Bruce Murray, CEO, The Murray Wealth Group
FOCUS: Global stocks
MARKET OUTLOOK:
We are in the early stages of a very powerful economic recovery with GDP growth rates forecast to be over 4 per cent next year in both the U.S. and Europe. Consensus market EPS is very low at around 7 per cent.
This should easily be beaten if GDP forecasts are right, as economies of scale will increase earnings as we get through industrial shortages and volumes increase. This should also cool the current inflation concerns.
Market gains over the past 12 months reflect strong earnings and P/E ratios were largely unchanged. The forward P/E sits at around 20X. Stocks are cheap compared to bonds and perhaps even real estate.
There is still over a US$1 trillion in money market funds, a lot of which could enter the market. The Biden infrastructure spend will also insulate the economy from a downturn. So, we remain very constructive on the outlook for stocks.
TOP PICKS:
Raytheon Technologies (RTX NYSE)
Resulted from the merger of United Technologies aerospace assets and the former Raytheon. There is substantial upside in the stock due to an estimated $1.3 billion in cost savings from the merger along with a recovery in commercial airline traffic.
This rebound should lift sales by about 20 per cent p.a. through 2024. RTX’s Pratt and Whitney division has developed the most fuel efficient new engine - the geared turbofan - which is being deployed on the new airbus 320NEO family.
This aircraft is the current market leader with Boeing’s 737 issues. Their Collins Division is a major player in the rest of the plane and is gaining share as well. Raytheon itself, has a very steady government customer for its intelligence work, space technology and missile defense. These businesses grow about 5 per cent p.a. We have a $110 target on RTX.
Bayerische Motoren Werke ADR (BMWYY OTC)
Like a lot of other western auto makers, it’s selling at a discount, and has been under pressure to move to electrification and more recently is suffering parts shortages. The German auto makers are now introducing an array of electric vehicles and sales should be strong as many German cities are phasing in bans of hydrocarbon fueled vehicles.
BMW has an attractive line-up and the company’s sales have held up well around the world. Margins are forecast to improve in the next year as well. If BMW can get market share in EV’s we believe a lot of market pressure on the stock may dissipate and BMW could deliver significant upside of 30-50 per cent in the near future and still be relatively cheap compared to the market.
Mastercard (MA NYSE)
The payments sector has been under pressure in 2021 as increasing competition and elevated valuations have caused broad-based underperformance. Despite the uncertainty, we still view the credit card networks as formidably positioned in a world that continues to move to electronic payments.
Local volumes are 35 per cent higher than 2019 levels and the highly profitable cross border revenue will recover with international travel.
In addition to transaction processing, the company has built out a strong services portfolio and aims to grow this business at a 20 per cent CAGR. We think the shares are attractive at a 3 per cent free cash flow yield and 20 per cent free cash flow growth.
PAST PICKS: December 1, 2020
Amazon (AMZN NASD)
- Then: $3,220.08
- Now: $3,585.04
- Return: 11%
- Total Return: 11%
Linamar (LNR TSX)
- Then: $62.95
- Now: $78.66
- Return: 25%
- Total Return: 26%
Boston Scientific (BSX NYSE)
- Then: $33.65
- Now: $40.97
- Return: 22%
- Total Return: 22%
Total Return Average: 20%
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| AMZN NASD | Y | Y | Y |
| LNR TSX | Y | Y | Y |
| BSX NYSE | Y | Y | Y |
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