Full episode: Market Call for Monday, February 11, 2019
Bruce Murray, CEO of The Murray Wealth Group
Focus: North American growth stocks
Stock markets posted a strong recovery in the first five weeks of 2019, largely clawing back from the sharp losses experienced in December. Nonetheless, as at the end of the first week of February, the S&P 500 remains 6 to 7 per cent below the early autumn highs. Macro events continue to be posted all over the wall of worry.
China’s growth is slowing to below 6 per cent as its standards of living rise. This was bound to happen due to the law of diminishing marginal returns. Yum China Holdings predicts a slowdown in sales growth at KFC restaurants due to the very strong sales a year ago, which has led some to conclude that the Chinese consumer is boycotting American brands due to the trade war. Meanwhile, Estee Lauder and Proctor and Gamble announced strong sales growth in China. The Trump gong show continues, with Nancy Pelosi insisting on winning an Oscar for best supporting actress.
Behind the noise, the bulk of the stocks we favour delivered very decent fourth quarter results and acceptable outlooks for 2019. On a fundamental basis, the S&P 500 is selling below 17 times 2019 forecast earnings and 15 times 2020 forecast earnings. These are not multiples to fear even in slowing economic environments.
We remain optimistic on the outlook for the next several years and continue to believe that well-run companies with solid growth prospects in industries gaining share of wallet will provide superior investment returns to patient investors.
As companies continue to transition to cloud computing, Microsoft should benefit from a near utility-like earnings stream in Enterprise cloud. We think Microsoft has a long-term advantage over Amazon’s AWS (the largest cloud player and Microsoft’s main competitor) mainly because of its reputation and experience working with large enterprises and the fact that some companies view Amazon as competition and may be reluctant to store data with them. Sell-side research indicates that Microsoft’s datacenter capacity is massively built out, meaning incremental margin from new business wins and a lower investment going forward. This should lead to tremendous free cash flow over the next decade.
Tapestry is the amalgamation of three affordable luxury brands: Coach, Kate Spade and Stuart Weitzman. The Coach brand is in turnaround mode, with management reducing store count and working to reclaiming its premium handbag image. The recently acquired Kate Spade brand offers potential for margin improvement and improved sales from new products rolling out in 2019. Tapestry has significant exposure to China, which has led to a downgrading of its price-to-earnings (P/E) multiple to just 13 times, which is below the multiple of the S&P 500 (typically it trades at a premium). Expectations are very low and we think the market will reward Tapestry with a higher multiple as its sales growth and margin targets are achieved.
MORGAN STANLEY (MS.N)
Morgan Stanley is a top investment bank and wealth management firm. The banking sector in North America is trading at depressed multiples, with investors concerned about a flat yield curve, a potential recession and stricter capital requirements. We think Morgan Stanley’s wealth management division deserves a premium multiple to money center banks due to its strong recurring revenue and growth over the past decade. The investment banking arm, while coming off a weak quarter, historically generates strong return on equity. Although this earnings stream is never highly valued by the Street due to its lumpiness, we believe it’s an attractive business.
PAST PICKS: MARCH 20, 2018
I continue to hold Facebook at almost 5 per cent of our portfolio and have increased our holdings by 25 per cent on the weakness
- Then: $168.15
- Now: $166.63
- Return: -1%
- Total return: -1%
On Jan. 3, Bristol Myers Squibb announced the takeover of Celgene. We like the deal and the prospects of the combined company.
- Then: $88.27
- Now: $88.07
- Return: -0.2%
- Total return: -0.2%
Linamar is incredibly undervalued, selling at a 5 times P/E with a mid-teens return on equity. We have doubled our Linamar position into this sell-off.
- Then: $71.71
- Now: $47.90
- Return: -33%
- Total return: -33%
Total return average: -11%
Global Growth Fund
The Global Growth Fund is a portfolio of about 35 best-in-class global stocks exhibiting strong earnings growth.
Performance as of: Jan. 31, 2019
- 1 month: 8.8% fund, 8.7% index
- 1 year: 6.1% fund, 0.5% index
- 3 years: 12.4% fund, 10.8% index
INDEX: TSX Composite.
Returns are based on reinvested dividends, net of fees and annualized.
TOP 5 HOLDINGS
- Alphabet: 6.0%
- Facebook: 4.9%
- TD Bank: 4.4%
- Constellation Brands: 4.3%
- Celgene: 4.3%