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

MARKET OUTLOOK

Following the spectacular winter rally the market has swung from greed to fear again, focused on the Federal Reserve’s policy and the trade agreement with China. Unlike the fall, when the fear was that the Fed would raise rates and drive the economy into recession, now the story is the opposite and the Fed won’t cut rates to keep the economy moving forward.

The U.S. and China are throwing more chips on the table, America now focusing on Huawei and China desperately retaliating against them with bans on agricultural imports and recycling inputs from North American garbage collection. This alone shows that the U.S. holds the “Trump” cards in this standoff. While China could sell its U.S. debt holdings, that would only flood China with U.S. dollars and drive up the Chinese yuan. China needs these imports to feed both its people and its factories. Some prices may rise marginally in the U.S., but most of these goods can be sourced elsewhere. Our portfolio is largely focused away from stocks that are directly hit by the China game.

Facebook and Google are banned in China and our medical stocks have only minor exposure. S&P 500 earnings are expected grow at rate of about 6 per cent for the next 18 months. As such we expect to be able to find attractive stocks in such an environment and will remain fully invested.

TOP PICKS

MICROSOFT (MSFT.O)

Microsoft is a high-quality growth stock and we believe will be a solid contributor to our performance. Our target price is in the $140 range. Microsoft’s year-over-year revenue growth has accelerated into the mid-teens from the largely single-digit growth of much of the past decade due to the introduction of its Azure cloud computing platform. Profit growth should parallel or exceed revenue growth as the infrastructure build for Azure moderates. Cloud computing provides a very high-quality income stream, with a utility-like risk profile and thus supportive of a higher multiple. Our target price uses a price-to-earnings of 30 times.

UNITEDHEALTH (UNH.N)

UnitedHealth is the leader in U.S. medical insurance and healthcare management and has delivered strong consistent growth for many years. This is expected to continue as the company benefits strong secular trends as the population ages, cost of care increases for both public and private entities and the need for higher-quality care at a lower cost continues to increase. In addition to insurance services, its Optum division provides healthcare management through over 35,000 doctors, clinics and technicians, and is expected to be a key contributor as the model shifts to value-based care and patient outcome-focused. The shares of health insurers have sold off on Medicare-for-all platforms pushed by some potential Democratic presidential candidates (we don’t believe these will be enacted), providing an attractive entry into the space. We believe the shares could trade up to $300 on a recovery in investor sentiment as the company should grow its earnings in the double digits and trades at a market multiple of 17 times.

LINAMAR (LNR.TO)

This is a extremely undervalued stock selling at five times earnings per share. Linamar has grown tremendously over my career and is up about 6,400 per cent since its issue in 1986 or almost 200 per cent annually on the original issue price of $0.71. I think the company is worth at least two times where it is trading now. Linamar is a diversified manufacturer with a lot more than automotive products. They have a leading access equipment business in Skyjack and are well positioned in premium farm equipment through MacDon Industries. The current negative environment for farm exports to China will pass and Linamar is well positioned to supply electric vehicle components to the auto industry as we move away from internal combustion engines. The company has a very healthy balance sheet and yields in the mid-teens on a free cash flow basis.

PAST PICKS: JULY 24, 2018

BROADCOM (AVGO.O)

• Then: $217.34
• Now: $260.09
• Return: 20%
• Total Return: 23%

BMW (BMWYY.PK)

• Then: $31.75
• Now: $23.65
• Return: -26%
• Total Return: -22%

AIR CANADA (AC.TO)

• Then: $22.09
• Now: $39.49
• Return: 79%
• Total Return: 79%

Total return average: 27%

Website: www.tmwg.ca