The S&P500 Index rose 11.3% over the first five months of the year where in May alone, it rose almost 5%; its best showing since February. Semiconductor stocks such as Nvidia - whose chips are used to train artificial intelligence models such as ChatGPT – paced the advance, with electronic components makers and medical services shares also contributing to the gains.
After three months of stronger-than-expected price increases, U.S. inflation tailed off modestly in April, posting its lowest percentage advance since 2021. The number followed three months of stronger-than-expected inflation, suggesting that consumer prices and economic activity aren’t picking up steam.
Monetary policy remains a wild card. The Federal Reserve (Fed), which influences the actions of most of the world’s central banks, continues to push back hoped-for cuts to its key interest rate. Fed officials have said that a continued softening in data over the next few months would allow them to consider cutting borrowing costs at the end of 2024 or at the start of 2025.
Outlook and Challenges
Upcoming U.S. election candidate positioning could add to existing inflationary drivers such as aging demographics, a labor force reassessing its work/life balance, and regionalization trends. Consequently, we at Montrusco Bolton Investments Inc. (“we”) believe investors should focus on business models that have strong pricing power.
The uncertainty surrounding changes in supply chains, consumer behaviors, digitization, AI impacts and rising wages will have a lasting impact on business models.
Investment Opportunities
We continue to see relative valuation dislocations caused by rapidly shifting market narratives that are offering compelling opportunities to lock in profits and reinvest in misunderstood and therefore mispriced stocks.
One such opportunity is Rollins Inc., a U.S.-based pest-control company that operates in more than 70 countries worldwide with a highly recurring and recession-resilient business model. We believe that financial analysts underappreciate the margin expansion potential of the cost-control initiatives now being rolled out by the new management team after decades of operating under the founding family’s leadership. As a company with a history of acquisitions, Rollins can use further transactions to improve its scale - both in the U.S. and abroad - in what remains a very fragmented industry.
Future demand is expected to benefit from long-term trends such as global warming, which is driving an increase in pest numbers in regions that have traditionally been spared by the issue; an influx of new residents in the southern U.S. states, which have larger pest populations and therefore require more pest-control services; and growing customer focus on health and hygiene in a post-pandemic world.
Fund Strategy
The NBI U.S. Equity Private Portfolio, managed by Montrusco Bolton Investments Inc., is a Quality- Growth at a Reasonable Price (“GARP”) portfolio that focuses on a limited number of high-conviction large capitalization stocks. It is built from the bottom-up with mispriced assets that offer catalysts over our three-year forecasted horizon. ESG considerations permeate the process from the definition of the investible universe through screening, fundamental analysis, monitoring and sell decisions.
Fundamental, bottom-up research provides visibility into a stock’s return potential. It allows us to:
- Understand how specific industry dynamics affect company operations.
- Assess how the market perceives the company and what catalysts could offer rerating potential.
- Conduct a multitude of valuation analyses to provide the clearest picture of a stock’s expected return profile.
- Embed the downside valuation analysis.
By building a focused portfolio, we:
- Minimize the dilution of total return from holding too many securities.
- Avoid risks where we do not add value.
- Respect our constant style biases.
