Jul 24, 2018

Bruce Murray's Top Picks: July 24, 2018

BNN Bloomberg

Bruce Murray , BNN Bloomberg

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

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MARKET OUTLOOK

At The Murray Wealth Group, we believe the outlook for the markets remain constructive overall and investors should relax and enjoy one of the great bull markets of their lifetime. The global economic picture is still quite bright, with real GDP growth currently forecast at 3.1 per cent. This healthy rate of growth, which is being led by the world’s largest economies, will support a bullish market.

China’s economy grew by almost 7 per cent in the first half and will exceed the output of the entire EU this year. Meanwhile the U.S. is forecast to approach 4 per cent GDP growth in Q2 and maybe for the year, and Europe and Japan are all experiencing growth rates at the higher end of recent years. Canada is expected to slip below 2 per cent for the rest of this decade.

Against this backdrop, the outlook for earnings is very strong, particularly when combined with lower taxes in the U.S.

Market worries of rising trade issues are legitimate, particularly those raised by the U.S. against China. Trump’s tweets, which bounce between sticks and carrots, have been accompanied by higher market volatility. We must believe sanity will bring resolution to these issues.

The Federal Reserve board has signalled higher rates, which the markets have so far absorbed. With inflationary pressures remaining low, we aren’t overly concerned that there will be a need to squeeze the economy hard enough to cause a recession — at least not in the U.S. and most of Europe.

A number of factors will discourage investment in Canada. The consumer remains over levered and there are concerns of higher taxes and a slowdown in the housing sector (both of which appear inevitable). Lastly, internal trade barriers will confine the exporting of oil.

We continue to find lots of stocks with solid growth prospects available at attractive prices.

TOP PICKS

BROADCOM (AVGO.O)

Broadcom is a provider of a wide range of semiconductors used across the entire technology sector for both wireless and wired connected devices. The stock was acting well until it announced the acquisition of CA Technologies, a computer software firm, earlier this month. The announcement sent the shares lower as investors are struggling to understand acquiring a business outside its core semiconductor business. We used the opportunity to increase our share position as financially the deal is a win. Longer term, the Broadcom management team will need prove the merits of the deal, but given their track record with acquisitions, we believe it will be a success. The shares trade at 10.5 times next year’s earnings.

BMW (BMWYY.PK)

BMW is a global original equipment manufacturer in the luxury vehicle segment. The shares are attractively valued as investors grapple with two concerns: Peak auto sales levels in North America and the increasing risk of a prolonged trade war between the U.S. and China. BMW produces its X series SUV in South Carolina, with about 80,000 vehicles produced from the plant being exported to China. Recently, the Chinese government imposed tariffs of 40 per cent on American-made vehicles, which will certainly dampen demand for the X series. We expect a positive resolution to the trade disputes, which would help the shares. BMW shares trade at 6.7 times next year’s earnings.

AIR CANADA (AC.TO)

Air Canada is a Canadian domestic and international airline. Following a tremendous turnaround in 2012, the airline is now comfortably profitable, reducing debt, enjoying healthy demand growth and expanding its route network. Due to this turnaround, we still see strong upside in the shares through several new efficiency programs: fleet re-positioning with new more fuel-efficient planes and the creation of an in-house loyalty program. These ongoing programs should help reduce earnings volatility and lead to multiple expansion. Air Canada trades at 6.4 times next year’s earnings. With good execution and airline demand, there’s visibility of $5 per share in free cash flow in 2020.

DISCLOSURE	PERSONAL	FAMILY	PORTFOLIO/FUND
AVGO	Y	Y	Y
BMW	Y	Y	Y
AC	Y	Y	Y

PAST PICKS: SEPT. 20, 2017

NEWELL BRANDS (NWL.N)

Then: $42.40
Now: $26.45
Return: -38%
Total return: -36%

ROYAL CARIBBEAN CRUISE LINES (RCL.N)

Then: $115.54
Now: $109.18
Return: -6%
Total return: -4%

MEDICAL FACILITIES (DR.TO)

Small reduction in our position. We reduced at $15.12. The position exceeded its 4 per cent of the portfolio by over 0.5 per cent and our discipline forces us to examine the fundamentals versus other stocks in the portfolio. We reduced it back to 4 per cent rather than decreasing another portfolio holding.

Then: $14.90
Now: $14.62
Return: -2%
Total return: 5%

Total return average: -12%