Bruce Murray, portfolio manager, CEO and CIO of The Murray Wealth Group
Focus: North American growth stocks

MARKET OUTLOOK

Following the banner year we have just completed, we still see a healthy background for equity investment, although returns will likely be more moderate. We are seeing indications of a cyclical industrial recovery in Europe and Asia and there is no sign of weakness yet in the U.S. economy. The average U.S. consumer has financial flexibility, unlike the average Canadian consumer. U.S. housing statistics show substantial room for an uptick in activity. Stock prices, while at the higher end of valuation, are not showing substantial excess and would have to move higher to reflect bond market valuations. Earnings growth of 5 to 10 per cent is expected in 2020 and 2021.

The stocks in our Global Growth Portfolios are less cyclical, with higher growth rates than the market. We’re very comfortable holding them. Canadian markets were also strong, but lagged the U.S. indexes. However, the 4 per cent gain in the Canadian dollar in 2019 brought the relative return closer to the broader U.S. indexes. A further recovery in oil prices would substantially help Canadian index investors.

TOP PICKS

HOME DEPOT (HD:UN)

The U.S. housing market still has a long runway following the 2006 peak and subsequent housing collapse. We believe Home Depot will continue to grow its market share and will benefit from ongoing growth in new homes. Despite the company’s dominance, it still only represents 15 per cent of the home improvement products market. The company is making large investments in customer experience, which will weight on profit growth in the short term but should cement Home Depot’s lead in the market. Earnings per share (EPS) growth is set to inflect higher in 2021. With the tailwind of a strong housing market, we believe a 21 times price-to-earnings is attractive compared with other retail peers trading near 25 to 30 times.

INTUITIVE SURGICAL (ISRG:UW)

Intuitive Surgical is a robotic surgery company that sells its Da Vinci Surgery System to hospitals globally. The systems provide enhanced experience for patients and surgeons alike, with faster surgeries, shorter recoveries and fewer errors. The company uses the razor/razor blade model and actually makes about 70 per cent of revenue from tools, services and accessories. Growing its installed base is key for the company. Over time, surgeons continue to grow the use cases for the system, which increases the total addressable market. Concerns around competition impacted the company in the first half of 2019, but now that these threats appear less impactful, there is a clear path for growth with additional R&D as well as marketing spending baked into estimates. Intuitive Surgical trades at high multiples on traditional metrics, but its large total addressable market and competitive position should keep its multiple elevated. On a free cash flow yield basis, it trades at 2.5 per cent yield. Appropriate, given its outlook for mid-teens revenue growth.

LINAMAR (LNR:CT)

Linamar is a Canadian manufacturer of auto components, industrial lifts and booms and agriculture equipment. The company is diversifying away from internal combustion engine (ICE) components via acquisition and major new business wins in electric vehicle powertrain components. Its agriculture and industrial lifts divisions are likely working through a soft patch in demand given global macro factors, but should continue to increase market share over time, as they have historically done. The company trades at 7 times earnings, has a strong balance sheet and a free cash flow yield of 12 per cent.

PAST PICKS: JAN. 7, 2019

ROYAL CARIBBEAN CRUISELINES (RCL:UN)
EPS are forecast to grow about 10 per cent. Analyst target prices are as high as $158.

• Then: $101.83
• Now: $133.86
• Return: 31%
• Total return: 35%

ARITZIA (ATZ:CT)
Aritzia remains one of the few high-growth stock opportunities in Canada at 22 times EPS and mid-teens growth potential. We continue to like the stock.

• Then: $ 15.81
• Now: $ 18.90
• Return: 20%
• Total return: 20%

HOME DEPOT (HD:UN)
Home Depot will remain a core holding until U.S. housing starts recover from the crisis of a decade ago. EPS is expected to grow 5 to 10 per cent yearly.

• Then: $ 177.04
• Now: $ 218.34
• Return: 23%
• Total return: 27%

Total return average: 27%

FUND PROFILE

Performance as of: Dec. 31, 2019

MWG Global Equity Growth Fund:

• 1 month: 0.74%
• 1 year: 24.64%
• 3 years: 14.15%

MWG Income Growth Fund:

• 1 month: 1.40%
• 1 year: 25.90%
• 3 years: 9.79%

Returns are based on reinvested dividends, net of fees and annualized.