Just after thinking it couldn’t get any better than 2024, the markets are off to a torrent pace in 2025. Most major indexes returned anywhere from 2.7%-4%, with the main laggard being the NASDAQ, with returns of 1.64% because of the DeepSeek AI fears.
My portfolio returned just over 5% on the month. Although I’m definitely enjoying the gains, I’m also making some strategic moves in light of higher valuations.
In this week’s newsletter, I’ll go over some of my core portfolio moves I made this week, including some sold and swapped positions, and then touch on a few earnings reports from Stocktrades Premium highlighted companies, primarily Value Call Lockheed Martin, and Canadian Pacific Kansas City.
Next week, we’re getting right into the thick of it in terms of earnings, and I’ll have plenty of fresh commentary on Premium featured companies.
Let’s dive right into it.
My portfolio moves this week
It was an active week for me, more active than I have been in a while. I made 3 core moves, all of which I’ll review below.
I trimmed Aritzia (TSE:ATZ)
Aritzia has been on a monumental run since its 2023 lows. If you remember, back in 2023, the company was hit with a substantial drawdown when its inventory levels started to rise.
To some, myself included, this looked like the untimely ordering of items due to large demand during the COVID-19 pandemic. To others, the inventory was building up because the brand was falling out of favor.
However, I continued to accumulate during the drawdown. I will admit that I did put a lot of faith in the company’s management and believed them when they said that the inventory was nothing more than untimely orders that were impacted by rising rates and a substantial slowdown in consumer spending.
Management ended up being right, and as inventory levels normalized, markdowns stopped, and the company got back to growth and started performing exceptionally well.
My additions inside of my TFSA were up over 200%, and my overall allocation towards Aritzia was creeping over the 3.5% range.
I’m still bullish on the company, and it will remain on the Bull List, but after some history with another high-flying retail company Canada Goose, which had a large-scale brand fallout and a struggle in terms of operational results, I try to keep my position around 2% if possible.
I sold off the shares inside of my TFSA and got my allocation back to what I am comfortable with.
I sold my position in Alaris Equity Partners (TSE:AD.UN)
I’d like to preface this with the fact that Alaris Equity Partners will still remain on the Dividend Bull List. The company is still an outstanding small-cap stock that provides a 6%+ yield. However, my primary thesis for buying the company and adding to it over the years has been from a value perspective, and I believe the company is fairly valued at this point.
My target for Alaris was a valuation of around 0.9x book value. This is typically what the company has traded at over the years, and I used that number to create a sell point of $20.50~ per share.
The company has benefitted substantially from a stronger US economy and the fact that the core of Alaris’s business is to issue capital to medium-sized private corporations in the US, and in return, those corporations pay Alaris a distribution.
If the US economy continues to turn out strong growth there is a chance I am selling Alaris a bit too early here, but I’m OK with that. I had a target, I had a thesis, and I am sticking with it.
I expected the company to continue to turn out low to mid-single-digit growth in terms of share price from this point on while providing investors with an attractive 6.7%~ distribution.
Another reason for pulling the trigger on the sale was again allocations. My financials have had a substantial runup over the last year or so, and I’m scaling back in that regard.
As mentioned above, the company will remain on the Dividend Bull List.
I swapped Canadian National Railway for Foundational Stock Canadian Pacific Kansas City
I have been a long-term shareholder of CN Rail for many years now. However, I’m really starting to like what CP Rail is doing on the acquisition front and the fact it is simply the better-operated railway, at least from a results standpoint.
From an efficiency standpoint, CP Rail stands out positively. Improved RTMs, fuel mileage, average weight per car, average car length, etc. This is ultimately impacting the top and bottom lines. Although I would say both companies are “struggling” right now, CN Rail is struggling more.
Both are high-quality companies. However, I believe CP’s results at this point in time, plus the future growth it has with the KCS acquisition, is more attractive. The company is guiding to 12%-18% in earnings per share growth in 2025, while CN Rail has commented that they are targeting a high single-digit CAGR in terms of earnings per share over the next couple of years.
In addition to this, I haven’t exactly been a big fan of the extensive buybacks and dividend growth CN Rail has been pushing out despite debt levels and interest expenses remaining high. While CP Rail has abandoned share buybacks and dividend raises in order to pay off debt, CN Rail has done the opposite, buying back an extensive amount of shares and raising the dividend.
CN Rail’s recent dividend raise was the lowest it has done in quite some time, and I’ve been wanting them to focus on deleveraging for quite some time now.
Overall, I believe the two companies are some of the highest quality companies in the country caught in a bit of a cyclical downtrend. However, at this point, I did feel it was time to pull the trigger and make the swap.
Earnings
Lockheed Martin (LMT)
I figure I’d go over Lockheed Martin as it was last week’s Value Call and the company took a bit of a dip post-earnings. What I will say immediately is that this earnings report does not bother me in the slightest, and my conviction remains the same. I will likely add to Lockheed this week.
