Full episode: Market Call for Tuesday, September 18, 2018
Bruce Murray, CEO of The Murray Wealth Group
Focus: North American Growth Stocks
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 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 globe’s major central banks have all signaled higher rates will continue to be brought in as we reverse quantitative easing, 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.
Airbus is a global commercial aircraft manufacturer with businesses in the defence and space markets as well. We recently purchased Airbus ADRs on view that demand for commercial aircrafts (a duopoly with Boeing) would remain strong with backlogs at seven years. We see Airbus’ free cash flow growing a fast rate for several years as the company is likely to increase production, raise prices and increase the sales of its Skywise digital fleet maintenance program (potentially a $10 billion data opportunity, currently $3 billion in revenue).
BOSTON SCIENTIFIC (BSX.N)
Boston Scientific is a U.S.-based medical technology company. Under CEO Mike Mahoney, the company has completely turned around nearly a decade of mismanagement and is firmly on a strong growth trajectory with a focus on seven business units, all leaders in their respective fields. The company recently raised its long term growth rate from 6-9 per cent to 7-10 per cent. We believe its numbers will be near the high end. The conclusion of various tax and settlement payments should result in a large increase in available free cash flow that will be redeployed into acquisitions, a very successful endeavour for Boston Scientific in the past five years.
Linamar is a very well run industrial company with leading positions in powertrain componentry as well as industrial access and farm machinery. The stock has been hammered by fears of NAFTA failure and peak auto sales. However the company’s impressive backlog should deliver 15 per cent revenue growth over the next two years and earnings per share are expected by veteran CIBC analyst Kevin Chiang to approach $11.50 by 2020. With over $1 billion of EBITDA Linamar should quickly pay down its MacDon acquisition. With the average North American auto supplier selling at over 9 times earnings per share, we believe Linamar has a reasonable chance to double over the next two to three years.
PAST PICKS: NOV. 13, 2017
THE KROGER COMPANY (KR.N)
We had recommended Kroger on the selloff following Amazon’s purchase of Whole Foods expecting it to recover into the low $30 range. We sold it on Jan. 31 at $30.91 and moved into Costco, a far better growth story at just below $198. Costco however hit our target price and we sold it at just over $230 at the end of August and distributed the proceeds across the other consumer names in the portfolio being Home Depot (HDN), Constellation Brands (STZ.N), Dollar Tree (DLTR.O) and Newel Brands (NWL.N) all of which we see 15 to 30 per cent returns in.
- Then: $22.14
- Now: $29.08
- Return: 31%
- Total return: 34%
We bought Oracle in belief that it has large potential to move its massive customer base into the cloud, which would rekindle earnings and lead to higher stock prices both from earnings growth and multiple expansion. Oracle's earnings report last night revealed revenue up only 1 per cent, which indicates the difficulty of moving a huge software business. We believe they will succeed with time. Meanwhile the stock will likely to continue to bounce around $50 until this happens. Meanwhile a $12 billion (6 per cent of shares at $50) will support the stock. This reminds us of Microsoft a decade ago when it was assumed the company could not grow and their huge cash flow was used to buyback over a third of the outstanding share count.
- Then: $49.40
- Now: $48.50
- Return: -2%
- Total return: -1%
We were holding Medtronics as a diversified play on the medical devices market. We sold the stock on Aug. 14 at $90.61 and moved into Boston Scientific at $33.83. We preferred Boston Scientific as the company is more focussed in higher growth markets. Since then, Medtronics has reported a better than expected quarter and the stock has gained a further 6.0 per cent. Fortunately, Boston Scientific is up 10.1 per cent in the same period. The market has shown more interest in health care stocks recently, with FANG stocks fading and medical stocks looking cheap versus their history.
- Then: $79.20
- Now: $96.70
- Return: 22%
- Total return: 24%
Total return average: 19%
MWG Global Equity Growth Fund
Performance as of: Aug. 31, 2018
- 1 Month: 1.59% fund, -0.8% index *
- 1 Year: 20.52% fund, 10.1% index
- 3 Year: 14.34% fund, 8.7% index
* Index: TSX.
* Returns are net of fees.
TOP 5 HOLDINGS AND WEIGHTINGS
- Alphabet Inc: 5.92%
- Celgene Corp: 4.55%
- Facebook Inc: 4.47%
- TD Bank: 4.44%
- Microsoft Corp: 4.02%