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It shouldn’t be hard to beat the TSX over a long period of time. The tech-light, energy-intensive index could do well this year. However, with energy prices slipping (WTI just dipped below US$90 a barrel) and financials feeling the heat of the coming economic downturn, it is the TSX that could expect yields below normal. For new investors, it may be a good idea to go for the S&P 500, as it seems to be catching up with the TSX for the year. Both indices are still correcting, with the S&P 500 gaining more positive momentum.
With such a strong US dollar (the loonie is worth US$0.77 today), Canadians should not feel the need to trade securities for securities south of the border. There is still a ton of great value to be had in Canada. It is simply underrepresented by the broader TSX index. Undoubtedly, this climate seems conducive to stock picking for above-average results. And in this article, we’ll take a closer look at two proven market beaters who are likely to continue to raise the bar over the next 18 months and beyond.
Consider the shares of Brookfield Asset Management (TSX:BAM.A)(NYSE:BAM) and Constellation Software (TSX: CSU).
Brookfield Asset Management
Brookfield Asset Management is a legendary alternative asset manager with a market capitalization of over $100 billion and over 100% gains over the past five years (not including dividends). Undoubtedly, the appetite for real assets, such as infrastructure, renewable energy assets, toll roads, pipelines and real estate could remain in high demand as investors look to put their money in assets less correlated to the broader market.
With a legendary management team led by CEO Bruce Flatt, Brookfield should be a staple in any Canadian investor’s portfolio. During the recent market sell-off, the stock fell more than 26% from peak to trough. The stock is now recovering and could hit new highs as investors push past recession fears.
For the future, management expects returns of around 12 to 15% for its investments. I think they are more than capable of hitting the high end of the target. If they do, BAM shares could continue to crush the broader TSX index.
At the time of writing, the stock is trading at one times the book price (P/B), which is well above the industry average P/B of 3.7. With a 1% dividend yield (that’s small, with growth potential), I’d be looking to be a long here.
Constellation Software is another proven TSX beater, posting an astonishing 212% returns over the past five years. Meanwhile, the TSX index only posted 30% returns.
Constellation is in the business of acquiring and bringing out the best in small-cap and startup software companies. Management exercises due diligence and only enters into transactions where significant value can be created. With the tech market in a rut, Constellation has an opportunity to accelerate its mergers and acquisitions. The $45.5 billion company has a remarkable return on equity of 15.8%, which is well above the software industry average of 12.4%.
Simply put, management has found a way to generate incredible results for long-term investors. And I think they can perform in any type of environment.