Lockheed Martin reported a relatively strong quarter, but some issues in relation to its 2025 guidance caused a selloff in terms of its share price. From an expectation standpoint, the company missed on both the top and bottom lines, but the bulk of this was due to one-time losses related to classified projects with the US military. These losses ended up impacting the company by large numbers, $5.68 to earnings per share and $835M to free cash flow.
Operating margins came in at 11%, which is relatively in line with the company’s historical numbers, and overall, the primary segments of the business did quite well. Aeronautic sales increased by 4% on the year, Missiles & Fire Control by 8%, Rotary & Mission Systems by 6%, and its Space segment decreased by 1%.
The company delivered 100% of its free cash flow generation back to shareholders either through dividends, which came in at $3.1B, or share buybacks, which came in at $3.7B. The company continues to be one of the most shareholder-friendly companies in North America, which certainly adds to the attractiveness of the company to risk-averse investors.
The company’s backlog grew by 9.6% and now sits at all-time highs. Obviously, these are orders that have not yet been executed and cannot be booked as revenue, but the company’s backlog is large enough that we can predict a reasonable stream of revenue from Lockheed moving forward, as there are few other defense contractors with the scale they have to deliver products.
As mentioned, operationally, it was a solid quarter from the company, but its Fiscal 2025 guidance is likely what caused a large drop in share price on earnings day. The company projects mid-single-digit revenue growth and operating income and high single-digit free cash flow growth, but it has guided to a low single-digit reduction in earnings per share.
The company attributes the decline pretty much solely to non-operational issues, such as pension adjustments and higher interest expenses. If we see interest rates in the United States decline in 2025, the company will likely report better-than-expected earnings. At this point in time, it is fairly clear that Lockheed is being cautious when it comes to its outlook.
There is also another interesting factor with Lockheed, and that is the fact it often “sandbags” its guidance. In the investment world, this means the company is known to under-promise and over-deliver. This is evident by the fact they beat their 2024 earnings guidance by $2~ per share. I don’t mind this as an investor, as it allows me to accumulate more shares of a high-quality company while the market sells the shares off on the news.
Canadian Pacific Kansas City (TSE:CP)
The next company I’ll go over is Canadian Pacific Kansas City, to highlight some of the underlying numbers that resulted in me swapping to the company and selling CN Rail.
CP Rail continues to provide rock-solid results amidst a fairly harsh economic backdrop. Revenue of $3.87B came right in line with expectations, and earnings per share of $1.29 beat estimates of $1.23.
The company is now reporting fairly stable results post-acquisition. For a year or so, Canadian Pacific had to post large adjusted results to the Kansas City Southern acquisition, causing large one-off expenses as well as increases in revenue and earnings due to the acquisition now impacting the company’s results.
Now that we are comparing integrated results from Kansas City Southern on a year-over-year basis, they’ll become much less “confusing.” Revenue grew by 3% year-over-year and earnings by 9%. While CN Rail is primarily growing its earnings per share through share buybacks, CP Rail’s high single-digit earnings growth is organic, as the company has not bought back any shares over the last while, as it has prioritized debt repayments first.
From an efficiency standpoint, the company saw a 4% improvement to the weight of its cars, a 4% improvement to the average length of its cars, and a 1% improvement to its total fuel efficiency. These numbers might not seem like much to someone glancing over them, but they are a slow but steady way to continue to improve earnings growth. More weight and longer cars, as well as continued fuel mileage improvement, are strong indicators of the company’s improving efficiency.
We can think of this like a vehicle you drive that is fully loaded with people and items and getting better gas mileage than if you were driving it by yourself and empty.
Carloads dropped by 4% on the quarter, which led to a decline in revenue in its coal, potash, fertilizer, metals, and intermodal revenue. These areas of the business struggling are not particularly surprising, as most all of them have some exposure to the current economic situation in North America, whether it be from an infrastructure expansion standpoint or a consumer standpoint (intermodal).
However, the company has been able to offset the declines in volume with a 7% increase in revenue generated per carload. This is good for a few reasons. For one, it allows the company to weather the storm during economic downturns and maintain flat to slightly growing revenue. But secondly, and arguably the most important, is when the economy inevitably rebounds, carloads will increase, and revenue generated per carload will not go down.
This is a direct result of the economic moat that railroads have. Shipping costs have gone up and are highly unlikely to decline in the future, as there is relatively little competition in North America, especially with CP Rail acquiring Kansas City Southern. The tracks are dominated by few players, and undercutting costs is likely something none of them are going to do.
Finally, I’ll make some final comments on the company’s outlook and debt ratios. It expects to grow earnings per share by 12-18% next year and has reduced its leverage ratio from 3.4x to 3.1x. It is likely as the company continues to pay down debt to get it to a comfortable range, it will then turn to share buybacks and dividend raises to reward shareholders.
