Nov 28, 2019

Bruce Murray's Top Picks: Nov. 28, 2019

BNN Bloomberg

Bruce Murray , BNN Bloomberg

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

MARKET OUTLOOK

While the equity markets have rallied hard so far in 2019, we remain constructive. S&P earnings growth is expected to be in the 4 to 7 per cent range for the next couple of years and I see little evidence to the contrary. With low interest rates and 10 years of underproduction, the U.S. housing market will continue to grow. Inflation remains under control and employment opportunities are abundant. Valuation in the 18 times range still delivers an earnings yield of greater than 5 per cent, which is attractive relative to alternatives and fixed income. The Murray Wealth Group expects the stock market to be higher next year by 5 to 10 per cent. The dangers are mainly political and markets can digest most political noise. Higher taxation would be the main concern in this arena. Cyclical stocks were weak the last 18 months in reaction to some weakness in consumer cyclicals and tariff scares. Confidence in cyclicals is recovering as outlook has not deteriorated further and there are now hopes for an upturn. Stock picking will be key for the next year and again TMWG will favour secular growth stories like the FANG stocks, healthcare, beneficiaries of e-commerce and companies that cater to growing consumer wealth.

UPDATE: Qualcomm acquired at $54.81 and sold at $77.83. We sold when the stock popped towards $80, causing the yield to fall towards the 3 per cent threshold we require in the Income Growth Portfolio.

TOP PICKS

AMAZON (AMZN:UW)

Amazon continues to drive quality of service and convenience levels higher with its recently announced one-day-shipping program. While short-term profits will be impacted, the bar continues to be raised, increasing the pressure on retailers that can’t compete and further commoditizing retailers without a proprietary product line. Revenue growth remains impressive and its free cash flow will benefit as it scales up its AWS cloud services division and from increased advertising revenue. On a free cash flow basis, the company is attractively priced at 5 per cent yield based 2021 consensus estimates.

FACEBOOK (FB:UW)

Facebook has emerged from its data and privacy concerns with a stronger focus on security and content moderation at the expense of its operating margins. However, revenue remains very strong and with data issues in the rearview mirror, and should grow 20 per cent a year with a long runway of new product launches in shopping and payments as well as incremental upside from messaging monetization. We recently visited several Asian countries and are more convinced of Facebook's runway for growth in these countries. The company is flush with cash with over $50 billion on the balance sheet and trades at just 22 times price-to-earnings on the 2020 earnings estimate.

ARITZIA (ATZ:CT)

Aritzia is women's fashion retailer with locations in Canada and the U.S. The company designs and sells through in-house owned brands which we believe reduces Aritzia's fashion risk by allowing it to pivot to new product categories as the fashion market changes. Most importantly, the brand is beloved by women across all demographics (Gen Z, millennials, baby boomers). The company has a huge growth runway in the U.S. and is using the weak retail landscape to pick up premium locations for its expansion. We think Aritzia could support upwards of 200 U.S. location versus its current 27 (it has 67 Canadian locations). The balance sheet is very strong and the company trades at 21 times price-to-earnings based on 2020 estimates.