplements its efforts with continued mergers and acquisitions and investments in promising technology through an internal venture capital arm. Overall, we believe the company should continue to outgrow its peers while improving profitability over time. CJT’s strong stock performance was driven by exceeding earnings expectations through cost control measures such as streamlining maintenance processes and insourcing flight simulators, which lowered pilot training costs. Additionally, CJT sold excess assets, generating cash to pay down debt, meaningfully reducing its leverage ratio. Despite a challenging domestic package market, the broader international air freight market showed signs of improvement. The company’s capacity to handle significant revenue growth with its current aircraft base also positions it favourably for future recovery, further bolstering investor sentiment. MSFT has been rerating higher following its strong quarterly results, with the company beating expectations on major metrics including Azure growth and providing positive guidance for the next quarter. Its management’s evident enthusiasm about the business, especially in the realm of Artificial intelligence (“AI”), and the significant increase in capital expenditures indicate confidence in future growth. The company’s transition to AI-driven services, with notable stats such as a 7% AI-driven tailwind for Azure and increasing adoption of Copilot in Windows, showcases its strong strategic positioning. Additionally, continued growth in Office 365 average revenue per user as well as robust commercial cloud revenue contributed to investor confidence.

During the second quarter of 2024, the Fund initiated positions in Accenture (“ACN”) and Tourmaline Oil (“TOU”). ACN is a global professional services company offering a wide array of services in strategy, consulting, digital, technology, and operations. With specialized capabilities across over 40 industries and extensive business functions, supported by the world’s largest delivery network, it operates at the nexus of business and technology to enhance client performance and create sustainable stakeholder value. The company is a market leader with robust competitive advantages allowing it to generate industry-leading returns on invested capital as a result of its scale advantage. Additionally, its ability to leverage its intellectual property solutions for customization through a combination of proprietary tools, frameworks, and methodologies tailored to meet the unique needs of its clients should allow the company to continue driving superior margins. TOU stands as a leading Canadian natural gas producer, primarily operating in the Alberta Deep Basin, Northeastern British Columbia, and the Peace River Triassic Oil regions. The company is poised for substantial growth due to the improving fundamentals of the North American natural gas market, driven by increasing Liquefied Natural Gas export capacity and rising domestic demand from sectors like power generation, AI data centers, and manufacturing. With the largest Tier 1 drilling inventory and strategic control over significant natural gas infrastructure, it is well-positioned to capitalize on these market dynamics, making it a strong candidate for investment growth.

Looking Forward

Inflation, interest rates, and the risk of recession continue to be the most prevalent themes in 2024. Macroeconomic forces are still the most dominant factors driving the markets. If inflation remains at a manageable level, central banks may be able to orchestrate a soft landing for the economy, avoiding a typical recession. However, if inflation elevates to undesirable levels again, a harder landing may be necessary where interest rates strain consumer spending, investments, and corporate profits, ultimately resulting in a classic recession with increased unemployment. While economic uncertainty is a predominant risk in the markets today, we remind investors that one of the Fund’s investment principles is to protect capital by seeking reasonable valuations. To that end, we think the Fund’s value tilt positions it well for the uncertain environment. History has taught us that crisis creates new opportunities and for those investors with multi-year investment horizons, we will continue to manage portfolios based on our investment principles of protecting and growing our investors’ capital through discounted valuations, strong balance sheets, good management teams and attractive business environments.