Jan 7, 2019

Bruce Murray's Top Picks: Jan. 7, 2019

BNN Bloomberg

Bruce Murray , BNN Bloomberg

Bruce Murray, CEO of The Murray Wealth Group
Focus: North American growth stocks

MARKET OUTLOOK

The stock market, as measured by the S&P 500, peaked at the beginning of autumn, closing just above 2,925 on the first two days of October. After tumultuous activity with large swings in both directions in October and November, we’ve seen capitulation in December. The market is currently more than 15 per cent off its early autumn highs.

While signs of slowing economic activity abound, it was unreasonable to expect that U.S. economic growth could be sustained at levels approaching 4 per cent for an extended period of time. U.S. GDP growth was still 3.4 per cent in Q3. This is not the stuff that recessions are made of. Members of the U.S. Federal Reserve Board are still concerned enough about economic activity reaching inflationary levels that they’re normalizing (raising) interest rates to slow the economy. At this morning’s S&P 500 index levels, the market is currently trading at about 16 times 2019 earnings estimates. This is a not an extreme level. We continue to believe that this is another so-called “correction,” although it has been severe. Market-wise sentiment and funds flow was indicative of extreme negativity, which is a contrarian indicator that further positive surprises could be ahead.

Other positives: Job creation has been very strong and unemployment has dropped, although we believe “underemployment” is still prevalent especially among young adults; commodity prices are low (for example, gasoline prices have fallen to levels about 10 cents below the average of the last 25 years); there are no signs of inflation and productivity is holding down prices across almost the whole of the consumer goods sector, benefitting from the increased use of artificial intelligence.

We remain optimistic on the outlook for the next several years and continue to believe that well run companies with solid growth prospects will provide superior investment returns to patient investors.

TOP PICKS

ROYAL CARIBBEAN CRUISES (RCL.N)

Cruise line shares have been weak given the uncertainties surround global growth and additional cruise line capacity, which have prompted fears of oversupply. Norwegian, a main competitor, recently put out a lower-than-expected guidance for 2019 although we believe it was likely conservative. Cruising remains a growing travel option as more people enter retirement and cruise companies find ways to increase onboard spending. Earnings per share (EPS) are projected to grow 50 per cent over the next three years and the shares already trade at an attractive level of 10 times 2019 earnings.

HOME DEPOT (HD.N)

Home Depot is the leading home improvement retailer in North America. The U.S. housing market softened in 2018, but housing starts remain below historical averages and we believe housing demand will be more persistent than expected. The home improvement market remains strong and Home Depot continues to take share from mom-and-pop stores that cannot compete on price and selection. The company is investing heavily in technology to provide a better shopping/in-store experience and while these investments are weighing on near =0term profitability, the company will be well positioned for profit growth to re-accelerate beyond 2020. The shares trade at 17 times 2019 earnings.

ARITZIA (ATZ.TO)

Aritzia is a Canadian fashion retailer with about 65 stores in the country and 25 in the U.S. The brand is beloved by the coveted 20- to 40-year-old female demographic and designs its own in-house brands, providing for product and pricing differentiation. Same-store sales have been very strong and the company has an extremely long runway in the U.S., with potential for roughly 200 stores (this is likely conservative). The company is also ahead of the curve on information technology for retail stores, which reduces the risk of future IT integrations. The shares trade at just 17 times 2019 earnings despite visibility for 20 per cent earnings growth driven by new store openings.

DISCLOSURE	PERSONAL	FAMILY	PORTFOLIO/.FUND
RCL	Y	Y	Y
HD	Y	Y	Y
ATZ	Y	Y	Y

PAST PICKS: JAN. 15, 2018

MICROSOFT (MSFT.O)

Microsoft continues to hit on many cylinders. It’s gaining share in small business with its Office products, where its Teams product for office-sharing is the fastest growing app in the company’s history. Its Azure cloud-based computing and data storage business is vying for market leadership with Amazon, but has a distinct advantage when sold with its Office products to smaller companies. With EPS growth forecast in the 13 to 16 per cent range and a 25 times target price-to-earnings (P/E), our target is over $120.

Then: $89.60
Now: $102.17
Return: 14%
Total return: 16%

NETFLIX (NFLX.O)

A revenue growth of over 25 per cent yearly for at least 2019 and 2020 combined with rising margins is expected to fuel Netflix’s EPS growth of over 50 per cent annually. Applying a growth multiple equivalent to the growth rate implies the stock has potential to retest its old high of over $400 a share.

Then: $221.23
Now: $311.78
Return: 41%
Total return: 41%

NEWELL BRANDS (NWL.N)

The company continued to struggle in the first half of the year of 2018, bottoming at $15.12 (down $40 from its June 2017 high) following the bankruptcy of Toys ‘R’ Us’ operations in the U.S. Newell’s September financial report indicated the start of a recovery and the stock popped 60 per cent up to $24. Earnings power is in our opinion over $2.50 a share and as the business stabilizes we believe the stock could double from here over the next few years.

Then: $32.26
Now: $19.40
Return: -40%
Total return: -38%

Total return average: 6%